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Enterprise solutions to poverty 1

Enterprise solutionsto poverty

Opportunities and Challenges for the International Development Community and Big Business

A Report by Shell Foundation

March 2005

Enterprise solutions to poverty Opportunities and Challenges for the International Development Community and Big Business

The report was written by the Shell Foundation team: Kurt Hoffman, Chris West, Karen Westley and Sharna Jarvis.

Produced and edited by Marc Lopatin

Shell Foundation is an independent charitable foundation which was established in 2000 and is fundedby the Royal Dutch/Shell Group of Companies*. The views and opinions set out in this paper are thoseof Shell Foundation and not of any other person including the Royal Dutch/Shell Group of Companies.

*The companies in which Royal Dutch Petroleum Company and The ‘Shell’ Transport and TradingCompany, p.l.c., directly or indirectly own investments are separate and distinct entities. But in this paperthe collective expressions ‘Shell’, ‘Group’, the ‘Shell Group’, ‘Shell companies’ and ‘Royal Dutch/ShellGroup of Companies’ are sometimes used for convenience in contexts where reference is made to thecompanies of the Royal Dutch/Shell Group in general. Those expressions are also used where no usefulpurpose is served by identifying a particular company or companies.

First published by the Shell Foundation in 2005

© Shell Foundation 2005

All rights reserved. This publication is copyright, but may be reproduced by any method without fee foreducation and communication purposes, but not for resale. The copyright holder requests that all suchuse be registered with them for impact assessment purposes. For copying in any other circumstances, orfor re-use in other publications, or for translation or adaptation, prior written permission must beobtained from the publisher.

Copies of this report and more information are available to download at www.shellfoundation.org

Shell Foundation is registered as a charity (no. 1080999)


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Executive summary 4

Introduction 7

Section 1: 8The case for putting pro-poor enterprise at the heart of the war on poverty

Section 2: 11Learning by doing: the Shell Foundation experience in catalysing pro-poor enterprise development

Section 3: 14Shell Foundation’s experience on the ground

Case study 1:Sustainable solutions to Indoor Air Pollution: the biggest killer you’ve never heard of

Case study 2:Catalysing the pro-poor market for solar home systems

Case study 3:Nurturing pro-poor small enterprise in southern India via the social merchant bank model

Case study 4:SME investment funds – deploying local capital and the challenge of going to scale

Section 4: 25Propositions and conclusion

Annex 1: Definitions 31

Annex 2: Anecdotal evidence 32

End notes 33

Additional copies of this report and further information regarding the activities of Shell Foundation maybe obtained from the following web site:

www.shellfoundation.org


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Contents

A moment in history?

The modern world has always encompassedextremes of affluence and poverty. But in 2005 theconfluence of advocacy, political serendipity andnatural disaster has rapidly pushed the plight of theimpoverished up the agenda of the wealthy asnever before. The sharpness of the challenge beingthrown down on behalf of the poor and thepressure on the rich to take action in response isunprecedented, as is the level of debate on a topicpreviously all but ignored by the public andmainstream media.

As a result of this campaign by the InternationalDevelopment Community (IDC) and non govern-mental organisations (NGOs), rich governmentsare likely to raise their aid budgets and expanddebt relief significantly while hopefully revisinginternational trading rules in a more pro-poordirection.

This is good news. The more sobering side of thisstory is that deploying this political and financialcapital effectively in the war against poverty will bea complex and difficult undertaking – as a lookbackwards tells us. Over the last 50 years, theinternational community has spent more than atrillion US dollars, and many times that amount ineffort, exhortation and emotion, to relieve humansuffering and create the starting conditions forpoor people to escape poverty.

Clearly, this assistance has brought much short-term relief, achieved real breakthroughs againstdevastating diseases and the scourge of famine andcontributed to the long-term developmentprospects of poor countries. But at the same time,much aid has been ineffectively and inefficientlyused and failed to deliver the broad-based gains ingrowth and quality of life that had been promised.

This means past efforts to tackle poverty are notnecessarily a reliable guide to what should be donein the future. And precisely how the internationaldevelopment community will use the newopportunities on offer to eradicate poverty is avitally important question for many reasons.

There’s a great deal of public money at stake andbold claims are being made about using it to‘Make Poverty History’. More importantly, thereremains great need. After fifty years of internationaldevelopment assistance, two billion people still live

on less that US$2 per day. Great uncertaintyremains about the mix of policies and interventionsneeded to stimulate equitable economic growth.Yet set against this great need and the doom andgloom that still inform the aid debate, there arepositive signs of progress in Africa, and elsewhere,that demand to be acknowledged and supported.

Enterprise first

So the question of what to do now to mosteffectively overcome poverty is challenging. Muchadvice is being tabled by commentators and expertcommittees such as the UN MillenniumCommission and the UK Commission for Africa.The ultimate focus of all of the wisdom on offertoday is the same basic issue the internationalcommunity has been struggling with for manyyears. And that is this: how, when and whereshould the international development communityintervene to best help developing countries createthe conditions that facilitate sustainable andequitable economic growth?

This is where the recent experience of ShellFoundation may be of value. Since 2000, we’vebeen exploring systematically the questions of howto catalyse and scale-up market and enterprise-based solutions to poverty – and how to harness tothe same task, the value-creating assets of multi-national corporations

There are sound reasons for this focus. Historydemonstrates that a flourishing, responsible privatesector, built on a broad base of enterprise,including small and medium sized enterprises(SMEs) and well-regulated foreign directinvestment (FDI), has been key to delivering thesort of economic growth in developing countriesthat we know pulls poor people out of poverty.

Going forward, common sense suggests the SMEsector in particular must grow on a massive scale ifthe Millennium Development Goals are to beachieved and sustained and if lasting gains are tobe secured from the opportunities created by debtrelief and fairer trade.

Most importantly, the growth of enterprise offerspoor people the hope that there’s an economicladder to personal betterment they can climb bydint of honest effort. If this hope does not exist,there is a danger they stop looking up and forwardand resign themselves to poverty – permanently.


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Executive summary

To be sure, there are many other poverty prioritiesthat need to be addressed. But what the poorestdeveloping countries absolutely need in order tomake poverty history is the growth of enterprise.

The Shell Foundation experience

The Shell Foundation, through pilots and partner-ships, success and failures, has been evolving anapproach to the promotion of ‘pro-poor’ enterprisethat has five key features:

First, our concept of pro-poor enterprise isinclusive and encompasses productive entitiesthat supply goods and services to poor people,employ poor people or are owned by poor people.

Second, the prime concern of all actors involvedin the intervention must be the long-termfinancial viability of the enterprises beingassisted. Socially or environmentally soundprojects or enterprises that fail or remainpermanently dependent on subsidy help nobody.

Third, the enterprise-support interventions mustthemselves have a financially viable businessmodel that can be scaled up using local capitaland local capacities. There will never be enoughaid funding available to support enough pro-poor enterprises to make an appreciable dent onthe scale of poverty that still exists.

Fourth, the most effective partners are thosewho can apply business principles and businessthinking – assess risk, know your market, offerwhat your customer wants, find least-costsolutions – to the challenge of catalysing pro-poor enterprise.

Fifth, multinational corporations are a largelyuntapped source of value-creating resources suchas skills, knowledge and networks that ifaccessed and deployed appropriately can addenormous social value to civil society efforts topromote enterprise and tackle poverty.

Promoting pro-poor enterprise on the ground

Four case studies of Shell Foundation initiatives are described in detail. These include efforts topilot and then scale up market-based mechanismsfor reducing substantially the nearly two millionextremely poor women and children who die everyyear from inhaling smoke from indoor cooking fires.

Another explains how an innovative consumerfinancing mechanism funded and jointly launchedby Shell Foundation, other donors and commercialbanks has catalysed rapid expansion of the marketfor solar home systems (SHS) among the under-served rural and peri-urban population in southIndia.

The third explains the way a ‘social’ merchantbank also operating in south India is using flexiblefinance, financial engineering skills and businessdevelopment expertise to assemble a series ofbankable, pro-poor energy and water infrastructureprojects run at a profit by barefoot entrepreneurswith capital requirements as low as from $1000 to$20,000 dollars.

And the fourth case study describes successfulSME investment funds being piloted in Ugandaand South Africa whose ‘clients’ are entrepreneurswith little collateral and limited business experience,previously unable to access finance of any kind, forprojects in the $10,000 to $500,000 range. Set upwith local banks and supported by the skills andinfrastructure of local Shell companies, more than300 hundred SMEs have received finance andbusiness training from these funds. More than athousand jobs have been generated by the 170enterprises in which investments were made, whilethe funds overall are delivering commerciallyattractive rates of return to investors.

Propositions for change

The final section draws on the Shell Foundationexperience – and the efforts of others working in asimilar way – and invites the international develop-ment and international business communities toaddress three questions:

First, how to increase the scale and effectivenessof pro-poor enterprise interventions;

Second, how to make the objective of pro-poorenterprise growth an integral part of poverty-reduction strategies advanced by theinternational development community andpursued by developing countries;

Third, how to more effectively engage theprivate sector but especially big business inefforts to tackle poverty through enterprise, bothdirectly and as a source of insight, advice andskills transfer.

Executive Summary


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Proposals for change are tabled that relate to theways donors concerned with enterprise promotionoperate, challenging them to act more like investorsand less like charities. This would involve themseeking, as accountable returns, measurable growthin the pro-poor enterprise sector – targets whichgrantees could be incentivised to achieve andpenalised if they do not.

Donors are also encouraged to enter into newarrangements with big business in order to enlistits support in ‘re-engineering’ the internationaldevelopment supply chain via the injection ofbusiness thinking along its entire length.

Propositions are also made that aim to get bigbusiness to engage much more effectively withpublic-private partnerships tackling poverty issues.The key to this is the restructuring of the risk-return profile of such partnerships, ensuringempowered players really are able to deliver changeand participate in the partnerships, and that theseprovide ‘returns’ to partners commensurate withtheir risk and expectations.

There are, of course, many other actors who havelong been pioneering ways to harness the power ofbusiness and business thinking to the challenges ofovercoming poverty. In that sense, most of thepropositions advanced in this paper complementand reinforce the efforts of others.

Given the scale of the problem to be tackled andthe encouraging signs that results can be delivered,the IDC, developing country governments and the big business community need to explore theenterprise-poverty territory together, robustly andurgently.

This does not mean more talking. Action must beagreed to pilot new ways of working together totackle both the direct and the business-environmentobstacles to pro-poor enterprise development andgrowth. The Shell Foundation over the comingmonths will be doing what it can to catalyse suchinitiatives and we invite others to join us.

Executive Summary


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This paper has two objectives. The first is tointroduce the Shell Foundation and its way ofworking. The second is to offer up insights drawnfrom our experience as a contribution to the widerdebate on how the private sector and the Inter-national Development Community (IDC) canmost effectively catalyse equitable, self-sustainingdevelopment in poor countries (see annex 1).

The Shell Foundation is new – established byRoyal Dutch/Shell Group of Companies as a UKcharity in June 2000 – and a little different. Unlikemany corporate foundations, the Shell Foundationfocuses on social issues aligned to the corecharacteristics of our founder – an energy majorand a multinational group of companies (MNC).Thus we address social problems arising from thelinks between energy and poverty, energy and theenvironment and the impact of globalisation onvulnerable communities.

In addition, while set up as a grant-making charity,the Shell Foundation believes the application ofbusiness principles and business thinking can bevery useful in tackling social problems, especiallythe challenges of overcoming poverty in developingcountries. Hence we tend to act more like aninvestor in deciding where and how to allocate ourcommitments of time and money. We also expectour partners to act more like entrepreneurs andbusinesses in the pursuit of their social andcharitable objectives.

Finally, and because of our focus on energy issues,we’re exploring ways of harnessing what we call the‘value-creating’ assets of one of the largest inter-national energy majors, the Shell Group, to advanceour charitable objectives. We could not do this ifour issues were traditional corporate philanthropyconcerns of health, education or culture.

Moreover, because the Shell Group has long beenpresent in many developing countries, we haveready access to practical experience and ‘local’knowledge on enterprise–poverty issues simply notavailable to the majority of IDC actors – donors inparticular. Taken together this means we are able tobring ‘more than money’ to the table when seekingstrategic partners and working with them todevelop and implement viable, scalable solutions tothe social problems we target.

Of course, the Shell Foundation is still young andour track record relatively limited. However, ourwork to date tackling poverty in developingcountries is throwing up intriguing challenges –not only for the Foundation Board and its staff,1

our founders, the Royal Dutch/Shell and ourpartners – but more widely for practitionersconcerned with international development andcorporate social responsibility (CSR).

In Section 1 we set the stage for exploring thesechallenges by reinforcing a case for putting ‘pro-poor enterprise’ more at the heart of the efforts by the IDC and big business to help poor peopleescape poverty (see annex 1). In Section 2, wedescribe the core features of the approach taken byShell Foundation to pursue this goal. Section 3uses case study material to illustrate our way ofworking and the outcomes being achieved. Finally,in Section 4, we distil our experience into a set ofpropositions for wider debate and consideration bythe international development and businesscommunities.


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Introduction

2005 is set to be a big year for poverty. Doublingaid, making trade fair and dropping Third Worlddebt are the headline goals of a campaign beingwaged and supported by many official and non-governmental aid and development organisationsdetermined to make ‘Make Poverty History’.2

Of course, the international community has longbeen trying to banish poverty. But this latest forayis notable for its scope, scale and populist appeal,having kicked off with the anti-globalisationprotests and Jubilee Debt Campaign in the late1990s. Establishment backing was added via thelaunch of the UN’s Millennium DevelopmentGoals (MDGs), the Monterrey Accord and theDoha Trade Round in rapid succession between2000 and 2004.

Throughout this period, a relentless wave of pro-poverty meetings, events and media coverage hascontributed greatly to the momentum and pressureon the governments of rich countries to finally actafter years of unfulfilled promises about tacklingpoverty. And during the same period even MNCsbegan to involve themselves directly in actionsagainst poverty that extended beyond their normalcontribution to development as investors, producersand employers.3

So as we head into the second half of 2005, it looksas if these efforts will lead to substantive action byOECD governments on upping aid flows,expanding debt relief and improving the traderules in a pro-poor direction. Of course, there aremany who voice contextual concerns about all this.4

But the gains being achieved in securing moreresources and renewed commitment from the Northto tackle poverty in developing countries are asignificant achievement and should be applauded.

