1. business and industrial

 How to Make Business Work for the Poor
Case Studies from the Energy Sector in Developing Countries
JENNY HASSELSTEN
HELENA NIELSEN
Master of Science Thesis
Stockholm, Sweden 2008 How to Make Business Work for the Poor
Case Studies from the Energy Sector in Developing Countries
Jenny Hasselsten
Helena Nielsen
Master of Science Thesis INDEK 2008:113
KTH Industrial Engineering and Management
Industrial Management
SE-100 44 STOCKHOLM
1 Master of Science Thesis INDEK 2008:113
How to Make Business Work for the Poor
Case Studies from the Energy Sector in Developing Countries
Jenny Hasselsten
Helena Nielsen
Approved
Examiner
Supervisor
2008-December-16
Staffan Laestadius
Staffan Laestadius
Commissioner
Contact person
Abstract
Looking beyond social investments and philanthropy, business is more often looking for opportunities to create
commercially viable business projects within their core business or value chain in new markets. This fact, along with
the stagnation of markets in developed countries, is contributing to more and more companies seeking new markets
to tap in on in developing countries. However, in many developing countries the foundations for private sector
activity, such as the rules of market operation and the legal and regulatory institutions necessary to support them, are
weak or non-existent. Under these circumstances business environments may seem too risky and complicated and
companies may therefore chose not to enter this market. The purpose of this thesis is to clarify how the market for
the poor works and to bring light upon how companies can create commercially viable projects in developing
countries. In order to do so, the study is divided in three research areas where it seeks to; 1) develop a framework for
analyzing and describing the market and its actors in developing countries for the energy sector; 2) study the
constraints and solutions in this market; and 3) discuss the private sector's role in international development. In
addition the study will focus on the energy sector, as this sector is a key factor for development and holds an
important role to play with the emerging challenges that climate change is bringing. The case studies are taken from
United Nations Development Programme's initiative “Growing Sustainable Business”. By using a qualitative
research methodology this study found the major challenges to be lack of; finance legal frameworks, political
instability, coherent public policy, health, security, human capacity, information, infrastructure, trust and climate
change. The main solutions could be found within the three categories; collaborations, incentives and adaptation and
innovation. Stemming out of "Bottom of the Pyramid" theory and market frameworks such as "Making Markets
Work for the Poor" this thesis provides a new market framework that recognizes that certain given conditions needs
to be in place in order for a market to create a favorable industrial climate that also benefits the poor. Such a market
consists of a core market, institutions and supporting infrastructure/services and is conditioned by economic,
political, social and cultural factors as well as the decisions to favor pro-poor or inclusive market policy. In order for
the business to create a maximum value added in these markets, collaborations with donors, governments, and
nongovernmental organizations are critical. Companies that manage to make the right choices and to build focused,
proactive, and integrated social investments in line with their core business will be positioned to succeed, especially
in markets that require new business models and untraditional partnerships. It is when business goals align with civil
society’s goals that the most productive relationships are created.
Keywords: business, markets, developing countries, energy sector, sustainable development, bottom of
the pyramid, BOP, markets for the poor, M4P.
2 Acknowledgements
We would like to express our sincere gratitude to our supervisor at the Royal Institute of Technology, Professor
Staffan Laestadius for his support and guidance throughout the process of writing this thesis.
We would also like to thank Eva Blixt, at the Ministry of Enterprise, Energy and Communication, Johan Åkerblom,
Swedish International Development Cooperation Agency (Sida) and Åse Botha, the Swedish Trade council for
sharing their valuable insight and knowledge in the field of business and development.
Finally, we also want to thank Lucas Black and the rest of the GSB team at UNDP for their guidance and advice
throughout this work. Letting us take part of their work in facilitating sustainable business projects has been a
valuable experience and a great source of inspiration to us.
The process of writing this thesis has been an exciting challenge which has proven to be an enriching experience,
from a professional and personal point of view. The commitment and enthusiasm of the wonderful people we have
met during this experience has given us the courage to follow our hearts and pursuing a future career within a field
we strongly believe in. To them, we are more than grateful.
Stockholm, December 2008
Jenny Hasselsten and Helena Nielsen
3 Abbreviations
ADB
ATI
ADEME
ADER
AMW
BOP
BDS
CO2
CER
CDM
CoP
CSR
GTZ
EDF
EDM
EU
FAO
FDI
BRSP
GH
GC
GEF
GOK
GHG
GIM
GPPO
GSB
IT
ISTA
IPCC
IAVI
IFC
IFI
IFAD
ILO
IMF
JBIC
JIRMA
KPLC
M4P
MDG
Asian Development Bank
Africa Trade Insurance Agency
Agence de l'Environnement et de la Maîtrise de l'Energie
Agence pour le Développement de l’Electrification Rurale
Animal Manure Waste
Bottom of the Pyramid
Business Development Services
Carbon Dioxide
Certified Emission Reduction
Clean Development Mechanism
Community of Practice
Corporate Social Responsibility
Deutsche Gesellschaft für Technische Zusammenarbeit GmbH
Électricité de France
Électricité de Madagascar
European Union
Food and Agriculture Organisation of the United Nations
Foreign Direct Investment
Former UNDP Bureau for Resources and Strategic Partnerships
Garrad Hassan and Partners Limited
Global Compact
Global Environment Facility
Government of Kenya
Greenhouse Gas
Growing Inclusive Markets programme
Green Power Purchase Obligation
Growing Sustainable Business programme
Information Technology
Institut Supérieur de Technologied’Antsiranana
Intergovernmental Panel on Climate Change
International AIDS Vaccine Initiative
International Finance Corporation
International Financial Institution
International Fund for Agricultural Development
International Labour Organisation
International Monetary Fund
Japan Bank for International Cooperation
Jiro Sy Rano Malagasy
Kenya Power & Lighting Company
Making Market Systems Work Better for the Poor
Millennium Development Goal
4 MoU
Momentum of Understanding
NOx
MIGA
Mono-Nitrogen Oxides )(NO and NO2)
Multilateral Insurance Guaranty Agency
Municipality Solid Waste
National Electricity Fund
Organisation for Economic Cooperation and Development, Development Assistance Committee
MSW
FNE
OECD/DAC
PGU
PPA
PRSP
PSD
PSE
PPPSD
PPP
PDP
Policy for Global Development
Power Purchase Agreement
Poverty Reduction Strategy Paper
Private Sector Development
Private Sector Engagement
Public Private Partnerships for Service Delivery programme (formerly PPPUE)
R&D
RWE
RESCO
SME
Public-Private Partnerships
Public-Private Product Development Partnership
Research and Development
Rheinisch-Westfälische Elektrizitätswerk AG
Rural Electricity Service Company
Small and Medium Sized Enterprises
SECREN SA
SAP
SO2
Societe d'Etudes de Construction et de Reparation Navales
Structural Adjustment Programs
Sulfur Dioxide
Sida
TNC
DfID
PB
SEMFIN
UN
UNCDF
UNICEF
UNCTAD
UNDP
UNEP
UNFCCC
UNIDO
USAID
WBCSD
WMO
Swedish International Development Agency
United Nations Environment Programme
United Nations Framework Convention on Climate Change
United Nations Industrial Development Organisation
US Agency for International Development
World Business Council for Sustainable Development
World Meteorological Organization
WTO
World Trade Organization
Transnational Corporations
UK Department for International Development
UNDP Partnerships Bureau (formerly BRSP)
UNDP thematic network on Small Enterprise and Microfinance
United Nations
United Nations Capital Development Fund
United Nations Children's Fund
United Nations Conference on Trade and Development
United Nations Development Programme
5 Table of Contents
1
1.1
1.2
1.3
2
Introduction .................................................................................................................................... 9
Purpose ............................................................................................................................................. 9
Scope............................................................................................................................................... 10
Disposition ...................................................................................................................................... 10
Background ...................................................................................................................................11
2.1
International development............................................................................................................. 11
2.2
From philanthropy and CSR to pro‐poor sustainable business ...................................................... 14
2.3
Collaboration................................................................................................................................... 17
2.4
Development agencies working with the private sector ................................................................ 19
2.4.1
United Nations Development Programme’s Private Sector Division ...................................... 19
2.4.2
Growing Sustainable Business initiative ................................................................................. 20
2.5
Climate change, energy and development ..................................................................................... 21
2.6
Adaptation to climate change......................................................................................................... 23
2.6.1
The Intergovernmental Panel on Climate Change .................................................................. 23
2.6.2
Monitoring emission targets................................................................................................... 24
2.6.3
The Kyoto mechanisms ........................................................................................................... 24
2.6.4
Clean development mechanism .............................................................................................. 24
3
Method ............................................................................................................................................26
3.1
Scientific approach.......................................................................................................................... 26
3.2
Method of reasoning ...................................................................................................................... 26
3.3
Practical approach .......................................................................................................................... 26
3.4
Sources............................................................................................................................................ 27
