Innovative Financing to Foster Private Pro-poor

Small-Scale Sustainable Energy Investments:

(Emphasis on Productive End Uses)

Revised Project Concept

Presented by

T L SankarOn behalf of ASCI, S3IDF, et al

ToGEF Empowered Committee

17 August 2004Delhi

2

Introducing Management Team & AssociatesIntroducing Management Team & AssociatesASCI

T.L. Sankar

Held senior government and academic positions in India dealing with energy, infrastructure and development. Former Chairman of the State Electricity Board of Andhra Pradesh. First Advisor (Energy), Planning Commission of India.

S3IDF

Dr. Russell J deLucia

Trained in Engineering and Economics (Ph.D. Harvard University) For more than 30 years he has been consultant to World Bank, Asian Development Bank with focus on issues concerning infrastructure and resource development.

S3IDF

Dr. Ramesh Bhatia

Expert on social-economic and policy issues in the energy and water sector. Former Professor, IEG, Delhi. Experience with World Bank, UNDP, UNICEF, ILO and Asia-Pacific Development Center and International Water Management Institute.

S3IDF

Dr. Harish Hande

Co-founded SELCO Solar Light Pvt. Ltd, the first rural solar service company in India.

S3IDF

Andrew Barnett

Economist with extensive experience on energy. Member, Boards of the Overseas Development Institute, Science Policy Unit, IDS, Sussex

S3IDF

Michael Lesser

Holds a B.S. in Economics from Massachusetts Institute of Technology. Was Consultant for World Bank, the Asian Development Bank and Inter American Development Bank

Infrastructure Development Finance Company, Chennai

Bharathiya Vikas Trusts (BVT, Manipal) / Sahayadri Energy Systems (SES, Bangalore) / Sun Min (Chennai)

Sowparnika Bio Energy (Puttur) / Shree Kshetra Dharmasthala Rural Development Project (SKDRDP, Belthangadi)

S3IDF Technical Financial Management Team, Bangalore

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Project PhilosophyProject Philosophy Modern Energy Services Critical for Poverty Alleviation

Inferences from work of S3IDF Founders re: Small Scale pro-poor RE/EE projects 1. Cost-effective solutions are possible if :

→ RE/EE players operate under commercial norms→ FI’s BAU practices are modified with innovative financing

2. Critical problems to market penetration are more institutional and financing than technical

3. In US & elsewhere individuals and institutions willing to support such projects

4

Our Unique Value Proposition for pro-poor Small RE/EE Investments

Study would result in :

Innovative Social Merchant Bank approach Identification, demonstration, implementation of

models Development of underlying processes, systems

for organisation and management Mechanisms to support, assist & guide new

such investments.

Pro

ject

Via

bil

ity

Investor Capability

5

Planned Activities to Achieve Outcome

I. Pre-Investment/Project Identification

II. Complete feasibility for priority projects

III. Innovative Financial Support

IV. Implementation and Operations Assistance

V. Post Investment Monitoring and Evaluation

VI. Supporting Studies on related issues

VII. Disseminate the knowledge

VIII. Raise Social and Environmental Investor Funds

S3IDF will provide :

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Expected OutcomesExpected Outcomes

A new financing fund/window for pro-poor small-scale RE/EE and investments;

New/innovative financing models; Implementing mechanism for multiple pro-poor RE/EE investments; Developing SME business models; Evolving models of innovative financial agreements / arrangements; Disseminating outcomes/results and lessons; Mobilising international financial resource.

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Relevance for India Today

Electricity Act 2003 and National Electricity Policy mandate :

All households in India to be electrified in 5 years. Minimum lifeline consumption of 1 unit of electricity / household /day. Per capita consumption to increase to 1000 units by 2012. Priority attention to electrification of Dalit bastis and tribal areas.

This gigantic task needs innovative approaches towards :

THE PROPOSED PROJECT WILL HELP IN FINDING COST-EFFECTIVE SOLUTIONS FOR ALL THESE ISSUES

Decentralized distributed generation. Cost-effective projects/technologies. Use of all locally available resources for power generation. Empowerment of consumers as partners.

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S3IDF Approach & How Poor Benefit

S3IDF Approach & How Poor Benefit

A Social Merchant Bank Approach

How the poor benefit:

» As users of infrastructure services from pro-poor projects – to increase productivity and income;

» As employees in SME(s) in infrastructure service industries;

» As beneficiaries who are enabled to set up low-cost infrastructure service industries.

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S3IDF Approach - Innovative Financing and Structuring Mechanism

S3IDF Approach - Innovative Financing and Structuring Mechanism

New/Innovative Financing:Approach is common and Main stream in large investments but new to small RE/EE transactions

Mechanisms for Investment Structuring of Pro-poor investment and their Risk Management:a. Guarantees or other credit mechanisms to overcome collateral constraints;b. One or more financing support types - debt (primary and/or secondary position)

and/or equity- that is “gap filling” and “deal enabling”. This menu is also employed to help small equipment players who are critical to these investment deals;

c. Equipment supplier-financing;d. Budget intercepts; e. New ownership and/or operations structures which lower costs and make

energy services viable.

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The Project Cycle & S3IDF Need for Grant Monies

Pre-investment phases

- Studies - Surveys; Feasibility

analysis

Implementation/Construction Phase Operation Phase

Milestones ( ) Financial Closure Implementation ends

Implementation begins Operation Starts

Project Operates Financially - Some cost share with

partners, cost can not be absorbed by the project (because of small size and pro-poor characteristics)

- These costs must be supported by grant funds.