However, the IDC must now address the challengeof using the new resources and opportunities beingmade available to kick-start a process of dynamic,self-sustaining economic development that willallow poor people in their billions to escapepoverty – permanently.

This is a complex and difficult undertaking as alook backwards reveals. Over the last 50 years, atleast a trillion US dollars5 and many times thatamount in effort, exhortation and emotionalengagement has already been spent by the IDC torelieve human suffering in poor countries andcreate the starting conditions for poor people toescape poverty.

There is ample evidence this assistance has broughtmuch relief in humanitarian terms, achieved greatbreakthroughs against disease and chronic foodshortages and made many other diversecontributions to the long-term developmentprospects of poor countries.6 Unfortunately, there’sequally ample evidence showing that even allowingfor difficult operating contexts, much aid has beeninefficiently and ineffectively deployed and has notcontributed nearly as much as had been hoped toeconomic progress in poor countries.7

So while aid gives much to build upon, the uneventrack record of development assistance and theuncertainty that remains about how best tocatalyse equitable economic growth means thatwhat was done to tackle poverty in the past is notnecessarily a reliable guide to what should be donein the future. So the issue of precisely what theIDC is now going to do with the newopportunities it’s been given to untangle theGordian knot of poverty in developing countries isa hugely important question for many reasons.

There’s a great deal of public money at stake andsome pretty bold claims are being made aboutusing it to ‘Make Poverty History’. The persistenceof extreme poverty in some regions of the world isseen as a security threat and an economic drain onrich countries.

Most importantly, there’s the urgent and massivebackdrop provided by the two billion people stillliving on less than $2 per day – many of thempoorer than they were just 20 or so years ago.8

And yet set against this great need, and the doomand gloom that still informs the aid debate, thereare positive signs of progress in Africa and elsewherethat demand to be acknowledged and supported.9

So which way now?

Not surprisingly, there’s much advice being offeredas to what should be done now to tackle povertyby commentators and expert panels such as theUN Millennium Commission and the UKCommission for Africa. The ultimate focus of allof the wisdom on offer today is the same questionthe IDC has been struggling with for many years.And that is: how, when and where should itintervene to best help developing countries createthe conditions that facilitate sustainable andequitable economic growth?


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Section 1: The case for putting pro-poor enterprise at the heart of the war on poverty

This is where the recent experience of ShellFoundation may be of value. Working with amajor multinational, we’ve been exploringsystematically the question of how donors andlarge companies can most effectively catalyse andscale up pro-poor market-based and pro-poorenterprise-based solutions to poverty (see annex 1).

There are sound reasons for Shell Foundation (andother organisations)10 adopting this focus. Mostimportantly, theory and past experiencedemonstrates a flourishing private sector, fairlyregulated by government and populated byenterprises of all kinds but especially by what wereferred to earlier as pro-poor enterprises includingsmall and medium-sized enterprises (SMEs), is keyto delivering the sort of economic growth that weknow pulls poor people out of poverty.11

Moreover, looking forward, it is obvious that pro-poor enterprise growth, especially in the SMEsector,12 will be critical in meeting the headlinegoals of the current campaign to overcome poverty:

Millennium Development Goals.

Pro-poor enterprise-based activity on a massivescale will be needed to deliver and maintain thebasic goods and services whose provision willunderpin the attainment of many MDGs.13

Fairer trade.

Using the Doha Trade Round to secure a morepro-poor trade regime is an important start. But ifthis is to be converted into real benefit for poorpeople, then large numbers of internationallycompetitive farmers and enterprises will be neededto capture and retain a fair share of the availableincome gains.14

Debt relief.

Much is made of how some countries have used thefunds freed up after debt relief for education andhealth. This is good news. But countries benefitingfrom debt relief must invest some of this boon inpro-poor enterprise, job and wealth creation toconsolidate and build on these quality-of-life gainsthat might otherwise be eroded over time.

Finally and most fundamentally, the growth ofenterprise, and particularly SMEs, offers poorpeople a powerful weapon in their fight to escapepoverty – hope. People must believe there’s an

economic ladder out of impoverishment that theycan get onto and climb by dint of honest effort. Ifthey lose sight of this goal, they lose interest in help-ing themselves, they don’t encourage their childrento go to school, they stop looking up and forwardand resign themselves to poverty – permanently.15

There are, of course, many qualifications that mustbe made about the pro-poor impacts of enterprisegrowth in developing countries.16 These rangefrom the potential for environmental damage toacknowledging there are many extreme povertycontexts where markets and thus enterprise cannotfunction in a normal way.17

And it’s true that development is about much morethan jobs and income; and that on balance,healthier, better fed, better educated, less oppressedpeople living in a cleaner environment are likely tobe much more productive in what they do. Thismeans there are, of course, many other povertypriorities that developing countries and the IDCmust address.18

But common sense also suggests it’s a lot easier forpeople to secure and retain the gains arising frominterventions focused on health, education, genderequality and so on if they have a job in the firstplace or have prospects of securing one in the nearfuture – which is why jobs are often at the top ofpoor people’s lists of priorities.19

So in theory, practice and common sense terms,most routes out of poverty for poor people startwith enterprise. To be sure, the starting conditionsfor addressing pro-poor enterprise developmentwill be extremely difficult in many countries.Fortunately, however, there’s plenty ofentrepreneurial drive, traders’ skills, risk awareness,consumer demand, innate talent, individual desireto improve and even disposable income in thepoorest countries.20

But what there clearly is not enough of yet isenterprise and the wealth, income andempowerment that enterprise development offerspoor people. And when there’s not enoughenterprise and not the right enabling environment,the downward trajectory of poverty is continuallyreinforced as shown by Figure 1.

So what the poorest developing countries needabsolutely in order to make poverty history is thegrowth of pro-poor enterprise.


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Section 1 The case for putting pro-poor enterprise at the heart of the war on poverty

Figure 1

Enterprise and development: the cycle of poverty

Adapted from a figure in M. Forstater et al (2002) Business and Poverty: Bridging the GapInternational Business Leaders Forum, London

Section 1 The case for putting pro-poor enterprise at the heart of the war on poverty


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Low labour productivity

Lack of jobs and accessto productsand services

Low tax revenues Little education and income

Low savings

Little disposeable income

InsecurityPoor infrastructure

Lack of investment

Since its launch in June 2000, the ShellFoundation has been pursuing a structured journeyto learn how market forces can be harnessed to getaffordable products and services to poor people,and which interventions and what kind of agentsare most effective at catalysing the emergence andgrowth of pro-poor enterprise – especially SMEs.21

We’ve also explored how best to take advantage ofthe corporate environment we operate in so as toadvance our charitable objectives and have observedcarefully under what conditions and through whatmechanisms large companies can most effectivelycontribute to development in general and pro-poorenterprise growth in particular.

At the outset of our journey we acted much like atraditional foundation. We consulted widely,publicised our areas of interest and then siftedthrough countless proposals submitted by profess-ional NGOs and non-profit organisations. Weused rigorous selection criteria to decide betweenproposals and wound up using our grant money tosupport a large number of relatively small, one-offprojects scattered across many countries.

Most early projects were competently completedby our grantees. But for reasons explained below,we now judge many of these to have ‘failed’because they did not leave behind initiativescapable of surviving or going to scale without ourongoing support or that of other donors.

Largely in response to that experience, we have beendeliberately evolving to something more akin to a‘social merchant bank’.22 In essence, this means wework with strategic partners and jointly deploy ourmoney, project development and financialengineering skills and networks to launch what wehope will ultimately become scalable, financiallyviable enterprise – and market-based initiativesthat deliver measurable financial and social (pro-poor and pro-environment) returns. (see annex 1)

There is still more to learn. But over time ourapproach has begun to bed down and has startedto generate interesting insights and someencouraging results. And it is this accumulatedexperience that provides the empirical groundingfor the four aspects of the Shell Foundation‘approach’ we describe below and illustrate withexamples in Section 3.

Financial viability

When we consider providing support to a pro-poor enterprise either directly or indirectly throughsome form of intervention or initiative, ourexperience23 leads us to look first at how the issueof financial viability is treated by other finance, bythose running the implementing of theintervention and by the enterprise themselves. Iffinancial viability is not given primacy in theirplans and actions, we do not offer support.

The reasoning is simple. Achieving financialviability is not just about ‘making a profit’. Manythings happen as pro-poor enterprises becomefinancially viable. First, they rely less and less onrelatively scarce aid money, which is a good thing.Second, achieving financial viability usually meansthey can start to grow, thus employing more poorpeople directly or through their suppliers. Third,through the ongoing process of innovation andproblem-solving that accompanies growingfinancial viability, they are able to provide more oftheir customers – poor people – with moreappropriate and more affordable goods and services.

Our experience is that the best way we, as a donor,can help this process of poverty reduction is byensuring our support is provided on terms thathelp and require the target enterprises to becomeever more innovative, efficient and profitable atwhat they do as a business.24

Going to scale with local capital and local capacities

We next look at the interventions proposed to us(financing schemes, training programmes,enterprise incubators, market developmentprojects) and assess whether they are designed to‘go to scale’ (via growth or replication) using localcapital and local capacities.

Again, the reasons are straightforward. There willnever be enough aid to provide the supportrequired to the millions of pro-poor enterprisesthat need it. So the reach and scaleability of anyaid or donor-funded interventions will always beseverely limited compared with need.25

Moreover, foreign grant money – however wellintentioned – almost always comes bundled withother things – distant knowledge, foreign skills,


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Section 2: Learning by doing: the Shell Foundation experience in catalysing pro-poor enterprise development

other agendas – whose presence for too long can‘inhibit’ learning opportunities for the enterprisesand local support institutions in ways that increaserisk and inhibit growth.26

Foreign support can play a vital seed-capital role –and indeed is doing so in the current wave of pro-poor private equity funds and ‘blended value’investment vehicles focused on providing financialsupport for a scattered portfolio of socialentrepreneurs.27

However, what we look for are pro-poor enterpriseor pro-poor consumer interventions that aredesigned to be taken up as quickly as possible bylocal suppliers – of capital and skills – and whoseincome stream has the potential to become lessand less dependent on grant funding. Essentially,we set out to use our funding and other assets to‘buy down’ the risks associated with theengagement of local capital and capacity in localenterprise development.

Transferring business DNA

We have found that if our interventions are tosuccessfully feature viability and scaleability, thenour partners need to be adept at applying businessthinking and business principles to how theyoperate and to the interventions they propose.

What we have in mind here is the deployment byour partners of the same set of skills andentrepreneurial instincts – what we call ‘businessDNA’ – that business people everywhere use toidentify and assess business opportunities and thenovercome the problems that must be solved enroute to setting up and operating an enterprise.

These include understanding the market andknowing who your customer is, what they wantand will pay for. It also means assessing anddealing with risk, instinctively seeking to keep costsdown and ensuring the security and quality ofinput and final product supply and distribution.

Our experience suggests that the presence ofbusiness DNA in our partners usually means theywill be particularly enterprising as they search forsolutions. And as a consequence, they are best ableto convert our support as a donor into largenumbers of pro-poor enterprises able to surviveand grow after the subsidy stops.

Obviously more than just business DNA is neededto cope with the complexities of running anenterprise in the context of poverty. Indeed, theideal is where best practice from the poverty andbusiness worlds can be integrated. And of course,there are IDC with no business record who havebeen able to engineer successful pro-poorenterprise interventions that also deliver valuablesocial benefits.

But our experience is that most actors from thenon-profit or the public sector do not take easily tothe business way of tackling problems – even ifthey ‘talk the talk’ of business. This is not acriticism or anybody’s fault. It is simply arecognition that either by virtue of education,experience or inclination, many civil society actors(at all levels in the IDC and including policymakers and policy advisers in developing countries)do not have business DNA in their make-up. Theyare, in effect, commercially illiterate. And, in ouropinion, these characteristics greatly reduce theirability to develop successful business – and market-oriented solutions to poverty. Indeed, thewidespread lack of business DNA and realcommercial experience in the internationaldevelopment supply chain arguably reduces theability of the IDC to solve many povertyproblems.28

And in our opinion the absence of this greatlyreduces their ability to develop successful business– and market-oriented solutions to poverty. So inthe case of our partners, and of course with theirpermission and full engagement, we put a gooddeal of effort into transferring businesses DNAinto them via various routes set out in the casestudies to follow.

Harnessing the value-creating assets of MNCs

Our core arguments so far – that enterprise andbusiness DNA are keys to eradicating poverty andthat a great deal more of both are needed –underpin the social benefits offered by the finalelement of our approach.

Simply put, our experience as a donor operatingalongside a major multinational has convinced usthat big companies possess a wide-ranging set oftangible and intangible ‘assets’ that can be of hugevalue in the fight against poverty, especially via an


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Section 2 Learning by doing: the Shell Foundationexperience in catalysing pro-poor enterprise development

enterprise-focused attack. So we consciously andtransparently seek to deploy these assets in supportof our work and that of our external partnerswherever we can.

The ‘assets’ we are referring to fall into threecategories:

First and most fundamentally, establishedbusiness is a vast repository of the generalisedbusiness DNA that is encapsulated in people,knowledge and techniques likely to be found ingreat profusion, especially in big business.29

The second asset category falls under theheading of ‘convening power’. This is shorthandfor the subtle and overt ways by which acompany’s track record, reputation, brand,political reach and financial clout makes otherpeople listen and respond to what the companyhas to say.

And the third category includes the company –and sector-specific physical and marketknowledge-based assets that lie at the core of theunique processes of value creation and captureon which every company relies.30

Usually, all these asset classes are fully and properlydeployed in the interests of the business and itsshareholders. And when business operates well indeveloping countries, this is a huge source of socialvalue via jobs created, taxes paid, technologytransferred, and so on. But typically these are notthe assets MNCs offer, or are asked to use, in orderto discharge their CSR or sustainable developmentcommitments.

What our experience suggests is that deploymentof these private value-creating assets via pro-poorenterprise interventions, could offer a huge but stillunrealised contribution to the efforts of the IDCand poor countries to make poverty history.

Section 2 Learning by doing: the Shell Foundationexperience in catalysing pro-poor enterprise development


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Below we illustrate how the four elements of ourapproach – financial viability, scaleability,deployment of business DNA and harnessing ofcorporate value-creating assets – are present in andadd value to what we do as a corporate foundation.We draw in detail in the main text on materialfrom our Energise and Breathing Space programmeswhich address the energy and poverty challenge.We also refer extensively to other activities of oursin the footnotes and in Annex 2.