3.4.1
Interview method .................................................................................................................... 27
3.4.2
Method for analysis ................................................................................................................ 28
4
The market in developing countries and its actors ........................................................29
4.1
The Bottom of the Pyramid (BOP) Theory ...................................................................................... 29
4.1.1
The BOP market ...................................................................................................................... 29
4.1.2
The BOP framework ................................................................................................................ 30
4.1.3
Market dynamics of the BOP‐market...................................................................................... 32
4.1.4
Criticism of the BOP theory ..................................................................................................... 34
4.2
Markets for the poor, M4P ............................................................................................................. 37
4.2.1
Engine of economic growth .................................................................................................... 37
4.2.2
Making Market Systems Work Better for the Poor (M4P) framework ................................... 37
4.2.3
Components of a functioning Market ..................................................................................... 38
4.2.4
Criticism................................................................................................................................... 40
4.2.5
Importance of addressing the causes to the problems ........................................................... 41
4.3
Market constrains ........................................................................................................................... 42
4.3.1
Corruption ............................................................................................................................... 42
4.3.2
Ineffective regulatory environment ........................................................................................ 42
6 4.3.3
4.3.4
4.3.5
4.3.6
4.3.7
5
Informal sector ........................................................................................................................ 42
Restricted access to finance .................................................................................................... 43
Poor physical and social infrastructure................................................................................... 43
Poor market knowledge .......................................................................................................... 43
Lack of knowledge and skills ................................................................................................... 43
Empirical Studies ........................................................................................................................44
5.1
Project Lokoho ‐ E8 ......................................................................................................................... 44
5.2
Industrial Wind Energy Centre ‐ Mad’Eole ..................................................................................... 46
5.3
Marsabit Wind Farm Project‐ Gitson Energy .................................................................................. 48
5.4
Rural Electrification in Mali: Improving Energy Accessibility to the Rural Poor ............................. 50
5.4.1
Koraye Kurumba...................................................................................................................... 51
5.4.2
Yeelen Kura ............................................................................................................................. 52
5.5
Energy for Poverty Alleviation ‐ Gikoko Kogyo ............................................................................... 54
5.6
PEC Luban: Using Straw as an Engine for Sustainable Local Economic Growth ............................. 57
5.7
LYDEC: Providing Electricity to Casablanca’s Shanty Towns ........................................................... 60
6
Key findings...................................................................................................................................63
6.1
Major challenges found .................................................................................................................. 63
6.1.1
Investment cost ....................................................................................................................... 64
6.1.2
Purchasing power.................................................................................................................... 64
6.1.3
Ineffective legal framework .................................................................................................... 64
6.1.4
Political instability ................................................................................................................... 64
6.1.5
Lack of public policy coherence............................................................................................... 64
6.1.6
Health problems...................................................................................................................... 65
6.1.7
Insecurity................................................................................................................................. 65
6.1.8
Lack of human capacity .......................................................................................................... 65
6.1.9
Lack of information ................................................................................................................. 65
6.1.10 Poor infrastructure.................................................................................................................. 65
6.1.11 Non technical losses & lack of trust ........................................................................................ 66
6.1.12 Climate change ....................................................................................................................... 66
6.2
Solutions found ............................................................................................................................... 66
6.2.1
Collaboration........................................................................................................................... 67
6.2.2
Incentives ................................................................................................................................ 68
6.2.3
Adaptation and Innovation ..................................................................................................... 70
6.3
Matrixes .......................................................................................................................................... 73
6.3.1
Challenges and solutions......................................................................................................... 73
6.3.2
Solutions and actors................................................................................................................ 73
6.4
Impacts............................................................................................................................................ 74
6.4.1
Positive environmental impact................................................................................................ 74
6.4.2
Employment ............................................................................................................................ 75
6.4.3
Transfer of technology and know‐how ................................................................................... 75
6.4.4
Development of local community and region ......................................................................... 75
7 6.4.5
Health and safety .................................................................................................................... 75
6.4.6
Regulatory framework ............................................................................................................ 76
6.4.7
Demonstration effect .............................................................................................................. 76
6.4.8
Energy independence .............................................................................................................. 76
6.5
Market framework.......................................................................................................................... 76
6.5.1
The core market ...................................................................................................................... 77
6.5.2
Institutions and supporting services/infrastructure................................................................ 78
6.5.3
Conditions for sustainable development................................................................................. 78
6.5.4
Networks for maximum value added...................................................................................... 79
7
7.1
8
8.1
8.2
8.3
8.4
8.5
9
9.1
9.2
9.3
9.5
Conclusions ...................................................................................................................................80
Remaining questions and areas for further research ..................................................................... 82
References .....................................................................................................................................83
Interviews........................................................................................................................................ 83
Literature and reports..................................................................................................................... 83
Project documents, PSD, UNDP ...................................................................................................... 86
Seminars.......................................................................................................................................... 88
Internet ........................................................................................................................................... 88
Appendices ....................................................................................................................................90
Appendix I: Statistics ....................................................................................................................... 90
Appendix II: Questionnaire for business leaders ............................................................................ 90
Appendix III: Matrix......................................................................................................................... 91
Appendix IV: Maps .......................................................................................................................... 93
8 1 Introduction This first chapter gives an introduction to the subject of the thesis and draws attention to importance of
the energy sector’s role in creating a sustainable future in developing countries. The chapter also
presents the purpose, scope and disposition of the thesis.
