Opportunities for funders

Simon Desjardins

There are currently many opportunities for donors and impact investors alike to support small and growing energy businesses in Bihar. For impact investors, providing scale-up funding to organizations with an established track record is one of the best options. For donors providing grants or soft loans, perhaps more surprisingly, making a grant to an organization that is already in the process of scaling up is still likely to be a good option in terms of impact per dollar spent.

Opportunities for social impact investors with patient capital

For investors with commercial capital to invest, there are two main opportunities. The first is to provide scale-up funding to existing organizations that have an established track record. For example, four of the organizations profiled in this issue (Husk Power Systems, Project Dharma, d.light design and Greenlight Planet) could use either debt or equity (or both) to grow their core businesses. All are either currently fundraising or will be in the months ahead. Debt provision in India is tricky for foreign institutions, but these four organizations also have offshore entities that may be able to receive debt.

The second and less obvious opportunity relates specifically to Husk Power. Its scale-up strategy involves a shift away from its current ‘Build, Own, Operate and Maintain’ (BOOM) model towards a ‘Build and Maintain’ (BM) model, where entrepreneurs will purchase Husk Power’s technology and delivery model but operate it independently (see Why are they funding Husk Power?). This is different from a traditional franchise model where someone pays an ongoing fee to use the franchiser’s brand. Given the increasingly short period of time it takes for a Husk Power plant to pay back the initial investment, this represents a viable business both to independent local entrepreneurs who want to install ten or more plants and to existing energy companies that want to expand into power generated from biomass. Both types of operators will probably require some level of commercial funding to do this.

Although perhaps less visible to outsiders than the option of funding Husk Power directly, this type of funding (to owners and operators) is what is most needed right now, and would arguably have the highest level of impact in terms of numbers of households provided with access to electricity. For first-time entrepreneurs or higher-risk operators (for example, those operating a not-for-profit model but seeking to become for-profit), there is also an opportunity for grant funders to establish a revolving risk capital pool to provide funding to get these operators started.

Opportunities for grantmaking organizations

For funders providing grants or soft loans, there are also numerous opportunities to support the sector. Paradoxically, and perhaps controversially, it is actually the organizations that have received previous funding and are in the process of scaling up that are most likely to benefit from a grant, in terms of generating impact per dollar spent. Companies like d.light and Husk Power are often perceived by outsiders as ‘already well funded’ and not well suited to soft funding. The opposite is true. One of the lessons we’ve learned as a foundation over the last ten years has been that ‘spraying and praying’ – injecting small amounts of grant funding into many small projects – doesn’t lead to scale. Far more effective are higher levels of smart subsidy allocated to organizations that are structured for growth.

Specifically, there are three opportunities in Bihar for donors interested in the energy sector. First, energy companies in this state require support to build the capacity of their staff and to educate consumers. For example, the centralized training centre that Husk Power is creating, which has been dubbed Husk Power University, will have a direct economic impact: everyone who graduates from Husk Power University will have a skilled job and opportunities for career progression. This would represent an attractive funding option for government bodies or education-focused donor organizations. There are also opportunities to support awareness-raising campaigns for d.light, Greenlight and Project Dharma, to educate and create demand among local consumers on the benefits of modern energy products like solar lanterns. Campaigns could be designed with more than one business as a beneficiary.

Second, there are numerous areas where additional funding for research and development could make a big impact. For example, Dr Zheng Jiang at Oxford University is working on a system to gasify biomass inside a magnetic field, which could lead to greater efficiency. We have yet to test this in the field. Project Dharma could benefit from R&D on the design of its sales process and delivery mechanisms for complementary but socially sensitive products like sanitary towels and contraceptives. Greenlight and d.light could benefit from R&D on ways to reduce product cost. These are just a few examples.

Third, more research is required on the actual benefits of energy provision and the economics behind different technologies and business models. Dalberg in India and the Khemka Foundation are working on this, but they could do with additional support. Equally, there are several student groups that are studying the effects of access to electricity in Bihar, though their results may be limited due to lack of funding for follow-up research. This kind of research has the potential to provide the concrete data that can help draw new investors and donors into the energy sector.

Fourth, there are numerous ways we could deploy soft funding effectively to improve the enabling policy and legal ecosystem surrounding energy in Bihar and in India more broadly. Pankaj Jain, a Delhi-based corporate lawyer, has set up a legal practice, Impact Law Ventures, to work on this specific issue, for example, and could provide direct support to organizations looking to make an impact in this area.

On the advocacy front, organizations like Greenpeace have been active in Bihar, working to improve government policy on energy provision. One area in need of change is the policy restricting foreign organizations from making local loan guarantees. This might sound like an obscure topic but it could actually help significantly to unlock lending by local banks to energy entrepreneurs and potential distributors.

Finally, we need to consider the question of why there aren’t more energy entrepreneurs out there. Partly, it has to do with the concept of the entrepreneur not being as respected yet in India as it is in the West. More importantly, I think a lot of bright students coming out of India’s universities simply aren’t being exposed to the entrepreneurial opportunities in this sector. Organizations like Dasra Social-Impact, the Indus Entrepreneurs and New Ventures India are active in this space and could use grant funding to good effect to educate potential entrepreneurs as well as to provide early-stage business development assistance to entrepreneurs in the start-up phase.

Non-financial support

For organizations with strong local networks in India that are interested in supporting the sector but unable to provide a financial contribution, there are also ways to make a difference. Corporate partnerships are needed to help distribute modern energy products as well as supply specialized equipment (such as gas engines) to energy businesses.

And I don’t know of a single energy business that isn’t looking for strong management talent willing to roll up its sleeves and work in Bihar. Individuals with operations experience or financial planning skills are particularly in demand, and people with strong business or engineering skills willing to work as interns are also needed.

Read more…

This article from June 2011 links to the forthcoming June 2012 issues, which has a special feature on High risk/high gain? Opportunity, risk and global development. 

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