Fostering pro-poor energy markets

As already explained, the Shell Foundation haselected to focus a significant portion of its effortson tackling the issue of ‘energy access’ in poorcountries. There is a robust poverty rationale fortackling these issues.

Many hundreds of millions, perhaps billions, ofpoor people in developing countries can’t go homeat night or into their workplace or out onto theirfarms first thing in the morning and switch on thelights or start up their sewing machines orirrigation pumps. They lack easy, affordable accessto reliable, modern energy sources and the modernenergy ‘services’ of light, heat, motive andmechanical power. This matters because increasedconsumption of modern energy services is one ofthe fundamental features of the economicdevelopment of poor countries.31

Thus pro-poor ‘energy access’ in poor countries hasa critical role to play not just by improving qualityof life but in dynamic development terms as powerof some form is required for all productive activities.Moreover, allowing production to escape from theconstraints of muscle power is a key stepping-stoneto development. So the lack of energy accessseriously constrains economic development andslams the door on billions of poor people trying toget started on the journey out of poverty.

The attention given by the IDC to energy accessby the poor – especially the rural poor – has waxed,waned and changed over the years and now has thefollowing features. First, there are new aid-funded,multi-stakeholder but NGO dominated initiativesunderway, intended to help poor countries put inplace sensible strategies to tackle energy access.32

Second, the size of the problem and limited publicfunding for rural electrification means market-based solutions to rural energy access are

considered necessary – though there is also a viewthat sufficient local capital is not available tofinance these solutions. Finally, concerns about theglobal climate change impacts of billions of poorpeople escaping poverty by using the same fossilfuels as do rich people, means the IDC is heavilybiased towards the promotion of renewable energysources in tackling the energy access problem.

The Shell Foundation consulted widely with othersto understand this landscape.33 As a result, wedecided to pursue a strategy to tackle the pro-poorrural energy access problem that complements andbuilds on the IDC’s efforts but at the same timediffers from the dominant approaches in a varietyof ways.

Not surprisingly, market-based solutions to energyaccess problems are at the heart of our strategy. Butwe don’t think local capital or income availability isthe major challenge to be overcome in making themarket work. We see the core problem being thelack of an SME sector (enterprises and supportingentities) able to deliver affordable energy services topoor people. The main contextual constraints to beovercome are institutional risk, rules that don’twork and lack of the right kinds of capacity.

We’re also concerned about the environmentalimpacts of poor people using fossil fuels but don’tbelieve that distorting the market via renewables-only rules is the most efficient and most equitableway to make things happen. Finally, whileplanning clearly needs to be done, our strategy forcatalysing action by others has been to build atrack record demonstrating there are financiallyviable ways of ensuring greater and sustainableaccess by poor people to modern energy services.

Our portfolio of energy access initiatives include afair number of social investments in individualenterprises from which we have learned a greatdeal. But we’ve found the greatest returns arecoming from our institutional pilots, some withlocal financial sector partners, and involvinginnovation in the delivery of finance and technicalassistance to our field partners and to pro-poorenergy SMEs and their customers. Whereverpossible the strategic exploitation of Shell Groupassets has been pursued to advance our charitableobjectives and those of our partners.


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Section 3: Shell Foundation’sexperience on the ground

Case study 1

Sustainable solutions to Indoor AirPollution: the biggest killer you’venever heard of

The common consensus is that at the beginning ofthe 21st century, more than 2 billion people arestill relying on traditional fuels for cooking andheating. This translates into hundreds of millions ofvery poor households cooking family meals indoorson smoky stoves and open fires using ‘traditional’fuels such as firewood, crop residues and animaldung. The smoke and fumes emitted (knowncolloquially as Indoor Air Pollution) contain

pollutants and particulates that when inhaled cancause deadly and debilitating diseases such aspneumonia and chronic obstructive lung disease.34

In October 2004, the World Health Organization(WHO) and the United Nations DevelopmentProgramme (UNDP) labelled Indoor Air Pollution(IAP) the ‘Killer in Kitchen’ because it’s responsiblefor 1.6 million deaths each year – largely womanand young children – and blights the lives ofmillions more. This makes little-known IAP thefourth largest health threat to these groups afterwater-borne diseases, malnutrition andHIV/AIDS.35 IAP is also part of a well-knownpoverty chain (the poor, not able to afford cleaner,commercial fuels, must spend many hard hourscollecting ‘free’ biomass fuel) whose direct andindirect costs are enormous.36

The Shell Foundation approach

For these reasons and because IAP is the mostserious energy and poverty-related health problem,the Shell Foundation has committed $10m totackle IAP through its Household Energy andHealth Programme (HEH) which we havebranded Breathing Space. The most importantfeature of Breathing Space is not the money,however, but our approach to tackling IAP. This isbasically to identify, test and then, ideally, cause tobe diffused on a very large scale, ‘market-based’mechanisms for getting killer smoke out of verylarge numbers of very poor people’s kitchens.

We adopted this approach for three reasons. First,distorting regulations, health and safety concernsand geography have inhibited commercial suppliersof cleaner fuels from entering a market segment itperceived anyway as having no money to spend.Second, for a variety of largely ‘silo-mentality’reasons, IAP as an issue, despite its significance, hasfailed to attract much donor funding compared toother poverty/health/environmental problems.37

Finally and most germane, the interventions thatdid get donor funding have not made real inroadsinto the problem on a significant scale. This ispartly because of limited funding but largely webelieve because the ‘solutions’ offered were basicallysubsidised, technical fixes (mostly ‘cleaner’ stoves)that were often designed elsewhere and bore littlerelation to what the ‘market’ (millions of poorhouseholds) wanted and could afford or to whatovercoming the IAP problem required.38


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Section 3 Shell Foundation’s experience on the ground

Key features of the Indoor Air Pollution case study

Breathing Space is the Shell Foundation’sprogramme for tackling Indoor Air Pollution (IAP)caused by smoke emitted from indoor cookingwith biomass. Acute respiratory diseases linked toIAP kill about 1.6 million women and childrenevery year in developing countries while hundredsof millions more suffer debilitating disease.Historically, aid-funded efforts to tackle thisproblem have had very little success.

Breathing Space is aiming to identify, test and thendiffuse on a very large scale, ‘market-based’mechanisms for getting killer smoke out of the‘kitchens’ of poor households.

Supply and demand-side interventions based onbusiness and market principles are being piloted in8 developing countries. To date 200,000households have been removed from risk – afigure that will rise to more than a million by theend of the pilot phase.

This is encouraging but trivial compared to thesize of the problem. More significantly a numberof the interventions tested are robust enough totake ‘to scale.’ So next stage scale-ups underwayin India and Guatemala, based on financiallyviable business models, are targeting three millionhouseholds.

By 2008, using our own resources as investmentcapital and smart subsidies, the target is to get 10million households out of risk. In parallel,exploration is underway into the feasibility ofsecuring strategic partnerships and setting upfinancially viable intervention mechanisms at theinternational and national level to reach theadditional hundreds of millions of poorhouseholds who will otherwise continue to sufferfrom this ‘killer in the kitchen’.

In our language, very little business thinkingappears to have been applied to tackling the IAPproblem by either the donor or the projectdeliverers. In our view, this resulted in most IDCIAP interventions being neither financially viablenor scaleable. Thus they usually made little sustain-able headway in eradicating the IAP problem.39

A new customer value-proposition

The new generation of stoves designed to effectivelyreduce emissions are significantly more expensivethan the lower-cost ‘efficiency stoves’, increasing thebarriers to access for poorer customers. In some casesthese improved biomass stoves are more expensivethan liquid petroleum gas (LPG) stoves. But LPGas a fuel is often not available in rural areas. Thecombined effect of these product limitations andthe low availability of desired alternatives is thatthere is often a very poor customer-value propositionfor IAP reducing stoves and fuels. Consequently,demand is low and marketing costs are high.

Against this backdrop, we reasoned that by success-fully demonstrating there might be at least partiallymarket-based approaches to tackling IAP, we mightbe able to break the vicious cycle of ineffectiveIDC interventions by better understanding andtackling the market barriers. This in turn mightprovide the impetus to attract sufficient donorand/or private sector interest to tackle an avoidablepoverty problem that has probably caused 40million unnecessary deaths over the last 20 years.

New partners and usual suspects

We kicked the whole process off via stakeholderconsultation and a typical donor ‘Request forProposals’ (RFP), asking for proposals for potential-ly commercialisable and scaleable ways of tacklingIAP. The RFP attracted about 140 proposals,primarily from NGOs, of which most addressed theIAP issue but failed to understand what we meantby commercialisable or scalable solutions to IAP.

Nevertheless, we did find some very good NGOpartners who could talk, and were willing to walkwith us, a route to commercialising solutions toIAP. So we set up pilots in a number of countries40

to explore systematically different market-relatedIAP ‘solutions’ including the development and saleof cleaner stoves, cleaner fuels, use of consumerfinance on a micro-credit model, education viasophisticated marketing strategies, reducing coststhrough mass production and distribution and so on.

Key actions for the pilot phase

Through these, we have sought, with our partners, to:

a. assess whether among our target ‘market’ – ruralhouseholds suffering from IAP – whether therewas an interest, willingness and ability to ‘pay’for IAP solutions;

b. verify the effectiveness of the interventions: dothe improved products really reduce IAPexposure;

c. assess whether there was some form of business,financing and distribution ‘model’ or valuechain that could produce and marketappropriate and affordable IAP products to verypoor households.

In parallel, we carried out a systematic review of theonly two large-scale household energy programmesin the world: the National Improved ChulhaProgramme in India and the National ImprovedStove Programme in China. Lessons from thesetwo programmes have been extremely valuable indeveloping our own approach. In both cases theprogrammes were highly subsidised and had mixedresults in reducing IAP. The China programme islargely deemed a success and has led to theestablishment of a thriving stove market as well assome excellent technical innovation. The ShellFoundation review was the first of the programmesince the 1980s and has brought the Chinaexperience to the attention of the internationalcommunity. Neither programme is beingcontinued by the national government in question.

More than money

In addition to providing financial resources to thepilots, the Breathing Space programme has threefeatures:

the provision to partners of significant technicaland business assistance through intensive hands-on engagement by Foundation staff, local Shellstaff and finance and business consultants;

complementary activities (separately funded)designed to answer key developmental andcommercialisation questions thrown up by thepilots and especially by our ‘going-to-scale’aspirations. These include development of astandardised monitoring methodology tomeasure the effectiveness of interventions,



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whether the product offering meets customerneeds and if there is a significant reduction inIAP. A set of tools is also being developed formarket research, demand assessment, supplychain development and sustainable financing;

In parallel, a second set of tools is beingdeveloped for market research, demandassessment, supply-chain development andsustainable financing.

Lessons learned

Once the pilot phase is completed by the end of2005 at a total cost of US$7 million, it will havecatalysed the market-based diffusion of smoke-reducing products to poor households andremoved over one million at-risk individuals fromthe perils of IAP. This is the first systematic IAPintervention ever mounted though it is still limitedcompared with the scale of the problem.41

We’ve also learned along the way the value of andhow to introduce business DNA into a developmentproject context and how to help NGOs adapt theirskills and ways of working. This is essential tomeeting the rigorous demands of developingfinancially viable ways of tackling a classic povertychallenge.

This has not been an easy task because the non-monetised nature of the biomass fuel market, highdistribution costs in rural areas, differences in tastesand diets, and the nature of the product offeringmeans that the most effective business models areoften decentralised, bundling together a network ofdozens and even hundreds of micro-enterprises.The most successful pilots have combinedcentralised component production, quality controland supply-chain management with decentralisedinstallation and assembly of products, linked to anetwork of social service providers (such as NGOs)which provide the link to communities, socialmarketing and awareness raising.

Successful models include both direct cash sales tocustomers and sales to NGOs or publicinstitutions, which distribute the products throughtheir own social programmes with variouscombinations of subsidies, micro-credit or in-kindpayments. The key factor is maintaining thecommercial integrity of the supply chain and keep-ing it separate from whatever facilitation process isused to get the product to the end customer.

Other advantages of this combined ‘public-private’model is that the NGOs or public institutions canprovide some of the ongoing training on stovemaintenance and inspect installed products. Linksto micro-finance institutions and other financingmechanisms such as revolving funds that provideboth enterprise financing to businesses in the supplychain, and consumer finance to end customers,provide an avenue for market growth and scale up.

Most importantly, the pilots have demonstratedthere may be viable business models, supply chainsand consumer financing mechanisms that could bebrought to bear on the IAP problem on a largescale.42

This has given us the confidence to take the nextsteps in our ‘going-to-scale’ journey. In Guatemalaalone, for example, this means all involved movingout of the comfort zone of managing a typical,subsidised, low-risk (to the implementers andfunders) poverty project with a target populationof 5,000, to planning and implementing a self-financing market entry and distribution strategy toget IAP interventions sold into a significantpercentage of the 600,000 at-risk and very poorhouseholds. Meanwhile, in one state in India, thescale-up approach will reach over three millionpeople, from a pilot level of 100,000.



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Case study 2

Catalysing the pro-poor market for solar home systemsIn recent years, the IDC has invested a great dealof effort and money in supply-side initiatives tostimulate the use of renewable energy bydeveloping countries. These have typically been ofthe technology-forcing and supply-side subsidyvariety – often delivered via donor – or government-designed and managed interventions. There hasnot been as much success as was hoped, thoughsome specific initiatives have worked well.43

A different approach was taken in a renewableenergy initiative in Karnataka State in south Indiain which Shell Foundation has been involved alongwith United Nations Environment Programme(UNEP) and United Nations Foundation. Thegoal of the initiative – called the ‘ConsumerFinancing Programme for Solar Home Systems inSouthern India’ – is to catalyse the market for solarhome systems (SHS) among the underserved ruraland peri-urban population in south India. It hastwo unique features. First, the private sector wasextensively consulted about how the interventionshould operate. Second, the initiative is actuallybeing run on a day-to-day basis by Syndicate Bankand Canara Bank – two of India’s largest bankswith extensive rural operations.