Climate change represents one of the greatest environmental, social and economic threats facing the
planet. The Earth's average surface temperature has risen and most of the warming that has occurred over
the last 50 years is very likely to have been caused by human activities.
In its Forth Assessment Report the Intergovernmental Panel on Climate Change projects that without
further action to reduce greenhouse gas emissions, the global average surface temperature is likely to rise
and could possibly lead to irreversible and catastrophic changes.1
Projected global warming this century is likely to trigger serious consequences for mankind and other life
forms. While climate change will affect all countries, it is developing countries and the poorest
populations that will be hit earliest and hardest. Increasing food insecurity, water scarcity, spread of
diseases to new areas, damage from floods and forced migration due to desertification of previously
arable land or sea-level rise are some of the likely effects on developing countries.
Poor countries with economies dependent on natural resource-related sectors such as agriculture, forestry
and fisheries will be disproportionately affected. But even developing countries with more diversified
economies are vulnerable since lack of financial resources, adequate technology and effective institutions
limits their capacity to adapt to the consequences of climate change.
Promoting overall development will help reduce vulnerabilities and raise the adaptive capacity of poor
people. As energy is a key factor for development and with emerging challenges that arise with climate
change, this sector holds an important role for development, and in creating a sustainable future.
The private sector has an important role to play in bringing energy to developing countries as well as
tackling the challenges posed by climate change. This involves investing in new clean technologies to
encourage countries and industries to make the necessary adaptations to change. However, companies
seeking new markets in developing countries often lack knowledge and information about these markets
and do therefore not know how to approach these markets.
1.1 Purpose
The aim is to increase the knowledge about how the private sector can create commercially viable
business models in developing countries adapted for the conditions and needs of the people at the bottom
of the economical pyramid. The study’s primary target group is anyone who is considering entering a
market in a developing country. However, the study also targets a broader audience with the aim to raise
awareness of business conditions in developing countries.
The stagnation of markets in developed countries is contributing to more and more companies seeking
new markets to tap in to in developing countries. The knowledge and information about markets in
1
IPCC (2007). Climate Change 2007: Synthesis Report. Contribution of Working Groups I, II and III to the Fourth
Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, Pachauri, R.K and
Reisinger, A. (eds.)]. IPCC, Geneva, Switzerland, 104 pp.
9 developing countries is however very limited and entering in to these markets therefore often involve a
higher risk. As a result companies might see these markets as too complicated and therefore chose not to
enter.
This study seeks to build a better understanding of how the market works for the poor and to bring light
on the opportunities to do business that is both commercially viable and have a developing impact for the
poor.
In order to increase the knowledge about how the private sector creates commercially viable business in
developing countries this study is divided into three research areas: (1) Develop a framework for
analyzing and describing the market and its actors in developing countries for the energy sector, (2) study
the constraints and solutions in the market, and (3) discuss how to create dynamic markets were the poor
are included and that promotes a sustainable use of the planets natural resources.
1.2 Scope
The study will focus on business within the energy sector. As energy is a key factor for development and
with the emerging challenges that arise with climate change this sector holds an important role for
development and in creating a sustainable future.
The projects have been collected from United Nation Development Programme’s (UNDP) Growing
Sustainable Business (GSB) initiative because (1) the GSB is an important actor in the field of emerging
markets (2) previous studies in the field often refer to the same cases while the GSB cases have never
been studied before.
In this thesis, 8 projects from different developing countries will be studied to obtain empirical data. A
wide geographical scope has been chosen to include as many projects as possible.
1.3 Disposition
This first chapter gives an introduction to the subject and presents the thesis’ purpose and scope. In the
following chapter background information about the situation and the involved actors is given in order to
better be able to understand the findings. Chapter 3 describes the scientific approach according to which
the work in this study has been conducted. In chapter 4 a theoretical background for how markets in
developing countries work is presented. Thereafter, the thesis’ case studies are presented in chapter 5.
Chapter 6 describes the study’s findings and suggests a new market framework based on the results. In
chapter 7 the thesis’ problem statement and key findings are summarized and finally the chapter proposes
suggestions for further research.
10 2 Background This chapter describes the process of the development leading to today’s existing problems for the private
sector in developing countries. Background information about the organization and division from which
the case studies where obtained is presented, and also, mechanisms available for the private sector to
adapt to climate change are given. These are meant to provide the reader with the knowledge necessary
in order to interpret the study’s results.
2.1 International development
International development is usually referred to as the process of development undertaken by countries
and communities with the assistance from international actors, such as other governments, nongovernmental organizations (NGOs) or from intergovernmental organizations. The definition of
development is however not universally accepted. Until late 1960s, development was considered by most
economists to be the maximization of economic growth.
The British economist, Dudley Seers, began to question the wisdom of trying to define the concept of
development in strictly economical terms.2 He argued that development was a social phenomenon and
that the focus on national income avoided the real problems of development. Seers suggested that other,
social measurements should be used for defining development and got recognized for his complaints. His
definition of development as “the reduction and elimination of poverty, inequality and unemployment
within a growing economy” became widely accepted.
It is only in the past century that international development theory has emerged as a separate theory. It is
stated that the theory and practice of development remains rooted in the period of the political thought
that existed in the immediate aftermath of the Second World War.