- Some of the costs are applicable to broader project replicability.

- Project capital (implementation, construction) and operations cost are covered.

- Project operates in a financially viable fashion including loan, guarantee fee, etc. payments to S3IDF revolving fund.

- Some monitoring done as part of financing procedures by both S3IDF and co–financing bank in both this and operations phase (until debt, etc. repaid)

- Technical support, SME capacity building must be covered in part/whole by grant funds

- Revolving fund must initially be capitalized by soft or grant fund, but then it operates on sustainable basis.

- Post-implementation Monitoring & Evaluation and Lessons Dissemination critical to replication by S3IDF (and others) and critical to S3IDF’s broader mission of getting big development entities to do similar projects.

- These costs must be supported by grant funds.

Implementation Monitoring & Evaluation and Support Post Implementation Monitoring & Evaluation Lessons, Dissemination

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Project Cycle and Need for grants

Grants :

- user risk-averse

- results can reduce costs of

other Similar projects

CooperationSympathyguidance

Grants for free S3IDF Assistance. Loans, guarantees

Interest subsidy

Commercial

financial

assistanceGrants Grants

Nature of assistance grant/loans

Project

Prioritisation

SeekingFinancial

collaboration

Implementation

Construction

Operation

phase

Monthly

Evaluation

Dissemination

of Knowledge

Projectpreparation

Feasibilityanalysis

Project

Identification

ProjectStage

Project

Analysis

Skills

ContactsLogistics

NegotiationSkills

Management

Capability

For project

construction

Effective

Management

Capability

Requisite

Skills

Analysis &

Conceptual

Skills

DueDeligence

Skills

Technology

Data Base

Access to

Sources

of supply

Inputsneeded

S3IDF & associations

ASCI S3IDF FIs Other

NGOs

Project operator

Banks/FIs

Project

Operator,

S3IDF

Associates

S3IDF S3IDFInsti-

tutions

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Requesting PDFA Funds ($25,000) For Detailed Project Preparation

Requesting PDFA Funds ($25,000) For Detailed Project Preparation

Indicative project cost at the concept level (To be refined under PDFA)

Estimated Project Costs

Project Analysis and Implementation (Activities I-IV)

M&E and Dissemination

(Activities V & VII)

Studies and Fundraising

(Activities VI & VIII)

Investment Costs $ 860,000

Indian Labor Costs $ 530,000 $ 310,000 $ 200,000 $ 20,000

International Labor Costs $ 310,000 $ 205,000 $ 65,000 $ 40,000

Other Direct Costs $ 70,000 $ 40,000 $15,000 $ 15,000

Total $1,770,000

Totals GEF Cost Share

Investment Costs $ 860,000 40% $ 344, 000

Indian Labor Costs $ 530,000 60% $ 318, 000

International Labor Costs $ 310,000 10% $ 31, 000

Other Direct Costs $ 70,000 60% $ 42, 000

Total $1,770,000 42% $ 735, 000

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S3IDF: A Schematic of Envisioned Flow of Funds Contingent Flow (For partial guarantees) Debt, equity, etc. Re-flow Services

Tariffs, fees

The Project (And owner/operator)

Revolving Fund Corpus

Grant/Tax Deductible Monies from Individuals and Institutions (restricted, unrestricted & matching)

Customers (May also be owners)

Soft Loan/Contingent Grant Funds From Development Finance & Other Institutions (Foundations)

Pool of Funds for S3IDF and S3IDF – South Asia Affiliate Operations Pre-investment Monitoring & Evaluation and Lessons

Dissemination Arranging co-financing and other support Fundraising Corporate management and reporting to

non-profit regulatory authorities

Local Bank & Other Financial Institutions (e.g. leasing company)

Financing and other assistance from government and other programs

Debt, equity, etc.

Re-flow

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Types of Projects currently under the S3IDF Portfolio and Pipeline

Types of Projects currently under the S3IDF Portfolio and Pipeline

Solar Photovoltaic for Charging Stations & Small Lighting systems Solar PV-Grid Hybrid Biogas for cooking and power generation Small Hydro Drying and other post harvest technologies Bio fuels for power generation Last mile electricity supply for both rural and urban Water and Energy Nexus – Improving efficiency at both energy and

irrigation Water Supply – Potable and Irrigation Biomass Gasifiers Transportation and Telecommunications

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Indicative Examples of RE and EE & Linked Productive-Use Investments

1. Village/community scale;

2. RE/EE based Energy Service Company

(ESCO) / Group of villages;

3. Household/small&meduim enterprise

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Summing Up1. The present request from PDFA funds is for a grant to prepare a detailed

project report.2. If approved, the project report will be prepared in detail as per GEF

funding requirements. This would again be evaluated on merits.3. If approved, it will result in implementing a large number of small RE/EE

projects each will contribute to sustainable energy development, local employment creation with least environmental adverse impact.

4. The implementation will be through new innovative financing procedures of mobilising capital, risk minimisation and well-designed operating procedures.

5. The project will be continuously monitored by the management team and experience would be shared with everyone interested in RE/EE projects.

6. New funds can be mobilised from national and international sources and thus trigger a accelerated development of small RE/EE projects.

THANK YOU