In the $7.6 million programme, donor money isproviding a small interest-rate subsidy to this bank-run consumer loan scheme. The banks areadministering the scheme much as they do otherconsumer financing products, but they havereceived strong training, marketing and othersupport provided by the approved vendors fromwhom customers can extract the best deal andsystem of their choice

It has catalysed extremely rapid growth in the SHSmarket (80% between start 2003 and end 2004with 10,000 systems installed) and now accountsfor an average of 60% of new business beingsecured by the four participating vendors. Overtime the interest rate subsidy to the banks has beenreduced but the success of the programme incatalysing market growth will likely lead SHSconsumer finance to be greatly expanded by theIndia banking sector, but on an entirelycommercial basis and involving no further donorcontribution.44

Case study 3

Nurturing pro-poor small enterprisein southern India via the socialmerchant bank modelThe Small Scale Sustainable Development Infra-structure Fund (S3IDF)43 is another innovativefinancing initiative operating in south India inwhich the Shell Foundation is involved – andwhich demonstrates the value of applying businessthinking and business principles to tackling evenmore extreme poverty contexts. S3IDF targets verysmall enterprises that require access to smallamounts of capital ($1000 to $10,000) so they canoffer energy, water and other basic infrastructureservices to very poor customers. Typical projectsare small community electrification schemes usingrenewable energy (solar, hydro, biomass).

The context in which S3IDF is operating isgeneric across developing countries and there is notan absence of technology, business ideas, or thewillingness of even very poor customers to pay(energy expenditure of poor households can bebetween 15% and 30% of total income). The keyproblems are the lack of availability of finance andappropriate business development assistance(BDA) to support the growth of these enterprises,and the lack of experienced intermediary agentswho can help bring these projects and their leadentrepreneurs to market.

Commercial banks and equipment suppliers won’tlend to what are inevitably inexperiencedentrepreneurs without collateral and little businessexperience (including experience in how to accessstart-up finance). The banks have no experience ofthese nearly invisible markets or of the particularneeds of these enterprises. So all in all, it’s just toorisky. There are better, safer ways to earn a return.For similar and other reasons, these types of dealsare simply off the radar screen of most pro-poordevelopment agencies and development financeinstitutions.

So S3IDF brings to small scale, pro-poorinfrastructure business opportunities, theinnovative financial, institutional and technicalengineering that is common in large infrastructuredeals. To do this, S3IDF operates as a ‘socialmerchant bank’ targeting very small enterprises.



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S3IDF applies business criteria and best practicefinancial engineering skills45 in assessing, selectingand structuring its deals, and delivers the flexiblemix of finance and specialised BDA its ‘clients’need but which is not available elsewhere. AndS3IDF works closely with select partners from thefor-profit and not-for-profit sectors who canprovide skills and assets to the deal engineeringprocess that it cannot.47

S3IDF addresses its scale-up aspirations by alwaysensuring the involvement of local capital sources in its deals on a learning-by-doing basis. This is socommercial banks will see there is a return to bemade and thus make more of their own capitalavailable in future to finance very small pro-poorenterprises.48

S3IDF now has a portfolio and pipeline of 80+projects. Almost 20 are in operation;4930+ areunder detailed pre-investment analysis and/or atthe final deal-structuring stage. All but one liveproject is producing returns as expected (albeit still below market rates). The evolving S3IDFportfolio/pipeline is in effect verifying its businessmodel and this process is helping it to line up theingredients needed for a partially self-financingscale up over the course of the next 12–18 months.

Of course, it’s early days for S3IDF as its portfolioincludes some high-risk projects and veryconsiderable subsidy for project preparation. Thisraises questions as to whether such a fund could(or indeed should) ever be fully commercial.50

But S3IDF, operating like a merchant bank in anextremely impoverished market yet successfullycatalysing enterprise-based solutions to poverty and doing it in a scalable fashion, deservescommendation and attention.

Case study 4

SME investment funds – deployinglocal capital and the challenge ofgoing to scale

Things are further advanced in our SMEinvestment fund programme – called InvestmentPartnerships – now operating in Uganda and SouthAfrica, and soon to be extended elsewhere in Africaand beyond. The issue – lack of energy access bypoor rural households and producers – is the sameas in India only more extreme.51 The energy accesschallenge being explored by Shell Foundation inAfrica is also the same as in India: how to catalysethe development of a financially viable SME sectorcapable of supplying pro-poor energy sources andservices.

Section 3 The Shell Foundation experience on the ground


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Key Features of the SME financing case study

The Shell Foundation is supporting the sustainablegrowth of SME’s in Africa via the linked provisionof both business development assistance and non-collateralised finance. African SMEs are typicallyunable to secure commercial finance becauselocal banks are reluctant to take on the ‘risks’represented by lending to entrepreneurs who lackboth business experience and collateral

In the last 2 years, in partnership with local banks,we have set up the $5 million Uganda EnergyFund and the $8 million Empowerment throughEnergy Fund in South Africa. Our bankingpartners in these initiatives are fully at risk with us.

Results to date:

345 pro-poor enterprises have received businessdevelopment assistance – of which 170 are nowreceiving finance and ongoing mentoring.

It is estimated that these two funds have createdalmost a thousand new jobs plus generated avariety of other pro-poor outcomes

Both funds have gained enormously from value-added and no-cost support from local Shellcompanies.

Both funds are generating financial returns thatare attractive to commercial investors

$20 million second stage funds are planned forboth with the large majority of capital beingprovided by local banks

Energy access as market failure

In sub-Saharan African countries as in other poorregions, development of the SME sector in energyand other segments is constrained by market failure.Figure 2 highlights the SME finance segment from$50,000 to $1 million where the supply of enterprisefinance is extremely limited in sub-Saharan Africa.It sits between the ‘relatively’ well served micro-finance segment (loans up to $10,000) and projectfinancing and venture capital (from $1m to $5m).Again as in India, African banks view lending toSMEs as high risk because entrepreneurs lackbusiness experience and acumen and have little ornothing in the way of collateral or assets to secureagainst a loan.

Figure 2

But some favourable conditions exist

There are, however, market, policy and businessdrivers that make African banks interested, inprincipal, in the SME energy sector. First, there’splenty of evidence that very poor segments of ruralAfrica are willing and able to pay for energyservices and already can spend as much as 30–50%of their disposable income on energy.

Next, governments want the overall SME sectorserviced with finance in order to trigger its growthand so often require local banks to earmark fundsfor this purpose. In parallel, internationaldevelopment finance organisations also have SMEfunds available to lend to African banks. Finally,the banks themselves recognise that a vibrant andexpanding SME sector into which they can lendwith confidence represents a major growthopportunity for their business.

But these positive preconditions have still notgiven local African banks the confidence to actuallyopen their loan books to SMEs. This is becausesmall enterprise requires finance and very specifickinds of business development assistance (BDA) atboth the pre-finance stage and during operation.

African banks have neither the ‘culture’ nor theskills and experience to provide BDA to SMEs.Banks know how to manage assets which means ifloans are not repaid, they know they can repossessthe assets used as collateral to recover their money.They don’t know how to manage businesses,especially start-up SMEs, to profit so the businesscan pay off its loans. So the banks deploy theirown funds into lower risk sectors they dounderstand and resist pressures to finance SMEs.As a result, local and international financeearmarked for the SME sector in Africa goesunused or is invested elsewhere.

There have been other SME financing initiatives inAfrica (some focused on the energy sector) wherelocal capital has played only a small role and wheregovernments or non-profits accessed developmentfunding from abroad. But these initiatives have byand large not been very successful.

Deciding on the right approach

We took explicit account of this reality in adaptingour model (viability, scaleability, business DNAand Shell Group assets) to develop a ‘market entry’strategy into the Ugandan and South African energySME sector. This strategy had four components:

to look for local sources of finance and businessknow-how (DNA) as partners (because they arebetter at delivering on our charitable objectivesthan non-profits);

harness the convening power and other assets oflocal Shell companies in ways that lowered therisk to local capital getting involved in SMEfinancing;

organise the provision of financing and BDAaround the needs of the entrepreneur;

design our initial forays into the sector in waysthat would provide robust evidence, learningopportunities and a strong demonstration effectso that local capital would be willing toundertake subsequent scale-up activities.



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Enterprise finance - $50,000 - 1m

Micro-finance - $0 - 50,000

Projects $10m +

Venture capital - $1m - 5m

Private equity - $5 - 10m

The evolution of the Investment Partnershipprogramme since 2002 first in Uganda and then in South Africa has robustly tested and validatedthe soundness of Shell Foundation’s approach bydelivering close to commercial returns frominvestments in the risky SME sector.

Getting a foot in the right doors…

Having decided in Africa not to partner with non-profits, Shell Uganda and Shell South Africa’s localknowledge helped the Foundation identify themost promising partner candidates from amongthe local financial institutions (FIs). But it was thecommercial credibility and convening power ofShell that subsequently persuaded these FIs tomeet the Foundation to discuss the model.

Having got the banks’ attention, it was the pack-aging of the Foundation’s funding and a soundbusiness plan that helped secure commitmentsfrom local banks to join us at equal risk inlaunching our funds.

In Uganda, DFCU Bank agreed to match theFoundation’s $2m investment capital and agreedto set up the $4m Uganda Energy Fund (UEF).

In South Africa, ABSA Bank and the IndustrialDevelopment Corporation, each contributedinvestment capital of $3.5m alongside $1m bythe Shell Foundation to create the $8mEmpowerment through Energy Fund (ETEF).

Because of the small size of these pilot funds, theFoundation also provided a limited amount ofgrant funding to cover start-up and ongoingbusiness development costs – a feature that will notbe necessary in the case of larger second-stage funds.

Another feature of the business plan that attractedboth sets of banks was that the funds were to becommercially managed to achieve, as a primeobjective, financial viability of the fundedenterprises and the funds themselves.

This was starkly different from the developmentalgoals the banks had previously been offered (andrejected) to get involved with other SME fundingopportunities. Moreover, funded enterprises were tobe charged full commercial finance rates while thebanks were offered funds with a familiar seven-year,closed-end structure but with net returns of 5%.Such returns were clearly below normal commercialexpectations, but were still attractive to our banking

partners for two reasons. First, they were perceivedas realistic and attainable based on the size of themarket and risk conditions (compared with theinternational rates of return some African venturefunds propose). Second, they were acceptable tobanks with a long-term view of investing in theSME sector in order to grow their own business.

How Shell assets boosted banklearning, market awareness and deal flow

Having helped bring about a marriage between thebanks and the Foundation, Shell’s local knowledgewas brought further into play by introducing thebanks to the realities of SME energy sectorfinancing. This was achieved by providing thebanks with technical assistance relating to both thesupply and demand sides of the small scale andrural energy sector.

In Uganda, this took the form of advising loanofficers about the financial risks related to variousenergy technologies – an input hugely valued byDFCU. And for ETEF in South Africa, Shellbecame a useful source of client referrals – a criticalinput to portfolio funds reliant on adequate dealflow – while in both countries, fund governanceand marketing was strengthened with Shell support.

Another feature of the business model that provedattractive to the banks and subsequently critical tothe success of the funds was the remit given to loanofficers on how and for what purposes the fundscould be used. Their broad specification was tosupport SMEs that require energy-related inputs toboost production or that sell pro-poor energyservices.

We put very few restrictions on the funds beyondthat, aiming to ensure they were flexible enough toallow sufficient deal flow to make their portfoliofinance structure work. Hence the deal range wasbroad: there were no restrictions on type of energy,meaning all sources of energy could be financedrather than just renewables (as was the case withless successful funds); and non-energy assets couldbe funded as well if they facilitated the productiveuse of energy.

These criteria thus allowed the funds to support avery broad range of SME activity. So, for example,financing was provided that allowed small farmersin eastern Uganda to acquire solar-poweredagricultural crop driers. And in South Africa,



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funding covered the capital costs incurred by anenterprise that wanted to use the waste products of shelled peanuts to make cheaper and cleaneralternative briquettes to charcoal. (A full list ofenterprises assisted via our SME funds is availableat www.shellfoundation.org)

Meeting the needs of theentrepreneur

Simply making finance available in the $10,000 to$500,000 deal size was crucial to attracting theinterest of Ugandan and South African SMEs sinceit had never been available before. But otherfeatures were also designed into the model toprovide tailor-made support to entrepreneurs.

First, finance is offered in local currency rather thanUS dollars – a feature of other SME funds that ineffect puts them out of reach of most SMEs.Second, we try to offer finance in a form that suitsthe particular needs of the SME client. Third,collateral requirements are kept low by the abilityof the fund managers to lend against the businessplan as opposed to only lending to the value of theassets the entrepreneur can pledge as security.

All together now: finance, businesssupport and risk assessment

But perhaps the most important and innovativefeature of the Foundation’s SME investment fundsis that appropriate finance and BDA are jointlyprovided to clients via the fund manager.Elsewhere, these are provided separately withentrepreneurs picking up business advice wherethey can from people usually not experienced inbusiness and in a form that is not useful to theirspecific needs and interests.

The concept embedded in our funds, is that themanagers work first with the entrepreneur todevelop a robust business plan. During this, themanagers develop an understanding not just of the competence of the entrepreneur but of theparticular package of finance and ongoingtechnical and BDA that will be required to ensurethe profitable operation of the enterprise.

So the manager, while applying rigorous financialcriteria, can base his risk assessment not just on thevalue of the collateral but on empirical insight intothe prospects for success of the business. So ineffect, lending decisions are based on the business

plan rather than the value of recoverable assets. Andonce the deal is completed this means there is aplan of ongoing assistance, tailored to the needs ofthe entrepreneur as he/she enters the most difficultstage of any business – start-up and early operation.

As our results show, this aspect of the model –though it has had to undergo adaptation to get it‘right’ – lowers risk considerably in the portfolio,imparts valuable training even to those SMEs thatdon’t get offered finance, and provides a usefulvehicle for local banks to learn about the SMEsector, thus changing their own perception of riskregarding the sector.

So far so good in Uganda…

While both SME energy funds are still young, thepace of capitalisation in Uganda has been veryrapid, indicating interest in the market and anencouraging depth of demand. UEF will be fullycommitted before the end of 2005 – well beforethe original close-out date.

For UEF, out of more than 160 deals closed, non-performing investments are running at 2% and nowrite-offs have yet been made. The expected netreturn on investment of 20% on a portfolio ofdeals ranging from $10,000 to $400,000 (inUgandan shillings) is, of course, well above theoriginal 5% return first anticipated.

The financial viability of the fund in Uganda hasled to direct and indirect developmental returns. Forexample, 80 enterprises have received some form ofBDA in addition to the more than 160 receivingfinance so far. And an independent audit of ninesample enterprises revealed these alone have created386 jobs. And interestingly, despite deliberately nothaving a renewables-only criteria, a majority ofUEF deals involve renewable energy sources.