As the Great Depression enveloped the whole world in, the 1930s the British economist John Maynard
Keynes, a key participant in the so-called Bretton Woods Conference, put forward an explanation for the
economic downturn. Keynes argued that the lack of sufficient aggregate demand was the cause of
economic downturn and that government policies could help stimulate aggregate demand. In cases of
monetary policy is inefficient, governments could rely on fiscal policies, either by increasing expenditures
or cutting taxes.3
In the preparation to finance and rebuild the international economic system after the Second World War
the U.S. took a lead role in setting up intergovernmental organizations that established a system of rules,
institutions and procedures to regulate the international monetary systems. At the United Nations
Monetary and Financial Conference at Bretton Woods, 1944, the International Bank for Reconstruction
and Development, now part of the World Bank Group, and the International Monetary Fund (IMF) were
established. While the World Bank’s mission is to provide support to developing countries, the IMF aims
to stabilize the international monetary system and monitors the world’s currencies.4 The United Nations
(UN), which also originates in the Second World War, was established in 1945 with the stated goal to
build communication and cooperation between nations in order to fostering international peace. Since
then its aims and activities have expanded to include facilitate cooperation in international law,
2
Seers, D, (1969) The Meaning of Development. International Development Review as described in Emmerii, L,
(2005) How has the UN faced up to development challenges, Forum for development studies
3
Stiglitz, J. E. (2002). Globalization and Its Discontents. New York: W.W. Norton and Company
4
World Bank (2007), Working for a World Free of Poverty, Brochure, World Bank Group
11 international security, economic development, social progress and human rights.5
Another important step in setting an agenda for international development after the Second World War
was the Marshall Plan, named after the U.S. Secretary of State George C. Marshall who laid the
foundation. It was the primary plan for rebuilding and creating a stronger foundation for the allied
countries of Europe, in order to repel communism, launched by the U.S.. The U.S. Congress approved
Marshall's proposal in 1948, and by 1952 the U.S. had channeled some $13 billion in economic aid and
technical assistance to 16 European countries.6
In the 1980's, during the era when Ronald Regan and Margaret Thatcher preached free market ideology, a
dramatic change in the international institutions occurred. The World Bank and IMF adopted the
neoliberal ideas of economists such as Milton Friedman in which the market is assumed to always be
efficient except for some limited and well defined market failures. These ideas where translated into
specific economic policy prescriptions that constituted a standard reform package promoted by IMF, the
World Bank and the U.S. Treasury department, later to be coined the Washington Consensus. The reform
packages were then implemented through Structural Adjustment Programs (SAPs) for developing
countries. SAP implicated policy changes in the developing countries and set conditions for getting new
loans from the IMF or World Bank, or for obtaining lower interest rates on existing loans. The policy
changes were implemented in order to ensure that the money lent would be spent in accordance with the
overall goals of the loan. These loans were in general designed to promote economic growth, to generate
income and to pay off the debt which the country had accumulated. The SAP generally implemented “free
market” program and policy which include internal changes such as privatization and deregulation, and
external ones such as reduction of trade barriers. If a country failed to enact these programs they became
subject to fiscal discipline.
Critics argue that the IMF and World Bank became new missionary institutions, through which the ideas
of a free market were pushed to the reluctant poor countries that often badly needed their loans and
grants.7 A lack of coherence between the institutions and the developing countries led to a multitude of
problems which in some cases have left the country worse off after the interference by IMF than it was
before. Some critics argue that the lack of coherency is due to IMF not only pursuing the set out
objectives, of enhancing global stability and ensuring that there are funds for countries facing the threat of
recession to pursue expansionary policies, but also pursuing the interests of the financial community.8
In order to increase the borrowing country’s involvement in setting policies for the country, they now
have to draw up a Poverty Reduction Strategy Paper (PRSP). These PRSPs have essentially taken the
place of SAPs. The content of PRSPs have however turned out to be similar to the content of the SAPs
which critics argue show that the banks, and the countries that fund them, are still overly involved in the
policy making process.9
In response to the neoliberal ideas that the IMF and the World Bank were implementing, various parts of
the UN system led a counter movement. These movements were initially led by the International Labour
Organization (ILO), followed by the United Nations Children's Fund (UNICEF) and UNDP who also put
forward the concept of Human Development and thus changing the nature of the development dialogue to
focus on human needs and capabilities.10
5
http://www.un.org/aboutun/
http://usinfo.state.gov/products/pubs/marshallplan/
7
Stiglitz, J. E. (2002). Globalization and Its Discontents. New York: W.W. Norton and Company
8
Ibid.
9
Ibid.
10
Ibid.
6
12 Since the fall of the Soviet Union in 1991, market economy, with a free price system, has been the
undisputed principle for economic activity and has been applied by all nations of the world with a few
exceptions such as North Korea.11 The end of the Cold War also meant a strong movement for
globalization. Private capital increasingly began moving across borders, facilitated by various forms of
financial liberalization and communication technology changes. Various trade agreements lead to the
creation of the World Trade Organization (WTO) in 1995, which reinforced the growth of a globalised
world economy. The private sector has expanded into new areas such as infrastructure, utilities and social
services, traditionally the domain of the public sector also in the most market-oriented countries. This has
however happened with uneven and some dysfunctional dividends.
While the market reform process and globalization have paid dividends both in economic growth and the
reduction of poverty globally, these benefits have been highly unevenly distributed. In many developing
countries the private sector has failed to play a dynamic role. Foreign investments have not emerged as
anticipated, and growth and poverty reduction have not taken place. Even though UN statistics show that
living standards around the world have improved over the past 40 years, a large portion of the world's
population is still living in poverty, governments is crippled by debt and concerns about the
environmental impact of globalization is rising.12 In fact, 52 countries experienced economic decline
during the 1990s, the majority of those in Africa13.
There is increasing recognitions that while the work by donor-governments, international organizations
and nonprofit sectors is important, aid and philanthropy were clearly insufficient to solve the problem of
poverty. Despite five decades and € 2.3 trillion spent on foreign aid14, 2.6 billion people15, or nearly half
the people on the planet, still lives on less than $2 per day, without access to many of the social services
basic to a decent human life.16
The highly uneven dividends so far of market reforms and globalization required creation of new models
after the Washington Consensus. In response to the earlier failures, development started focusing on the
issue of poverty, a shorter term vision embodied by the Millennium Development Goals (MDGs) and the
Human Development approach, established in 2000. World leaders from 189 countries adopted the UN
Millennium Declaration, which includes eight MDGs, committing their nations to a new global agenda to
halve extreme poverty by 2015.17
To contribute to this global agenda the Swedish Parliament adopted a Policy for Global Development
(PGU). Its objective is that all policy areas should contribute to equitable and sustainable global
development. By doing so, Sweden is the first country in the world to have adopted a policy that requires
every policy area to take into account the effects of its policy actions on global development.18
At the same time, more and more development agencies are starting to explore opportunities for PublicPrivate Partnerships (PPPs) and promoting the idea of Corporate Social Responsibility (CSR) with the
11
Sida (2003). Challenges to Sida’s Support to Private Sector Development - Making Markets Work for the Poor.
Private Sector Development Report.
12
Fukuyama, F. (1992). The End of History and the Last Man. Glencoe: Free Press.
13
UNDP (2003). Millennium Development Goals: A Compact Among Nations to End Human Poverty, Human
Development Report 2003
14
Easterly, William (2006). The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill
and So Little Good Penguin Press
15
http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/0,,contentMDK:21882162~pagePK
:64165401~piPK:64165026~theSitePK:469382,00.html
16
Stiglitz, J. E. (2002). Globalization and Its Discontents. New York: W.W. Norton and Company
17
http://www.un.org/aboutun/
18
Swedish Parliament (2005) Sveriges politik för global utveckling, skr. 2005/06:204
13 apparent aim of integrating international development with the process of economic globalization.19
In a World Bank study, “Voices of the Poor”, 20 000 poor people in 23 countries were asked what factor
was the most important to improve their life. Having a good and stable income from employment was
overwhelmingly most common answered.
In order to create lasting solution to address poverty, development needs to be built on economical
activity and growth by the involvement of the private sector, it also needs to take in to consideration the
attributes of a market in a developing country.
2.2 From philanthropy and CSR to pro-poor sustainable business
As management strategies evolve over time and companies follow different management trends, CSR has
emerged as one of today’s most important priorities for business leaders around the world in order to
achieve competitive success. However, this trend has not been entirely voluntary. Not so long ago many
corporations exploited their workers, polluted the environment and committed fraud. The focus was
exclusively on profit maximization20.
During the 1970s environmental protection agencies where created in the west economies and extensive
regulations were passed, aimed at forcing companies to mitigate their negative environmental impacts.
Regulators and citizen activists increased the pressure on companies through fines, penalties and
campaigns. The message was that environmental and social issues were “responsibilities” that companies
were required to deal with and it was going to be expensive. 21
In the 1980s there was a growing unease with the enormous expenditures due to the extensive controls
and regulations and it was questioned if the end-of-pipe approach to pollution control was the optimal
solution. Market-based incentives such as emission taxes were introduced. By the late 1980s it had
become clear that pollution preventing was usually a much more efficient and cost-effective approach
than trying to clean up the mess after it had already happened. As pollution preventing was focused at
reducing waste and emission by changing processes and better utilization of inputs, this resulted in lower
costs for raw material and waste disposal as well as reduced risk. This was a win-win situation for the
company as well as for the environment.22
In the early 1990s activists and media began to focus on social consequences of companies’ activity. The
environmental responsibilities of the private sector was also growing, from internal operation and
pollution preventing to product stewardship which extend beyond organizational boundaries to include
the entire product life cycle, from raw material access, through production processes, to product use and
finally to reuse or disposal. Companies that did not live up to the expectations of the consumers soon
faced extensive problems. Nike, for example, faced an extensive consumer boycott after media reported
abusive labor practices in some of its Indonesian suppliers.23 In 1995, Shell’s decision to sink an obsolete
19
Utting, P. (2003) Promoting Development through Corporate Social Responsibility - Does it Work? Global
Future, Third Quarter, 2003.
20
Yunus, M. and Weber, K. (2007). Creating a World without Poverty, Social Business and the Future of.
Capitalism. New York, NY: PublicAffairs
21
Hart, S. L. (2005). Capitalism at the crossroads: The unlimited business opportunities in solving the world's most
difficult problems. Upper Saddle River, N.J.: Wharton School Publishing.
22
Ibid.
23
Porter, M., Kramer, M.R. (2006), Strategy & society. The link between competitive advantage and corporate
social responsibility, Harvard Business Review, No. December.
14 oil rig in the North Sea led to Greenpeace protests and widespread boycott of the Shell’s service stations.
Some Shell station in Germany reported a 50percent loss of sales.24
Many companies were taken by surprise by public response to issues that they had not previously thought
were a part of their business responsibility. To regain the costumes trust many companies were eager to
create a positive image, which gave a strong push to the CSR movement.
Companies invested great resources to develop expertise in these new areas. At first, they did so
defensively, launching counter campaigns to protect their reputation and using social marketing slogans in
advertisements. Over time, they developed more proactive strategies and many companies have done
much to improve the social and environmental consequences of their activities.
Yet these efforts have not been nearly as productive as they could have been, for two main reasons. First,
they focus on the tension between business and society. Secondly, they have forced companies to think of
CSR in generic ways instead of the most appropriate way for each firm’s strategy. Companies’ wrong
focus results in uncoordinated CSR and philanthropic activities that are disconnected from the companies’
strategy and neither makes a meaningful social impact nor strengthen the company’s long-term
competitiveness.25
There is now a growing recognition by governments, development actors and NGOs that the private
sector and the society should not be put against each other, as they clearly are interdependent. A healthy
society needs successful companies, as much as a company needs a healthy society to become successful.
The private sector is the most important driving force when it comes to creating jobs and income
opportunities. The private sector also plays a significant role in meeting the challenges of the society.
Many experts believe, for example, that given the right price signals, the private sector is better equipped
to address climate change than any central planning or state enterprise model.26
The concern for climate change has generated a growing interest and investments in clean technology
(clean tech). Clean tech is a diverse range of knowledge-based services and processes that harness
renewable material and energy sources, dramatically reduces the use of natural resources and cut or
eliminates pollution and wastes. Rather than simply seeking to reduce the negative impacts of their
operation, firms strive to solve social and environmental problems through innovation and internal
development and acquisition of new capabilities that address the sustainable challenge directly. Examples
include renewable energy, Information Technology (IT), electric motors, non-toxic material and nanotechnologies.27
A growing number of firms have begun to develop the next generation of clean technologies to reposition
and drive future economic growth. In the automobile sector Toyota and Honda entered the market in the
beginning of 2000 with their hybrid cars and today almost every automobile company are trying to catch
up. In the energy sector BP and Shell are increasingly investing in solar, wind and other renewable
technologies that might ultimately replace their core petroleum business.28
Clean technologies are becoming increasingly competitive to their conventional counterparts. Parallel
with the decline of the relative costs of these technologies, the Clean Development Mechanism (CDM)
24
www.greanpeace.org/international/history/the –brent-spar
Porter, M., Kramer, M.R. (2006), Strategy & society. The link between competitive advantage and corporate
social responsibility, Harvard Business Review, No. December.
26
McKinesey&Company (2007) Shaping the New Rules of Competition: UN Global Compact Participant Mirror.
27
Hart, S. L. and M. B. Milstein. 2003. "Creating Sustainable Value." Academy of Management Executive, 17(2):
56-69.
28
Ibid.
25
15 has through extra finance from the carbon credit trade, given clean technology projects an additional
strong push.
Where climate change has had a steadily rise to the top of the world’s agenda during the last years as
reports and predictions have made it clear that the time is running out, global poverty has been on the
agenda for decades. But it is not until the last years that poverty has been on the agenda of the private
sector.
Governments, development actors and NGOs are now starting to see the private sector as a key player in
their goal of economic development and for poverty alleviation in the development world. Poor people
are ranking employment and a stable income as the top priority to improve their life and the private sector
is the most important driving force when it comes to creating jobs and income opportunity.
Through innovation the private sector can improve standards of living and social conditions. In the
developing world, where the challenges are most significant and where other actors have failed to bring
economic development and sustainable poverty alleviation, the private sector is now seen as an important
partner and key player. The private sector has the capacity, both in terms of innovation and investment, to
generate large-scale impact. By investing in new business ideas that provides innovative products and
services and create jobs and skills in low-income communities, companies can act as a powerful catalyst
for market-based development. They also contribute indirectly, through aggregate income and wealth
creation and by generating tax revenues to finance social and economic infrastructure.