Real time adaptation of the model

While the UEF’s performance is pretty solid for apilot, operational experience revealed aspects thatcould be improved to lower costs and risk. Forexample, UEF mainly offered lease finance as itwas a product that ‘worked’ for both Ugandanentrepreneurs and our banking partner.52 But wefound that on its own, lease finance did notprovide sufficient capital or flexibility to meet theneeds of SMEs.



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Second, it soon became clear it was not costeffective for the bank operating the fund to makelarge numbers of small lease deals. But increasingthe deal size was not an option because SMEs werethe target market. So we experimented in using anintermediary to carry out business developmentand part of the credit assessment role. This wasfeasible where we found SMEs operating in the samesector – dried fruit, mushrooms and honey – sinceall had similar finance and BDA requirements.

So in one case, a fair trade purchaser of dried fruits– a company called Fruits of the Nile – took onpart of the bank’s role because it already hadcommercial relationships with hundreds of thefarmers our SME fund wanted to reach. Thisinnovation significantly lowered unit costs and ineffect greatly increased the portfolio size less than ayear after launching the fund.

Third, though our local bank partner adapted wellto the aspects of our model, the bank’s asset-lendingculture and incentive structure combined to reducethe potential value of the BDA component andconstrain the growth potential of the funds.

Applying lessons learned fromUganda in South Africa

Based on what we learned in Uganda through UEF(including the convening power that the Shellbrand had with local banks) we established ETEF,our South African fund, with new financialproducts and an independent intermediary in theform of an independent fund manager withparticular expertise in the small-scale energy sectorin place from the start.

Both the financial products and the contract withthe fund manager (who also had an equity stake inthe fund) were designed to tackle the incentive/equity/exit problem that bedevils all SMEfinancing in developing countries.

Offering finance to the SME in return forappropriately geared, performance-related returns –via profit sharing for example – is the key. It allowsyou to incentivise the entrepreneur (the better heor she does, the lower the cost of finance) andincentivise the fund manager (the better-performing the portfolio the better it does) so thatboth invest all their efforts in trying to succeed.

In the process you improve the risk–return profileof the portfolio. Also key is the fact that the fundmanager is expert at both BDA for SMEs andinvestment assessment and thus is much moreeffective at making this crucial dimension of ourmodel work in comparison to ‘converted’ in-houseloan officers.

ETEF progress and impacts

At the end of 2004, after less than a year’soperation, ETEF was 45% committed to dealsranging between $50,000 and $600,000. There’sbeen one write-off and the 5% target rate of returnwill be easily exceeded. Independently validateddevelopmental returns include 120 new jobscreated and 80+ enterprises – all pro-poor SMEs –received BDA. In recognition, ETEF and the ShellFoundation won ‘Best Initiative in Support of theMillennium Development Goals’ at the 2004Africa Investor Awards.

Comparative performance

Though it’s difficult to obtain information fromother donor-funded SME energy sector fundsoperating in sub-Saharan Africa, our best estimateis that for every $10 available to these funds, only$3 reaches the enterprises in the form ofinvestment capital (typically in forex). By contrast,for every $10 made available through our funds, atleast $8 in local currency (which is what SMEsneed) reaches the enterprise.

First steps to scale-up

The most important outcome of our pilots is thatlater in 2005, a $20m east African regional SMEenergy fund will be launched alongside a similarpetroleum sector SME supply-chain fund in SouthAfrica.53 Local bank contributions to both willexceed $10m and these have been committedbecause of the success of our pilots. Moreover,based on firm expressions of interest from theinternational corporate and finance community,more pro-poor, SME investment funds in Africa,Asia and Latin America will follow.

These first scale-ups demonstrate how businessthinking has produced an incentivised commercialvehicle that escapes the inherent constraints onscale and effectiveness that is associated with moretraditional donor-financed and controlled schemes.



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Grounds for optimism

The progress of the pilots and scale-up effortsunderway in our Energise and Breathing Spaceprogrammes is encouraging. But set against thescale of the problems being tackled and allowingfor risk and room for error, it’s clear we’ve madeonly a start. Nevertheless, we think the outcomesemerging from the Shell Foundation’s business-minded approach to tackling poverty are worthy ofconsideration and, of course, challenge. They alsoprovide the basis for the issues and questions raisedin the concluding section.


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We have argued throughout that the expansion ofenterprise, particularly SMEs, is critical to economicand poverty reduction. This is hardly a new orrevolutionary argument. It has been advanced bymany others starting probably with Adam Smith.Indeed, a great deal of government policies andIDC interventions over the years have focused oncreating the enabling environment for theexpansion of the private sector in poor countries.

But given the proven importance of enterprisedevelopment in poverty reduction, directintervention to promote enterprise and especiallySME development has not been as high on thespending agenda of the IDC in recent years as itperhaps it should have been.54 And a lot of whatwas done to promote SMEs in particular has notbeen particularly effective.55

The central role that enterprise development couldplay in the fight against poverty is also not gettinga lot of ‘airtime’ in the context of the current ‘MakePoverty History’ campaign. Nor does it featurevery prominently in the many recommendationsbeing made to the IDC by commentators andexperts about what it should be doing now.56

The IDC and poverty campaigners are not alonein the way they address the role of enterprise intackling poverty. MNCs, whose very existence isenterprise-based, historically devoted only a smallfraction of their CSR spend to pro-poor enterprisecreation in developing countries. In more recenttimes, their focus has shifted more in thisdirection.57 But there is still a very long way to gobefore tackling poverty through enterprise creationbecomes a top ‘business issue’ or publicengagement priority for the senior management ofa majority of big companies.58

The above analysis leads us to our first set ofconclusions. There are obviously many otherpoverty priorities that need to be addressed but theIDC and the international business communityneed also to give more effective attention tocatalysing enterprise in the poorest countries. Andtheir exploration of this issue might perhaps bestructured around the following questions:

First, how to increase the scale and effectiveness ofpro-poor enterprise interventions?

Second, how to make the objective of pro-poorenterprise growth an integral part of poverty-

reduction strategies advanced by the IDC andpursued by developing countries?

Third, how to more effectively engage the privatesector but especially big business in IDC efforts totackle poverty through enterprise both directly andas a source of insight, advice and skills transfer?

In Sections 2 and 3, we drew on the ShellFoundation experience and approach to exploretwo routes to answering these questions. These arethe application of business thinking to pro-poorenterprise interventions; and how deploying value-creating assets belonging to internationalbusinesses can greatly enhance the impact ofenterprise interventions.

The Shell Foundation’s experience to date is stillfar too limited to generalise. But there are othersoperating in the same space as we are, and all areseeking to harness the power of business thinkingand finance to the challenge of overcomingpoverty.59

Taken together, this accumulated experiencesuggests a number of more specific propositions forwider debate and consideration by the IDC andinternational business community around thespecific challenge of catalysing pro-poor enterprisedevelopment.

Propositions for the internationaldevelopment community

The first set relate primarily to the role of donors(including corporate foundations and philanthropyprogrammes) who, because they control themoney, are critically important influences on whatissues IDC actors focus on and how they work.60

1. Don’t give, invest

The core proposition is that donors should act lesslike charities and more like investors. In part, thismeans allocating more of available resources (suchas might be forthcoming from the ‘InternationalFinance Facility’ proposed by the UK government)towards investment vehicles targeting the pro-poorenterprise sector. However, more fundamentally wealso mean that when donors spend aid moneythrough their normal partners – governmentagencies, NGOs, etc – the primary outcomes theyshould be after are measurable impacts on the pro-poor enterprise sector linked directly to the projector activity they are funding.


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Section 4: Propositions and conclusion

a. Make it hurtTo facilitate this, donors could do a number ofthings – some of which no doubt more progressivedonors are already doing. They could requiregrantees to make real financial contributions fromtheir own funds to the project. Grant paymentscould be phased against meeting performancetargets. Financial incentives could be built intorewarding the grantee if the project exceeds itsenterprise targets (including awarding bonuses orretaining any surplus). And the grantee could facesanctions and be held accountable if it does notdeliver on what is promised – perhaps, forexample, by having to return a percentage of thegrant to the donor.

b. Do as I doAnd just to demonstrate commitment, the donorsthemselves could use their own internal incentivestructures to ensure staff and managers arerewarded or held accountable for the performanceof their projects against what we would argue isone of the few ‘bottom lines’ that should matter inthe fight against poverty – measurable growthamong pro-poor enterprises and increased benefitsflowing to poor people as a result.

These are clearly extreme steps for the donorcommunity, non-profits and civil servants and to besure even the Shell Foundation does not operateentirely along these lines. And many objectionscould be raised.61 But we offer them up in suchstark terms in order to encourage debate aroundthe following proposition.

c. Put the poor ‘customer’ in charge – not the rich paymasterOur hopeful assumption is that by striving towardsthe ideal of being held accountable for achievingmeasurable contributions to pro-poor enterpriseand sustainable livelihoods, donors and granteeswill be catalysed into becoming more enterprising,innovative and efficient in their search for solutionsto poverty.

Why might this happen? Because this approachtackles a costly (for the poor) contradiction at theheart of the aid-poverty equation.

The ‘failure’ of many projects in our portfolio andelsewhere can often be traced directly to the factthat the project partners were not focused on bestmeeting the needs of their real customers but wereresponding to other incentives – including donor

agendas and their own professional interests (Seeannex 2).

If one were to apply this ‘who’s the market/who’sthe customer’ filter to the aid-funded ‘output’ ofthe IDC, especially that part of the IDC locatedinstitutionally in the rich countries, we expect avery large share of what is done (and certainly thevast majority of what is studied and written) in theinterests of development, is primarily undertakento meet the agendas of the IDC itself rather thanthe material interests of the poor.

So we are arguing – along with others such asEasterly (2002) – that setting targets and incentivesfor donors and other IDCs that are linked tocustomer satisfaction (i.e. measurable success orfailure in pro-poor enterprise creation) should ensuremaximum effort is focused on delivering resultsthat matter (See annex 2).

The logic of the approach we are proposing issimple. The challenges involved in actuallyimplementing it are obviously not. It requiresdonors and recipients to think very differentlyabout how they do what they do. More importantly,it would lead them to work within a risk–returnrelationship and ‘consequence accountability’structure similar to that which exists between aninvestor and a start-up business, and betweenshareholders and management – cultures that areforeign to many donors and grantees.

Nevertheless, our experience and that of otherssuggest it is possible to structure interventions andincentives that powerfully and successfully focuseveryone’s attention on the end game of pro-poorenterprise creation and we suggest the topic isworthy of wider debate and consideration.

2. It’s not the (aid) money that matters

This proposition harks back to our arguments thatthere will never be enough foreign ‘soft’ money toallow pro-poor enterprise financing to go to scaleand thus the importance of getting local capitalinto a lead role in this area.

As argued earlier, using ‘softer’ money from abroadto invest in pro-poor enterprise can play animportant starter or demonstration role. Andclearly, in regions such as sub-Saharan Africa, it isvery important we do everything we can toenhance investor confidence.

Section 4 Proposition and conclusion


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But our proposition is that the introduction ofpro-poor enterprise aid funding should from theoutset complement and catalyse the increasinginvolvement of local capital and local suppliers ofbusiness development services – not substitute forthem. It’s possible to do this and it can work as ourefforts and those of others in Uganda and SouthAfrica and those of S3IDF in India have shown.

3. Link MDG interventions, debt relief andother macro-interventions to pro-poorenterprise creation

We’re conscious that the share of availableresources and effort going to pro-poor enterprisecreation will always be limited. However pro-poorinterventions in other areas can be ‘calibrated’ tohelp contribute to the enterprise objective withoutdetracting from their core objectives. Debt reliefconditions, the way aid financing is delivered andvarious MDG programmes including the provisionof education, health care and clean water can relative-ly easily incorporate pro-poor enterprise objectivesthat do not have negative impacts elsewhere.

In the case of MDGs, this would range fromensuring money spent on pro-poor service deliverycatalysed local enterprise growth through to theapplication of enterprise or business thinking tobetter ensure MDG plans delivered specificmeasurable outcomes benefiting the most poorpeople at least cost.

The same logic applies in relation to interventionsdesigned to tackle corruption or strengthening themanagement capacities of local government. Theseare very big problems in most poor countries andthe resources don’t exist to tackle them everywhereat once. Interventions in these problems areas mustbe prioritised.

So why not focus on those aspects of the genericproblems of corruption or capacity that mostinhibit the growth of enterprise? Entrepreneurs andbusinesspeople can help governments and the IDCmap out the ‘value chain’ of activities and stageswhere corruption or lack of government capacitiesimpinge on enterprise creation. Then, provided thepolitical commitment is present, intervention couldfocus on tackling the most important blockages.

These are not backdoor strategies for theprivatisation of the delivery of poverty services orthe imposition of user fees. They are simplysuggestions that those designing MDG policies

and programmes be aware, competent andincentivised to apply enterprise thinking to whatthey are doing and to leverage their resources toaid pro-poor enterprise creation.

There are probably some good examples of thishappening but as aid flows targeting MDGsincrease, many more opportunities will arise. Ourconcern is that if enterprise thinking and objectivesare not mainstreamed now, these opportunities willbe ignored at great long-term cost to poor people.

4. Re-engineering the internationaldevelopment supply chain

We argued and demonstrated earlier that in ourexperience the presence of business DNA in ourpartners – whether they were non-profit or for-profit – was an important ingredient in the successof pro-poor enterprise interventions. Thisexperience underpins our proposition that donorsshould be considering the following options:

a. Transfer business DNAThe first is how they can best use their positionand resources to promote the transfusion ofbusiness DNA and enterprise behaviour all alongthe international development supply chain. Theexamples given in Section 3 of our efforts on thisfront related mostly to ‘front-line’ NGOs who aretraditionally donor-funded and operate indevelopment project mode, insulated from marketforces as it were.

Other parts of the development supply chain couldprobably do with an injection of business DNA aswell. Most academics, policy makers, and develop-ment agency professionals endeavouring to catalysepro-poor enterprise don’t have real business-basedexperience to draw on. Their knowledge of howmarkets operate and the problems faced by businessof all kinds is largely theoretical or conceptual.

Thus they operate on the basis of many partiallyinformed and often downright incorrectassumptions about markets and enterprise. Thismeans the policies and interventions they designand implement, with the best intentions, tocatalyse the efficient operation of markets or thecreation of enterprise just don’t work or don’t worknearly well enough.

This mismatch between theory and practice,between ‘talking the talk’ of markets and enterpriseand actually knowing how to ‘walk the walk’, are



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obviously not the sole reason why many enterprise-oriented (and growth-oriented) policies andinterventions in poor countries haven’t worked aswell as intended. But there is a certain logic in theargument that if we want policies andinterventions that help pro-poor enterprise grow, itwould be useful to be able to inject moreexperience-based, business DNA into the projectand policy design process. It’s not easy62 but it canbe done and donors are perfectly positioned todrive this process – perhaps even via new forms ofpartnership with big business that would facilitatethe transfer of their business DNA into thedevelopment supply chain (See annex 2).

b. Develop alternative sources of supplyThe second option is to construct an ‘alternative’development supply chain by working more exten-sively and more directly with the for-profit sectoron devising and delivering pro-poor enterpriseinterventions. Our experience is that the efficiencyof resource use is higher, the transaction and learn-ing costs lower and the going-to-scale opportunitiesmuch greater than when trying to accomplish thesame thing with the non-profit sector.

c. Promote hybridsA third route could be to use market principles toencourage the emergence of financially viable,hybrid ‘network business models’ capable ofdelivering pro-poor services on a large scale.Donors could facilitate the coming together ofprivate and non-profit entities into a new form ofhybrid ‘enterprise’ that could use smart subsidiesand commercial capital, best-practice business anddevelopmental skills, to deliver differentially pricedservices to different segments of the povertymarket.

This is an approach the Shell Foundation ispiloting in the scale-up phase of its Breathing Spaceprogramme in India and elsewhere, where the aimis to achieve significant ‘market penetration’ ofcleaner stoves and fuels among poor household‘markets’ that number in their millions.

The re-engineering of the development supplychain along business lines is happening to a certainextent as some donors and non-profits try to applybusiness thinking to what they do.63 But thesebusiness-like development entities and experimentsare still in the minority and largely peripheral tothe way most of the IDC is organised andincentivised. We suggest therefore that whether

and how to introduce business principles andbusiness DNA into the mainstream IDC is a topicworthy of further urgent debate.

Propositions for engaging theinternational business community

Our second set of propositions relates to the role oflarge businesses, especially multinational corpora-tions, in tackling poverty. Our core position is thatthrough harnessing its value-creating assets, bigbusiness is especially well-equipped to addenormous value to pro-poor enterprise initiatives –and elsewhere in the war against poverty.

As noted above, some of this is happening but notenough and our propositions below focus on howto make more of it happen.64

1. A case of mutual myopia: the wrong ‘ask’ and the wrong ‘offer’

An important and very simple reason why notenough of the ‘right’ type of business engagementwith poverty takes place is that civil society isusually primarily interested in the financial contri-bution business can make – and business is used toand perfectly happy with doing just that.65 Theissue of seeking or offering access to a company’svalue-creating assets as the key contribution totackling a poverty issue via a public-privatepartnership (PPP) simply doesn’t arise.

No doubt this situation could be improvedthrough education and exhortation directed atboth sides. But we think something morefundamental has to occur in order to breakthrough the self-reinforcing, mutual myopia thatleads to the suboptimal involvement of business inthe fight against poverty.

2. Making poverty partnerships more like business partnerships

And this ‘something’ is to do with recasting the ‘risk-return profile’ of the poverty projects and public-private partnerships that business is asked to join.

Let us explain. Businesses participate in commercialpartnerships with each other because they offereach partner specific value they cannot secure byacting alone. Both sides bring to the table anexclusive set of assets essential to accomplishing thetask at hand. And both sides have a strong vestedinterest in a successful outcome.



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The contrast with the typical poverty project orPPP in which business is asked to participate isilluminating. First business is often not consultedin their design and as we’ve noted money is usuallythe main input asked of business.66 PPP objectives,though worthy, are frequently so generally specifiedthat the outcomes, even if achieved, will have littlereal social or business relevance.

Moreover, the lead civil society partners are notreally ‘at risk’ in any meaningful sense as they relyon aid or public money to fund theirinvolvement.67 Most importantly, whileknowledgeable, articulate and full of ideas, thesepartners usually don’t have influence or are notempowered to deliver change where it’s needed inorder to help achieve the PPP’s objectives.

This is not a criticism of the competence orcommitment of civil society partners or of theirright to play a role or of the value of theircontribution to PPPs. It’s simply acknowledgingthat on their own, non-empowered civil societypartners can’t bring enough of value to the table tocatalyse a high value-added response from business.

So not surprisingly, big business turns down mostinvitations to join PPPs because they have thewrong sort of risk–return profile. And whenbusiness does join up, the inputs that are sincerelyoffered, while appropriate to the circumstances arerarely the core value-creating assets where webelieve real social value-added lies.

Clearly there are some very successful PPPs out therewhere the business partners are delivering real socialvalue via deploying their core competencies. Andthere is already a sizeable ‘literature’ full of usefulrecommendations about the principles of effectivepublic-private partnership.68 But we want to drawattention to two fundamental weaknesses that under-mine the ability of many pro-poor public-privatepartnerships to contribute to their full potential.

a. Ensure the right parties are at the PPP table ordon’t bother issuing the invitationsBig business is often appropriately criticised for notinvolving key stakeholders in discussions aboutactions by the business that directly affect them.

But very often, the civil society members of a PPPdo not have the power or influence to effect thechanges necessary to solve the problem the PPPwas set up to tackle. Our proposition is that only

parties who add real value and are empowered andable to deliver change where it is needed should sitat the public-private partnership table.

b. Set goals that make a difference to poor people but ensure that the partners also secure ‘returns’ they valueAny pro-poor project or PPP of value must haveachievable goals that deliver measurable (andwanted) benefits to poor people. But our mainpoint here is not about the poverty outcomes ofPPPs but about the benefits that devolve to thepartners as a result of participating in the initiative.

It seems to us that to get big business to investvalue-creating assets in PPPs, these need to generate‘returns’ to all partners in ‘currencies’ they value andat a scale commensurate to the risk they are taking.

This is precisely the logic deployed in the designof our SME funds in South Africa and Uganda.The local banks felt that the SMEs helped initiallywould eventually become customers for largercommercial loans – while Shell Foundation gotinvolved to demonstrate to other banks thatinvesting in SMEs was good business.

The process at work in this example is linear andin the banks’ case clearly linked to future profits.Other risk-return relationships are possible. Forexample, big businesses operating in the samecountry could pool their input needs and thuscreate a market for local SMEs in return forgovernment efforts to introduce ‘level playing field’policies with regard to adherence to standards orthe removal of differential pricing structures.

The challenge is in crafting a PPP that will deliverto each of the partners a set of returns of sufficientvalue that it makes it worthwhile for them toexclusively commit whatever is necessary on theirpart to achieve the overarching social outcomes ofthe partnership.

3. It’s all about getting the risk and returnbalance right

There are many other dimensions that could beexplored arising from the proposition that PPPsshould be structured like business partnerships.But they are all essentially thrown up by the factthat the parties involved would have to deal withthe implications of a very new set of risk-returnrelationships. Again the challenges in doing this are



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significant but we think the potential benefits areof such scale that this topic too is worthy of moreextensive debate.

Come together: an invitation to invest in proving and positioningenterprise as a key part of thesolution to poverty

Society is clearly in an era of renewed commitmentto explore new ways of tackling the scourge ofpoverty with the aim of banishing it to the historybooks. This is a moment to be seized upon.Already there is much creative and boldexperimentation going on within the IDC, bydeveloping country governments, by leadingpoliticians and actors in the industrialisedcountries, and by big business.

So the propositions put forward in this conclusionthat encourage focus and experimentation aroundthe issue of enterprise and poverty reduction donot necessarily break new ground. This is verypositive because it means there is already much totalk about and much to learn from each other.

Some of the right kind of talking and learning istaking place but not enough – especially since the‘sales pitches’ are already being made and plans arealready being laid to deploy the new pro-poorpolitical and resource commitments that appear tobe on the horizon in 2005.

Given the scale of the problem to be tackled andthe encouraging signs that results can be delivered,the IDC, developing country governments and thebig business community need to explore theenterprise–poverty territory together, robustly andurgently.

This includes not just more talking but action aswell to invest in piloting new ways of workingtogether to tackle business environment obstaclesto enterprise development and growth. The ShellFoundation over the coming months will be doingwhat it can to catalyse such initiatives. We inviteothers to join us.


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International DevelopmentCommunity

The ‘International Development Community’ werefer to in this paper includes private and corporatefoundations, individual philanthropists,multilateral and bilateral development agencies anddepartments, and non-profit groups concernedwith poverty and development, including academicinstitutions and professional NGOs. Unlessspecifically mentioned, not included are donors,academics and agencies concerned with human-itarian and disaster relief, developing countrygovernments or private sector actors who work onpublicly-funded development and poverty projects.

Enterprise and pro-poor enterprise

We use the terms ‘enterprise’ and ‘pro-poorenterprise’ extensively and often interchangeably inthis paper and have in mind the following featuresof each. By ‘enterprise’ we mean primarily privatesector enterprises but include also NGOs, socialentrepreneurs, even public sector enterprises actingin a business-like way to deliver services to poorpeople. The ‘pro-poor’ enterprise boundary is quitebroad and encompasses productive entities of anysize or national origin that provide affordable andappropriate products and services that are boughtby poor and often previously un-served populations;entities that employ poor people; and entitiesowned by poor people – from small farmers,through traders and into more conventionalproductive activities. Hence the main focus of ourwork on poverty issues is catalysing the developmentand growth of pro-poor enterprise.

SMEs

Our notion of what constitutes an SME is not tiedto numbers of employees or turnover but rather tostart-up and first-stage enterprises which needcapital of the order of a few thousands of dollars toupwards of $500,000 to $750,000. As such, someof our initiatives involve truly micro-enterprises atone end and big companies at the other whichhave operations with local supply chains that do orcould feature SMEs.

The poor

Ultimately we want the things we do or cause tohappen to materially and measurably benefit ‘poorpeople’ which for us mostly means people indeveloping countries who live on $2 a day or less.However, we don’t draw any rigid dividing lines interms of income level or asset ownership indeciding what to do and where to do it. This isbecause the dynamic development processes, onwhich we focus, work in complicated ways – asshown for example in the way that a rise in non-farm wages pulls agricultural labour into non-farmjobs, creates labour scarcity in the agriculturalsector and thus causes rises in farm wages. See P.Lanjouw and N. Sterns (2003), ‘Opportunities offthe Farm as a Springboard out of Rural Poverty:Five Decades of Development in an Indian Village’in G. Fields and G. Pfefferman (2003), Pathwaysout of Poverty: Private Firms and Economic Mobilityin Developing Countries, Kluwer AcademicPublishers. So we believe it’s possible to aid ourtarget beneficiaries not only directly, but byinfluencing the actions of others, or by deployinglessons learned from interventions whoseimmediate beneficiaries may not in fact be poorpeople or be located in the poorest countries.

Financial Viability

We have a flexible interpretation of the concepts ofself-financing, financial viability and financialreturns. Our ultimate aspiration is for the initiativeswe support and the enterprises they support to relyon earned income (not grants) to cover all costsand deliver a commercial rate of return. But weare, of course, aware that in many of the povertycontexts we operate in, these aspirations may notbe attainable at the outset and indeed may neverbe in certain circumstances and subsidies may berequired – as is the case in many enterprise contextsin rich countries. So what we look for are plans,groups and people who will try to harness thedisciplines involved in pursuing full commercialviability while they pursue their social objectives.


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Annex 1: Definitions

Meeting The Needs Of Real Customers

In one Shell Foundation project intended to testthe commercialisation possibilities of village-scalebiomass gasifiers, our partner – a team from auniversity engineering department who haddeveloped the technology – spent most of theirtime and our money on R&D issues close to theirhearts as engineers. But they didn’t pay attention tothe main developmental challenge (and objectiveof the project) of commercialising their technologyand so carried out no market research and as aresult were unable to secure the local investorinterest that the plan called for. In anotherexample, the social entrepreneur we supported –again in an effort to commercialise a technicallyviable village power production system – had astrong developmental aim which was bringingelectricity to unserved villages and creating micro-enterprises able to use the power provided. Muchdonor money was raised and used to subsidise thepilots thus eliminating the ‘need’ to charge poorcustomers the full cost of the power provided. Thisconfounded our efforts to assess whethercommercial finance could be used to scale up tomeet the needs of thousands of un-electrifiedvillages. And this means that the NGO partner isnow continually having to raise ever more ‘soft’money just to keep their few pilots operational.

Those familiar with the history and current statusof the famous ‘Multi-Functional Platform (MFP)in West Africa’ may recognise a similarconundrum. See UNIDO/UNDP regional Multi-functional Platform Programme (MFP), at www.un.org/special-rep/ohrlls/UN_system/unido.htmThe MFP is a diesel-powered generator that drivesa set of agro-processing equipment for productiveuse at village level and is managed by women’sassociations. Its development has been completelydonor-funded with a social objective – to empowerthe women who operate the platform. As aconsequence, not much business thinking isapplied to the manage-ment of the platform (forexample, capital costs are never factored into userfees) or to the challenge of going to scale.Intriguingly, there is evidence that the MFP (whichis emphatically a pro-poor piece of technology) isin fact commercially viable. This means at leastsome of the costs of a rollout could be financedcommercially and as long the operators arewomen’s groups the original ‘empowerment’

objectives could be met as well. However,significant donor and public money is now beingused to finance rollout in some West Africancountries.

Measureable Success And Failure

Our engagement with INTEGRA, a RomanianNGO involved in micro-finance, as part of thework of our Market Access programme, illustratesthe point. Integra realised its clients wereproducing products for which there was nomarket. We engaged with them around thisproblem and pushed them to understand that theycould offer much greater value to their clients ifthey both started by identifying marketopportunities rather than just rushing to set upproduction and then looking for somewhere tosell. This engagement catalysed Integra intoeducating itself – with the help of expertconsultants – about how markets work and themost appropriate ‘routes to market’ for theirclients. This in turn kicked off a process wherebytheir clients started to produce more marketableproducts. Integra also realised that this newknowledge itself had commercial value and openedup a business opportunity for themselves that willproduce more income for the NGO and benefitsfor its clients.