At the same time it is increasingly recognized that the
developing world is critical to future business
success. By 2050, 85 percent of the world’s
population of some nine billion people will be in
developing countries.29 If this group of people is not
engaged in the market place by then, many
companies will not be able to prosper and benefit as
they could have. For a sustainable vision of the future
of our globe it is crucial to include these people in the
market in order to meet their needs.
More and more business leaders are starting to see the
poorer regions of the world as a place they can do
business, while helping the local population. The
2008 World Economic Forum clearly illustrated that
addressing global poverty is now on the agenda of the
worlds Chief Executive Officers. In his speech “A
New Approach to Capitalism in the 21st Century” Bill
Gate argues that companies should create business
that focuses on building products and services for the
people in the bottom of the pyramid.
Figure 1 Creating Sustainable Value
“If we can spend the early decades of the 21st century finding approaches that meet the needs of the poor
in ways that generate profits and recognition for business, we will have found a sustainable way to
reduce poverty in the world” 30
29
30
www.wbcsd.org
www.microsoft.com/Presspass/exec/billg/speeches/2008/01-24WEFDavos.mspx
16 A new trend is emerging where companies play a significant role in meeting the greatest challenges of
society. By investing in clean technologies and in products and services for the people living at the
bottom of the economic pyramid they can make profits while creating sustainable value for society. This
trend of shared value between business and society has the potential not only to foster economic and
social development but to change the way companies and societies think about each other.
2.3 Collaboration
As there has been a growing recognition that collaboration between the private sector and public sector
and NGOs can be mutually beneficial. Each side is starting to learn more about each other and the focus
has changed from areas of friction to the points of common interest. Realizing that they each possess
competencies, infrastructure, and knowledge that the other need to be able to reach success, companies
and NGOs and development agencies are trying to learn from and work with each other. Together they
create benefits for the company as well as for the society. Companies and NGOs, development agencies
and government have arrived at the same place by different routes.
There are several examples of areas of convergence and collaboration between the private sector and
NGOs, governments and development agencies described below.31
• The convergence of standards of practice and the emergence of joint regulatory frameworks.
Companies build relationships with NGOs, governments and development agencies to adopted joint
regulatory schemes to stipulate social and environmental practices in their industries in markets with
lacking legal framework. One example is the Kimberley Process; an international process to ensure that
trade in diamonds does not fund violence. The scheme was put together by the major diamond trading and
producing countries, the diamond industry and NGOs and was later endorsed by the United Nations
General Assembly.
•
The convergence of marketing and communications, and the emergence of the joint platforms for
marketing and customer management.
One example is cause-related marketing, when a company markets its products or services to an NGO’s
loyalists, and the NGO markets itself to the company’s customers and employees, generating revenues for
both the company and the NGO’s charitable activities. One example is the Proctor and Gamble and their
“The Always Africa Campaign”. The campaign is a joint program to provide school-based support and
feminine hygiene products to girls in Sub-Saharan Africa through HERO; UNA-USA Campaign in
partnership with US Agency for International Development (USAID).32
• The convergence of activities in developing countries
Globalization has provided corporations with access to new consumers, but reaching low income
customers are difficult. Executives have to invent new business models if they are to succeed in those
markets, and they often find that NGOs possess the knowledge, local infrastructure, and relationships
necessary to make them work. More and more companies are beginning to work with NGOs to break in to
new markets. For instance Telenor teamed up with the non-profit Grameen Bank to set up a joint venture,
Grameen Phone, to sell mobile phones to rural consumers in Bangladesh. The number of mobile
subscribers has been doubling on an annual basis in the country and in the end of 2007 Grameen Phone
was the major operator with more than 20.8 million users.33
31
Brugmann, J. & Prahalad, C.K. (2007), Cocreating Business’s New Social Compact, Harvard Business Review,
85(2), pp. 80-90
32
www.protectingfutures.com
33
http://www.grameenphone.com
17 Other examples of partnership in the development world are international health care programs and
product development partnership (PDP). The Global Alliance for TB Drug Development (TB Alliance) is
a not-for-profit PDP, that builds partnerships between the public, private, academic, and philanthropic
sectors to drive the development of novel treatments for Tuberculosis that are affordable and accessible to
the developing world.34
Another PDP is the International AIDS Vaccine Initiative (IAVI) which was established in 1996 to
accelerate the development of a vaccine to prevent HIV infection and AIDS. Governments, multilateral
35
organizations, and major private sector institutions and individuals financially support the IAVI.
Public Private Partnership (PPP) is a long-term arrangement in which governments are turning to the
private sector to provide a broad range of services previously delivered by the public sector.36 The
government purchases services under a contract, either directly or by subsidizing supply to consumers. In
other PPPs the government bears substantial risks, for example, by guaranteeing revenue or returns. These
types of partnership which have become increasingly important in the developing world as well as the
developed world arose initially from the pressure to change the standard model of public procurement
after growing concerns about the level of public debt, which grew during the macroeconomic dislocation
of the 1970s and 1980s.37
•
The convergence of career paths and the emergence of management professionals dedicated to
working with companies on social causes and with NGOs and Development agencies on business
endeavors.
Once, activists would have labeled NGO professionals as sellouts if they started working for the private
sector and executives who took a position at NGOs were seen as they signaled their early retirement.
Today a growing number of managers are building their careers by moving back and forth between the
two sectors.
There are still many obstacles to overcome. Among some people working in NGOs and multinational
development agencies there is notable ambivalence and suspicion about bringing in the private sector in
the sphere of development. Many still see business as part of the problem and not the solution, and the
positioning of business as a positive agent of change can be a difficult idea to accept.38
On the other side, the private sector may hesitate before starting collaboration with public organizations
as they are seen as too ineffective and bureaucratic because of their different and slower decision process
and NGOs can be seen as naive and not in touch with the conditions that the private sector work in.39
34
http://www.tballiance.org/home/home.php
www.iavi.org
36
Dutz, M. (2006). Public-Private Partnership Units: What Are They, and What Do They Do? The World Bank
Group
37
www.un.org/partnerships/
38
Sida (2007). Sidas samverkan med svensktnäringsliv – Riktlinjer och handlingsplan GD-beslut 16 april 2007
(PowerPoint)
39
Sida (2003). Challenges to Sida’s Support to Private Sector Development - Making Markets Work for the Poor.
Private Sector Development Report.
35
18 2.4 Development agencies working with the private sector
2.4.1
United Nations Development Programme’s Private Sector Division
UNDP is the UN's global development network. It is an organization advocating for change and
connecting countries to knowledge, experience and resources to help people build a better life. UNDP is
on the ground in 166 countries, working with them on their own solutions to global and national
development challenges.40 As the countries develop local capacity they draw on the people of UNDP and
their wide range of partners.