Transferring Business DNA

The Shell Foundation is partnering with the WorldConservation Union and UNESCO to doprecisely this in a slightly different context by usingthe business and site management skills andtechniques available in Shell Group to upgrade thelocal management of UNESCO’s World Heritagesites throughout Africa and get these onto a morefinancially viable footing for the longer term.There are obviously other examples of this kind ofskill transfer taking place between big business andthe IDC. For a non-enterprise example seeUNAIDS (2004), Aids in Africa: Three Scenarios,Joint UN Programme on HIV/AIDS, New York.This is a case where core value-creating assets ofthe Shell Group – its scenarios methodologies – arebeing used in partnership with the United Nationsto tackle HIV/AIDS in Africa. We know of othercurrent examples where large MNCs are deployingcore skills and assets working in public–privatepartnerships (PPPs) to tackle the problems ofAIDS, child malnutrition and community health.


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Annex 2: Anecdotal evidence

Introduction1 The Shell Foundation is a UK registered charityestablished by Royal Dutch/Shell Group ofCompanies in June 2000. It is governed by a Boardof Trustees composed of three senior Shell Groupexecutives, including the Group’s Chief Executive andthree independent external Trustees. The managementteam has four members with extensive professionalbackgrounds in poverty, environment and business.See www.shellfoundation.org for further information.

Section 1: The Case For Putting Pro-poor Enterprise At The Heart Of The War On Poverty2 This slogan was initially coined by the rock starBono and is now a headline sound bite for the‘Global Call for Action Against Poverty’ coalition – agroup composed largely of poverty-oriented NGOs.See www.makepovertyhistory.org. The work of thiscoalition is most visible in the United Kingdom.Elsewhere, the push for more help to poor countries is less high profile but just as earnest.

3 Since 2000, there’s been a marked rise in MNCinvolvement in the attack on poverty, especially viapublic–private partnerships launched through venuessuch as the World Summit on Sustainable Developmentand the United Nations Global Compact. Seewww.sustainabledevelopment.gov.uk/wssd2/04.htmfor a review of public–private partnerships launchedat WSSD; for the UN Global Compact see C. Fussleret al (eds) (2004), Raising the Bar: Creating Valuewith the United Nations Global Compact, GreenleafPublications, UK and for the forerunner to the GlobalCompact see UN (2004) Report to the UN SecretaryGeneral of the Commission on the Private Sector andDevelopment. United Nations, New York. Of coursethere’s no shortage of cynicism about the sincerity ofthe increasing commitment of MNCs to tacklingpoverty. See, for example, Christian Aid (2004),Behind the mask. The real face of corporate socialresponsibility, Christian Aid, London, but equallythere are powerful counterarguments as well. SeePaul Lewis (2005), ‘The Fight Against Poverty: Harness-ing the Power of the Multinationals’, InternationalHerald Tribune, Monday 14 February 2005.

4 Some argue the increased aid funding on offer isfar too little while others fear heightened politicalinterference in a post 9/11 world. And many worrygiving more aid to misruled countries will just line thepockets of corrupt officials and remove the pressurefor reform. See for example R. Righter (2004), ‘FreeTrade not Free Aid will help to end poverty’ The Times,14 December 2004; Christian Aid (2004), The politicsof poverty: Aid in the new Cold War, Christian Aid,London; and J. Sachs (2002), ‘Developing Africa’sEconomy’ in The Economist, 22 May 2004.

5 Between 1950 and 1995 OECD countries gave $1trillion (in 1985 dollars) in aid. See W. Easterly (2002),The Elusive Quest for Growth, MIT Press, Cambridge.

6 For compilations of ‘Aid Works’ evidence, seeOxfam (2004), Paying the Price: Why rich countriesmust invest now in a war on poverty, Oxfam, Londonand UN Millennium Project (2005), Investing inDevelopment: A Practical Plan to Achieve theMillennium Development Goals, United Nations, NewYork. For macroeconomic analyses addressing thesame topic see C. Burnside & D. Dollar (2000), ‘Aid,policies and growth’, American Economic Review 90(4) 847–868, and M. Clemens et al (2004),‘Counting chickens when they hatch: The short-termeffect of aid on growth’, Center for GlobalDevelopment, Working Paper No 44, July.

7 For anecdotal evidence of the ‘Aid Doesn’t Work’argument see M. Maren (1997), The Road to Hell:The Ravaging Effects of International Aid and Charity,The Free Press and R. Jacob (2005) ‘Whose power,whose glory?’ FT.com, 9 January 2005. Formacroeconomic evidence see Easterly (2002) and L.Pritchett (1997), ‘Where has all the education gone’,World Bank Policy Paper, Research Working Paper1581, Washington, D.C.

8 Between 1981 and 2002, GDP per capita in sub-Saharan Africa contracted by 13%, nearly doublingthe number of people living on less than $1 a day,from 164 million to 314 million. World Bank (2004)World Development Indicators World Bank,Washington, D.C.).

9 These include the outstanding economic performanceturned in by China and India over the last twodecades, the more recent growth spurts recorded bysome of the poorest countries in Africa and theimpressive commitment to and progress towardsdemocracy and better governance in large parts ofthe continent. See UN Millennium Report (2005).

10 We should mention early on that the best of thecurrent round of initiatives focusing on enterprise anddevelopment is the Growing Sustainable Businessprogramme of the UN Global Compact. Seewww.undp.org/business/gsb

11 See for example Jagdish Bhagwati (2004), InDefense of Globalisation, Oxford University Press;Martin Wolf (2004), Why Globalisation Works, YaleUniversity Press; and David Dollar and Aart Kraay(2000), ‘Growth is Good for the Poor‘, a World BankWorking Paper cited by Easterly (2002) whichdemonstrates the long-accepted relationship that anadditional 1% per capita growth causes a 1% rise inthe income of the poor.


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12 As is well known, SMEs account for the large bulkof employment in poor countries, provide goods andservices to poor people, create jobs when they grow,are key in the transition from agriculture-led to industry-led growth and provide supply chains that attractforeign direct investment. See especially UNDP (2004)Partnerships for Small Enterprise Development,Sustainable Business Programme, UN GlobalCompact, New York and B. Wedder (2003), ‘Obstaclesfacing Smaller Business in Developing Countries’ in G.Fields and G. Pfefferman (2003).

13 Just think of how many plumbers will be requiredto carry out the real work needed to meet the MDGfor clean water.

14 The access versus capacity trade point is made bymany in relation to the agricultural sector but is evenmore critical in relation to securing trade gains inindustrial goods. Not just exporting but remainingcompetitive in an increasingly technology-intensiveworld is a huge challenge for poorer countriesbecause expansion of industry and industrial exportsis essential to escape the inherently low-growthtrajectory associated with an agricultural-basedeconomy. See S. Lall with E. Kraemer-Mbula (2004),‘Stimulating Industrial Competitiveness in SubSaharan Africa’, Paper presented at the TokyoInternational Conference on African Development,November 2004; and A. Beattie et al (2005), ‘Trade,aid and debt relief: can this year’s ambitious anti-poverty promises be kept?’, Financial Times, Thursday6 January 2005.

15 See Theroux (2004) Dark Star Safari: Overlandfrom Cairo to Cape Town, Penguin for vivid accountsof this sense of hopelessness in some African countries.

16 And the same can be said for the pro-poorimpacts of economic growth, trade and direct foreignenterprise. For example the negative environmentalimpacts of growth in developing countries have beenshown repeatedly to fall excessively on the poor.There are many other ways growth, and trade for thatmatter, do not necessarily work out to the benefit ofthe poor. See S. Bromley et al (2004), Making theInternational: Economic Interdependence and PoliticalOrder, The Open University

17 However, even extreme poverty contexts do notconstitute an impenetrable impediment to enterprisehaving positive impacts or, as we will show later inthe case study section, to the added value enterprise-like thinking can bring to poverty-reduction strategiestargeting the poorest of the poor.

Section 2: Learning By Doing: The ShellFoundation Experience In Catalysing Pro-poor Enterprise Development18 And many of these address important enterprisedevelopment-enabling conditions. See for examplethe UN Millennium Project (2005).

19 The importance to poor people of having work isbrought home by a recent journalist’s report on UKChancellor Gordon Brown’s trip to Africa. Thisrecounted the plight of a 67 year old woman from aNairobi slum, living on the equivalent of $6 a monthwho, after making it clear she had never heard ofGordon Brown and his initiative to eradicate poverty,was quoted as saying: ‘Nothing ever gets through tous. The money does not get past our leaders. Thebest thing they could do is help us set up somebusiness. With transport I could sell vegetables andearn money to buy food.’ See J. Clayton and XanRice (2005), ‘Where poverty means living on just £3a month’, The Times, Saturday 15 January 2005.

20 For much evidence of this and a compellingrecasting of the way the development communityshould look at poor people see C. K. Pralahad(2004), The Fortune at the Bottom of the Pyramid:Enabling Dignity and Choice through Markets,Wharton School Publishing

21 See annex 1 for our concept of SMEs and UNDP(2004) for a good conceptual discussion.

22 A phrase we have adopted from the descriptionused by one of our partners – the Small ScaleSustainable Development Infrastructure Fund – whichis discussed in the case study section.

23 Which includes not just what we’ve experienced viathe Shell Foundation but also in the many years ofprofessional development and business andentrepreneurial experience of the management team.

24 The simple point here is that when donors imposetheir own ‘public benefit’ agendas on enterpriseinitiatives – whether requiring only renewable energybe used, hiring disadvantaged employees or evenmonitoring social impacts and telling others aboutthem – this has a tremendously distorting effect onenterprise effort and inevitably makes it very muchmore difficult for the enterprise simply to survive.

25 The history of development assistance – and moreimmediately our own project portfolio – is littered withgood ‘projects’ that have never gone to scale andwhile perhaps helping locally for a short while, haveleft the majority of the poor untouched.

26 So for example, in a number of developingcountries, SME-focused investment funds launched inthe renewable energy sector have failed largelybecause of the ‘starting conditions’ they werelumbered with by the northern donors who set themup. In our own portfolio, we have frequently found,for example, that when a pro-poor service deliveryintervention starts off fully funded by grant money, it’soften difficult for the project managers to pursue a fullcost-recovery model because of the primacy given todevelopmental objectives. This means they spend alot of their time at conferences – but more

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importantly, continually need to chase donor moneyto cover operating costs (which is hugely time-consuming and diverting) and can never expandproperly because of the limits of donor funding.

27 See background papers, conference report andwork of individual participants at ‘Private Investmentwith Social Goals: Workshop on Building the BlendedValue Capital Market’, WEF Headquarters, Geneva,21–22 September 2004, sponsored by IFC, TheRockefeller Foundation and the World EconomicForum.

28 For example, the instinctive reaction of much of theIDC and many developing country policy makerswhen confronted with poverty problems is to seethese as ‘public good’ issues and thus they look firstto what the public sector (using grant funding andapplying development principles) can do to solve theproblem. There is an almost automatic assumptionthan in many poverty contexts markets can’t operateso the options aren’t explored rigorously. But muchmore importantly, business principles of the sort wehave been talking about (which are themselves allabout finding least cost solutions to the problem ofgetting people what they want) are not applied in thesearch of solutions to poverty. And when IDC actorsand policy makers do acknowledge or allow formarkets or private sector enterprise activity being partof the poverty solution, there is an almost naiveassumption that if you just apply market principles tostructuring the enabling environment, somehowefficient markets and profitable enterprise will followautomatically. Markets and enterprise can and dowork against the interests of poor people, obviously.But getting markets to work in a pro-poor way andespecially catalysing successful SME developmentrequires a great deal of attention to very specific andvery practical details and is not at all automatic orformulaic as our case studies demonstrate.

29 The business purposes in using these assets arestraightforward but they are usually wrapped up inbusiness speak – project framing, carrying out a riskassessment, developing a customer value proposition,analysing the value chain – and are not wellunderstood by the ‘outside’ world. But we have foundthat their appropriate use can have tremendous valuein tackling poverty.

30 We are not referring here to proprietary assets buton the physical side to distribution networks, retailoutlets, supply chains, etc and to knowledge derivedfrom a long-term presence in a country or market,from the experience of building a business underspecific circumstances, and so on.

Section 3: Energy access, poverty and our experience on the ground31 See World Bank (2000), Energy and DevelopmentReport 2000, Washington, DC; Netherlands Ministry

of Foreign Affairs (2004), Energy for Development2004 and IEA (2004), World Energy Outlook,Chapter 10, International Energy Agency, Paris.

32 The most well-known of these is the Global VillageEnergy Partnership launched at WSSD in 2002 (seewww.gvep.org).

33 We did this via a series of on-line dialogues andstakeholders’ workshops. Seewww.shellfoundation.org for further information.

Case study 1: Sustainable solutions to Indoor Air Pollution34 The concentration of particulates and pollutants inindoor smoke is many times higher than even theworst outdoor pollution. See ITDG (2003), Smoke: theKiller in the Kitchen, Intermediate TechnologyDevelopment Group (www.itdg.org).

35 Because the technical solutions – ventilation,cleaner fuels, better stoves – are well known and lowcost, IAP is one of those ‘unnecessary’ dimensions ofextreme poverty the ‘Make Poverty History’ campaignwants to do away with.

36 See V. Laxmi et al (2003), ‘Household Energy,women’s hardship and health impacts in ruralRajasthan, India: need for sustainable energysolutions’, Energy for Sustainable Development VolVII, No 1, March, which reported the results of astudy that valued the annual cumulative economicimpacts (imputed health and labour costs) of IndoorAir Pollution on a rural population of 5 millionhouseholds at $725 million – for one year for justone state of India.

37 For more on the IDC and IAP prevention see ITDG(2003).

38 The commercial success stories for biomass stoveproducts such as the charcoal ‘jiko’ in East and nowin West Africa do not necessarily lead to reductions inIAP for a number of reasons, primarily because theywere originally designed to increase fuel efficiency,not to reduce emissions. For detailed analysis of theIndian case see article by R. D. Hanbar andPriyadarshini Karve (2004), ‘National Programme onImproved Chulha (NPIC) of the Government of India:an overview’, Energy for Sustainable Development,Vol 6 Issue 2, published by the International EnergyInitiative (www.ieiglobal.org/esd.html).

39 See ITDG (2003) especially Appendix 1 andreferences therein.

40 In India, Guatemala and Mexico in the first roundlaunched in 2002; and then subsequently in 2004 inGhana, Ethiopia and Kenya and in 2005 in Braziland Pakistan.

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41 By comparison, some multilateral institutions havebeen trying and failing for years to work throughgovernments in Asia to launch IAP interventions. Theseinstitutional roadblocks are starting to ease, at leastpartly as result of Breathing Space and the efforts ofthe Shell Foundation. For example, the launch ofBreathing Space helped catalyse the launch by the USEPA at WSSD of a ‘Partnership for Clean Indoor Air’(www.pciaonline.org). And in autumn 2004, ShellFoundation worked with ITDG, UNDP and WHO togenerate significant media coverage of the IAP issueduring World Rural Women’s Day, 15 October 2004.See Fiona Harvey (2004), ‘Where there’s smoke,there’s a health risk’, Financial Times, 29 October2004 and BBC World’s Asia Today, 15 October 2004.

42 For example in India, the pilots uncovered thatthere could be enough margin in a smokeless chula(stove) for which poor women are willing to pay 300rupees, to give profits to artisans and pay for socialmarketing costs. In Kenya and in India, financialinstitutions have, through the Foundation’s work,recognised the demand for improved energy productsand services and are offering consumer financing forthe purchase of improved products and services andenterprise financing for businesses in the supplychain. The households and villages involved here areextremely poor, including, in India, tribal communities.The uncovering of a sustainable business model forgetting smoke out of the kitchens of these people is a good example of the value added from applyingbusiness thinking to the identification of povertysolutions in contexts where ‘markets won’t work’.

Case study 2: Catalysing the pro-poormarket for solar home systems43 For example, reviews of donor efforts and majoraid-funded programmes such as the GlobalEnvironmental Facility to advance the use ofrenewables and promote the creation of renewableenergy enterprises in developing counties at the costof many, many hundreds of millions of aid dollarshave identified many problems. See Andrew Barnett(1999), ‘A Review of the Renewable Energy Activitiesof the UNDP/World Bank, Energy Sector ManagementAssistance Programme 1993 to 1998’ ESMAP, WorldBank, Washington DC; and Eric Martinot et al (2002),‘Renewable Energy Markets in Developing Countries’,Annu Rev Energy Environ 27:309–348. And for adetailed discussion see Kurt Hoffman (2003), ’The Roleof Public/Private Partnerships in improving access bypoor communities in developing countries to modernenergy services‘, paper presented at Rice University,Houston, Texas. Available from the Shell Foundation.

44 See D. Sreedharan (2004), ‘Here solar powerbrightens up people’s lives‘, The Hindu, 26 November2004; and S. John (2004), ‘Forget Electricity: ruralfolk tap solar power’ The Times of India, 30 November 2004

Case study 3: Nurturing pro-poor small enterprise in southern India viathe social merchant bank model45 Details of S3IDF’s origin and descriptive andanalytical material on its activities are available on itswebsite (see www.s3idf.org).

46 Which means there must be client capital at risk;deals do not go to financial closure unless pre-investment work indicates financial feasibility, and thebusiness plan demonstrates all capital and operationscosts are covered including financing costs for anycapital injected by S3IDF and local financial institutions.

47 Selco India is one of the pioneering for-profit solarenergy companies that has struggled and succeededin creating a market for solar energy systems in Indiaand works very closely with S3IDF.

48 S3IDF leverages its involvement by its ‘gap-filling’financing menu (debt, equity, partial guarantees)inducing the participation of local banks and otherfinancial institutions in pro-poor viable small projectsthat were otherwise non-bankable under ‘business asusual’ practice. And in so doing, S3IDF begins chang-ing the mindsets of local banks and their willingnessto provide more financing to this sector in the future.

49 One set of examples are its ‘Light Point’ investmentprojects which feature support for small enterprisessupplying poor consumers such as street hawkers withsolar ‘lanterns’ to replace the kerosene or gas lampsused previously. The entrepreneur charges thelanterns’ rechargeable batteries at his PV-poweredbattery charging station (financed with the help ofS3IDF) and delivered to the hawkers on a ‘pay forcharge’ fee that is cheaper than the running costs ofkerosene and gas lanterns. The hawkers are able tosave money and the quality of lighting service isimproved while the entrepreneur makes a handsomeprofit after meeting his capital and operating costs.In one specific project, S3IDF helped an NGO –MASARD – launch a Light Point company (servicing35 street hawkers in the Viveknagar, Neelasandraand Koramangala areas of Bangalore, Karnataka) byproviding business planning skills, a partial riskguarantee and transaction assistance to allow it toaccess bank financing. MASARD is now bothexpanding its business and using the profits to createa ‘Hawkers’ common’ or ‘revolving fund’ from whichits clients can borrow to make additional investmentsin their own businesses.

50 S3IDF generally provides know-how free becausesmall, pro-poor projects do not allow capitalisation of knowledge, project preparation, etc into the projectcosts (as with large projects). These must be grantfinanced and grant support is also needed forMonitoring & Evaluation and lessens disseminationefforts.

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Case study 4: SME investment funds – deploying local capital and the challenge of going to scale51 More than 500 million people in sub-SaharanAfrica did not have access to electricity in theirdwelling or place of work in 2002. By 2030 it’sestimated that half the population of sub-SaharanAfrica will still be without electricity. InternationalEnergy Agency analysis also suggests that if the mainMDG poverty-reduction target is met, governmentswould need to take new measures to extend the useof modern cooking and heating fuels to more than700 million people from 2002 to 2015. For moreinformation see IEA (2004).

52 Lease finance lowers up-front capital costs andovercomes the collateral constraint – both aspectsthat typically constrain SMEs from accessing finance –and provides the bank with an acceptable level of risk.

53 Mining giant Anglo American launched the KhulaMining Fund in partnership with the South Africangovernment to invest in SMEs in its sector.

Section 4: Propositions and conclusions54 This is understandable perhaps given the publicpressure to spread aid money and effort across anever-widening array of urgent poverty issues. But itdoes mean that direct support of pro-poor enterprisedevelopment has garnered a relatively small share ofavailable support. At least that’s what appears to bethe case. Our admittedly rough calculations (basedon a simple analysis of Development AssistanceCommittee aid allocations between 1990 and 2000at the three and six-digit SIC level and the annualgrant allocation of the 10 major private US-baseddonors with international programmes) suggest directpro-poor enterprise interventions have attracted lessthan 10% of official and private aid flows of the lastdecade.

55 See K. Hallberg and Y. Konishi (2003), ‘BringingSMEs into Global Market’ in Fields and Pfeffermann(2003) for a review of the failure of government anddonor-funded SME interventions and policies and thedonor’s response to their failures in this area, seeCommittee of Donor Agencies for Small EnterpriseDevelopment (2001), Business Development Servicesfor Small Enterprises: Guiding Principles for DonorIntervention, SME Donor Committee Secretariat,World Bank, Washington, DC.

56 Rarely mentioned in press releases, sound bites orspeeches of poverty campaigners, enterprise alsohardly surfaces on the agendas of the many pro-poverty conferences and talkfests taking place and inthe many recommendations being made. Forexample, enterprise doesn’t feature in any of 24recommendations given in Oxfam (2004) on aidreform. The Report of the distinguished UN

Millennium Project (2005) addresses the role of theprivate sector and the need for a pro-enterprise-enabling environment more extensively. The problemis that it also addresses every other aspect of povertycomprehensively thus embedding its enterpriserecommendations in an enormous shopping list ofaction proposals all calling for fundamental changein the way the IDC operates.

57 This is evident via a number of channels. For‘social performance’ examples see the case studiescited in IFC (2003), ‘Addressing the SocialDimensions of Private Sector Projects’, Good PracticeNote No 3, December, IFC, World Bank Group,Washington, DC; and Titus Moser (2004), ‘SocialPerformance: Key Lessons from Recent Experienceswithin Shell’, Social Performance ManagementGroup, Shell International, London. For ‘supply chain’examples see M. Winner (2005), ‘Levers & Pulleys:Extractive Industries and Local Economic Developmentin Poor Regions – Incentivising Innovation by LeadContractors through Contract Tendering’, BriefingNote No 3 in the Enhancing Social Performance in theEngineering Services Sector Programme, OverseasDevelopment Institute, London; and for ‘bottom of thepyramid’ examples see C. K. Pralahad (2004), TheFortune at the Bottom of the Pyramid: EnablingDignity and Choice through Markets, Wharton SchoolPublishing Pralahad. And for more general review ofbusiness and poverty issues, opportunities and casestudies see especially UNDP (2004); WBCSDpublications such as ‘Doing Business with the Poor –A Field Guide’ and ‘Finding Capital for SustainableLivelihoods Programme’; and A. Maitland (2005),‘From a handout to a hand up’, Financial Times,Thursday 3 February 2005; and M. Forstater et al(2002), Business and Poverty: Bridging the Gap, IBLF,London.

58 There are of course strong counter-arguments that business should never go beyond its normalactivities to tackle issues such as poverty. See CliveCrook (2005), ‘The Good Company: A Survey ofcorporate social responsibility’, The Economist, 22 January 2005.

59 We’ve mentioned already the UN Global Compactand its Growing Sustainable Business programme,the International Business Leaders Forum, and thework of the World Business Council for SustainableDevelopment but there are many other forums suchas Business for Social Responsibility and the ResourceCentre for the Social Dimensions of Poverty andindividual actors such as TechnoServe andDevelopment Alternatives International in the US andmany NGOs in developing countries such as TERI inIndia and ApproTec in Kenya. Some donors havesmall but imaginative mechanisms in this area suchas DfID’s Business Linkages fund. There are playerssubsumed under the heading of ‘blended value’ ordouble bottom line investors such as Acumen Fund,

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the Provenex Fund of the Rockefeller Foundation. TheGatsby Charitable Foundation, the Skoll Foundation,Schwab Foundation for Social Entrepreneurship andthe Lemelson Foundation. See also the variousinitiatives of the participants at a meeting in Londonin early 2004 on financing the SME sector indeveloping countries, organised by the ShellFoundation and Forum of the Future; and thoseattending the previously mentioned ‘Blended Value’meeting hosted by the World Economic Forum in late2004. See Forum of the Future (2004), SustainableInvestment in Africa: pipedream or possibility?Innovative financing mechanism for SMEs in Africa,Forum of the Future, London.

59 The community of donors we have in mindspreads from the treasuries of rich countrygovernments who approve aid budgets (includingspecial windows such as the FFI) through the bilateraland multilateral aid organisations, privatefoundations and philanthropists, the charitable grant-making arms of big business and the largerinternational NGOs who act like donors byredistributing charitable funds to others to carry outpoverty projects in developing countries.

59 Not least of which is that some elements mightcontravene charity law, others could introduce themore negative aspects of profit-seeking behaviour,and that cause and effect is terribly difficult tomeasure in poverty environments.

60 Many development agencies report that whenexperienced business people do wind up working withthem on development issues, they often become‘softer’ than the development professionals!!

61 See footnote 58. And in some cases quiteinnovative experiments are being attempted such asthe emergence of ‘development marketplaces’ on theweb and under the aegis of some multilateralagencies such as the World Bank.

62 We have been talking mainly about interventionsmore or less directly targeting enterprise developmentbut of course there are many obstacles in the‘enabling environment where big business can deployits knowledge and other assets in support ofenterprise. These start with tackling micro problemssuch lack of property rights, enterprise financing orappropriate skills, and run through all manner ofregulatory and other issues at the level of the market,and into the big governance concerns of corruption,stakeholder engagement and the rule of law. Bigbusiness operating in poor countries faces andovercomes these issues on a daily basis. In so doingthey generate specific pools of practical knowledgethat if deployed properly could help unblock hugeobstacles to enterprise development in poor countries.

63 There are understandable reasons why not enoughof the ‘right’ kind of business engagement with

poverty takes place. Some are internal to businessand linked to its natural tendency towards cost andrisk minimisation. Frequently, this orientation isreinforced by a traditional corporate philanthropicmindset that dictates business deals with poverty bygiving money away to the neediest. So business ineffect doesn’t ‘think’ or know how to deploy its value-creating assets when tackling poverty. It mainly offersmoney – although it usually does so via asophisticated and highly professional approach. Buttypically the good causes supported are notconnected to their business and the skills deployed bythe company in support of this are those associatedwith giving money away rather than creating value.See M.Porter and M. Kramer (2002) ‘The CompetitiveAdvantage of Corporate Philanthropy’ HarvardBusiness Review, December.

These internal drivers are reinforced by externalexpectations. The traditional CSR community largelywants business to concentrate on obeying the law,doing less bad and mitigating or remedyingoperational harm – rather than creating value. At thesame time, those closer to the problem such as hostgovernments, donors, NGOs and local communitiesfirst don’t appreciate ‘where’ in business value-creating assets can be found or indeed even whatthese are. But primarily they have other expectationsand agendas when they approach business abouttackling poverty – most of which boil down torequests for money. As a result, governments and civilsociety don’t make the right ‘ask’ when theyapproach business for help in tackling poverty.

64 Though speaking opportunities at high-profiletables are also often attached to invitations toparticipate in PPPs.

65 And the individuals involved are not likely sufferany consequences if the project fails. This is certainlythe case in our different but still analogous experienceas a donor where we have provided financial supportto grantees from the non-profit sector to allow themto develop commercial initiatives where they failed toeven come close to delivering what they promised butnever took any action against the project managerswho presided over the failures.

66 See for example M. Winner (2003), The NewBroker: Brokering Partnerships for Development,Overseas Development Institute, London; J. Nelson(2004), Partnering for Success, World EconomicForum and UN Foundation (2003), UnderstandingPublic Private Partnerships, Washington, DC. See alsoGeorge C. Lodge (2002), ‘The Corporate Key: UsingBig Business to Fight Poverty, Foreign AffairsJuly/August Vol 81, No 4, who proposes a WorldDevelopment Corporation with some of the featureswe call for in PPPs. For non-enterprise example seeUNAIDS (2004), Aids in Africa: Three Scenarios, JointUN Programme on HIV/AIDS, New York, for a casewhere core value-creating assets of the Shell Group –

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its scenarios methodologies – are being used inpartnership with the United Nations to tackle toHIV/AIDS in Africa. See Porter and Kramer (2002)

67 The Extractive Industries Transparency Initiative (EITI)is a good example of a PPP where the right partiesare now involved and there are good prospects forsignificant advances on the governance and trans-parency front that will ultimately benefit poor people.EITI really only began to make progress towards itsultimate goal of getting more state revenues fromenergy and mineral exports flowing to help poorpeople once host governments joined the internationalenergy industry at the negotiating table (seewww2.dfid.gov.uk/news/files/extractiveindustries.asp).


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