The agency has adopted a focus on pro-poor market facilitation, which is referred to as promoting the
development of Inclusive Markets - markets that result in expanded choice and opportunity for the poor
and produce outcomes that benefit the poor.41 This pro-poor market facilitation approach is similar to
‘making markets work for the poor’ (M4P), which is being implemented by the international development
agencies such as Asian Development Bank (ADB), UK Department for International Development
(DfID) and Swedish International Development Cooperation Agency (Sida).
UNDP works in many countries where the preconditions for private sector development and the
emergence of inclusive markets are not in place. The result is that the transformative potential of the
private sector fails to be realized. The markets, where they operate, often end up favoring elites and
reinforcing existing patterns of inequality and social exclusion.
The UNDP Private Sector Division’s mission, working together with UN specialist agencies, other
partners in the international development system, and private companies, is to tackle these issues.42 The
Private Sector Division seeks to address the needs of the poor as active economic agents such as
entrepreneurs, employees and consumers. The type of partnerships UNDP seeks with larger companies
embraces not only ‘traditional’ CSR activities but also increasingly the deployment of core business
process and value chains in direct and sustainable support of inclusive markets.
UNDP’s Private Sector Divisions strategy to create inclusive markets is based on five priority areas,
which are the following:
Priority 1 - Establishing the Policy and Institutional Infrastructure. Recognizing that for markets to
work for the poor, they must first work. UNDP will support governments that wish to promote the
development of rule based, non-discriminatory and inclusive markets, including robust and transparent
market institutions that promote competition whilst safeguarding the rights of poor entrepreneurs,
employees and consumers.
Priority 2 - Facilitating Pro-Poor Value Chain Integration. Inclusive markets are defined partly by
their ability to generate significant employment opportunities for the poor as self-employed producers or
wage employees. UNDP will therefore support the development of integrated value chains in market
sectors that offer the prospect of sustainable growth and transition to higher value added and better
remunerated forms of employment. Priority will be given to commodity product and services markets
characterized by a high labour intensity.
40
UNDP (2008). Capacity Development: Empowering People and Institutions. Annual Report 2008
UNDP (2007). Private Sector Strategy, Promoting Inclusive Market Development. (Draft, September 2007)
42
Ibid
41
19 Priority 3 - Brokering Investments in Pro-Poor Goods and Services. Inclusive markets are also
defined by their ability to increase access to important goods and services that contribute tangibly to the
reduction of income and non-income forms of poverty. Building on existing programmes in this area,
UNDP will facilitate research and development that leads to the identification of viable ‘bottom-of-thepyramid’ investment opportunities and business models and will work with key international and national
investors to realize these. Support will also be provided for development markets for pro-poor goods and
services, with special emphasis on key factor markets.
Priority 4 - Fostering Inclusive Entrepreneurship. Inclusive markets require the poor to take advantage
of new opportunities and become agents in their own economic empowerment (Unleashing
Entrepreneurship). UNDP, in conjunction with other UN agencies, development partners and the private
sector, will support the design and delivery of new entrepreneurship development initiatives that will be
tailored to local opportunities and delivered through the private sector.
Priority 5 - Encouraging Corporate Social Responsibility in support of Inclusive Market Development
and the MDGs. Recognizing that CSR has become a central consideration in the investment decisions of
multinational corporations (MNCs) as well as an increasing number of small and medium-size enterprises
(SMEs), UNDP will continue to advocate for the use of CSR resources in ways that contribute to the
development of inclusive markets, producing sustainable long-term benefits rather than short-term
visibility or dependency.
2.4.2
Growing Sustainable Business initiative
GSB initiative is a business-driven programme coordinated by the Private Sector Division of UNDP.43 It
facilitates partnerships between companies and relevant actors from the public sector and civil society to
develop and undertake commercially viable business investments in poor countries that have a positive
impact on local economic development and poverty reduction.
Through GSB UNDP has gained experiences in engaging the private sector and other local partners to
explore and develop sustainable business models for reaching the poor with basic goods and services in
areas such as energy, electrification, clean water, telecommunications, consumer goods and financial
services.44 The GSB approach is to identify and work with ‘lead companies’ that are looking at new or
different business models for serving the base of the economic pyramid.
The GSB initiative grew out of the 2002 UN Global Compact policy dialogue on ‘business and
sustainable development’.45 It was presented and endorsed in a high-level session at the World Summit on
Sustainable Development in Johannesburg in 2002, attended by the UN Secretary-General Kofi Annan,
UNDP Administrator Mark Malloch Brown, heads of state including British Prime Minister Tony Blair
and French President Jacques Chirac, chief executive officers of global companies and representatives
from labour, non-governmental organizations and other UN organizations.
The overall development objective of the GSB initiative is to contribute to poverty reduction and
development by promoting and facilitating sustainable business and investments by the private sector.
More specifically, the GSB initiative aims to:
•
Facilitate increased sustainable investments and business activities in developing countries that link
large companies to local small and medium enterprises, along with communities and other relevant
43
UNDP (2007) GSB Operations Manual, (Draft, October 2007)
Ibid.
45
Ibid.
44
20 local partners. By working with large lead companies, GSB aims to improve the competitiveness of
key value chains in which large numbers of SMEs participate.
•
Highlight innovative sustainable business projects that demonstrate how commercial business
activities can contribute to poverty reduction and promote sustainable development. Through these
activities, the GSB initiative seeks to encourage overall greater engagement and contribution of the
private sector in the national poverty reduction strategies (PRS), and thus aligning private
investments more closely with development priorities.
GSB leverages the institutional networks, resources, programs and convening power of UNDP and the
UN. GSB’s portfolio of value-added services includes access to global knowledge/research, provision and
placement of highly qualified professionals and experts, and seed funding. The GSB helps companies
identify pro-poor investment opportunities, develop them into viable business models, find local partners
and gain buy-in from domestic stakeholders, and serve as a critical link to governments. The nature of
these projects being done in challenging markets in developing countries and also having a focus on a
sustainable future is the reason why this study will be looking at GSB projects for its analysis.
Operationally, the GSB hires a full-time “broker” on the ground, who leverages UNDP’s local knowledge
and relationships, as well as its global experience in enterprise- and private sector development. The
broker serves a critical role in working with companies to develop the investments as well as bringing
together the key stakeholders needed to make the investment successful, operationally and politically. The
broker also convenes the national steering committee, and serves as a “problem solver” to help ensure
investments move along and can access needed global resources where appropriate. By holding such a
central role in the creating sustainable business projects the results in this thesis are derived largely from
insights shared by the brokers.
2.5 Climate change, energy and development
Climate change represents one of the greatest environmental, social and economic threats facing the
planet. The warming of the climate system is indisputable, as it is now evident from observations of
increases in global average air and ocean temperatures, widespread melting of snow and ice, and rising
global mean sea level. The Earth's average surface temperature has risen by 0.76° C since 1850. Most of
the warming that has occurred over the last 50 years is very likely to have been caused by human
activities.46
In its Forth Assessment Report the IPCC projects that, without further action to reduce greenhouse gas
emissions, the global average surface temperature is likely to rise by a further 1.5-4.5°C this century.
Even the lower end of this range would take the temperature increase above 2°C since pre-industrial
times, a threshold beyond which irreversible and catastrophic changes become far more likely.47
Projected global warming this century is likely to trigger serious consequences for mankind and other life
forms. But, while climate change will affect all countries, it is developing countries and the poorest
populations that will be hit earliest and hardest. Increasing food insecurity, water scarcity, spread of
diseases to new areas, damage from floods and forced migration due to desertification of previously
arable land or sea-level rise are some of the likely effects on developing countries.
Human activities that contribute to climate change include in particular the burning of fossil fuels,
46
IPCC (2007). Climate Change 2007: Synthesis Report. Contribution of Working Groups I, II and III to the Fourth
Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, Pachauri, R.K and
Reisinger, A. (eds.)]. IPCC, Geneva, Switzerland, 104 pp.
47
Ibid.
21 agriculture and land-use changes like deforestation. These cause emissions of carbon dioxide (CO2), the
main gas responsible for climate change, as well as of other greenhouse gases (GHG). To bring climate
change to a halt, global greenhouse gas emissions must be reduced significantly.48
While fighting climate change it is important to safeguard the right to development for developing
countries. The world needs to ensure that the least developed and most vulnerable countries receive the
amount of assistance needed to protect their future from the impacts of climate change as well as promote
expanded energy services in order to meet their growth and development needs.
Access to energy is a prerequisite for economic growth and essential for human development and poverty
eradication. In modern times, no country has experienced a reduction in poverty without a significant
increase in energy consumption. Communities require energy for the delivery of basic services such as
heating, light, cooking, refrigeration of medicine and food as well as telecommunication. Recent analysis
confirms that without a dramatic increase in access to energy service around the globe the UN MDGs for
poverty reduction will not be achieved.49
At a national level, energy services help to facilitate stable economic development, industrial growth and,
via transport and communications, providing access to international markets and trade. Currently 2 billion
people lack access to electricity and still rely on traditional biomass to cover their energy needs.50 Of
these over 99 percent live in the developing world, predominantly in sub-Saharan Africa and South Asia
and 80percent live in rural areas.51
In the poorest households candles, kerosene lamp and batteries are used for lighting, and biomass (wood,
charcoal, straw, dung, etc.) is generally used for cooking and heating. By using candles, kerosene or
batteries for lightning, the poor people end up paying much more than wealthier neighbors. Light
generated from batteries cost 10-30 times more and candle costs as much as 150 times more than the
equivalent light from the cost of average electricity.52 The cost of biomass is very little in cash terms, but
is hugely expensive in terms of the time it takes. Families can spend several hours each day collecting
wood. The burning of biomass in simple stoves also results in indoor air pollution that causes 1.5 million
deaths per year, primarily among young children and mothers.53
As income increases, modern energy sources as kerosene, liquefied petroleum gas and diesel replaces
biomass and candles. When available, electricity that are offered in rural areas is more expensive than the
average cost of electricity in the country, its use in poor households tends to be reserved for applications
where it vastly improves services, notably lighting and communication.
Bringing electricity to low-income communities involves inherent difficulties as electricity requires a
network of high-tension power cables to cover large distances. The remoteness of certain developing
country populations and unfavorable terrain in many of these regions pose a further challenge for energy
48
IPCC (2007). Climate Change 2007: Synthesis Report. Contribution of Working Groups I, II and III to the Fourth
Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, Pachauri, R.K and
Reisinger, A. (eds.)]. IPCC, Geneva, Switzerland, 104 pp.
49
Goldemberg, J. & Johansson, T, (2004). World Energy Assessment Overview (2004 Update). New York: U.N.
50
UNDP (2004). Water supply and energy services for the poor: Rules make markets. UNDP/BDP Energy and
Environment Group
51
Hammond, A et al., (2007) The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid.
World Bank Group and International Finance Corporation
52
Barnett, A (2001). The role of energy in the development of sustainable livelihoods: a set of tables. Sussex
Research Associates Ltd
53
Joshi SK (2006). Solid Biomass Fuel: Indoor air pollution and health effects. Kathmandu University Medical
Journal (KUMJ) 2006;4(2):141-142.
22 delivery. As a consequence, the majority of the rural population in many developing countries is not
connected to the electricity grid.
A total capital investment of $8,1 trillion, equivalent to an average of $300 billion per year, is needed to
2030 for the developing and transition economies to meet their energy needs.54
Where public centralized approaches have failed to reach the poorest communities, there is a need for a
new approach based on small-scale, decentralized sustainable energy production, new innovative
technologies and financing models to reach the poor communities.
2.6 Adaptation to climate change
Developing countries, and the poorest people who live in them, are the most vulnerable to climate change.
However, they are also the ones most in need of expanded energy services in order to meet their growth
and development needs. UNDP is working across the world to help developing countries build the
capacity needed both to adapt to the impacts of climate change and dramatically expand the reach of
affordable, improved energy services to the 2 billion people who currently go without.55
The Clean Development Mechanism (CDM) of the Kyoto Protocol, which is aimed at reducing the GHG
emissions of industrialized countries, could become an important source of new finance for projects in
developing countries. Developed-country firms can begin meeting their reduction targets by funding
emission reduction projects in the developing world and contribute to sustainable development in the
process.56
2.6.1
The Intergovernmental Panel on Climate Change
The IPCC was established in 1988 by the United Nations Environment Programme (UNEP) and the
World Meteorological Organization (WMO). IPCC’s role is to assess a range of information relevant for
the understanding of the risk of human-induced climate change.57
The United Nations Framework Convention on Climate Change (UNFCCC) is one of a series of
international agreements and treaties on global environmental issues that were adopted at the 1992 Earth
Summit in Rio. It provides the overall policy framework for addressing the climate change issue and
forms the foundation of global efforts to combat global warming.
The ultimate objective of the Convention and the related legal instruments is to achieve stabilization of
greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic
human induced interference with the climate system. Such a level should be achieved within a time-frame
sufficient to allow ecosystems to adapt naturally to climate change, to ensure that food production is not
threatened and to enable economic development to proceed in a sustainable manner.
The Kyoto Protocol is a legally binding agreement linked to the UNFCCC under which industrialized
countries will reduce their collective emissions of greenhouse gases (GHG), by at least 5 percent over a
period of 2008-2012 and is compared to the base-year 1990. Compared to the emission levels that would
be expected by 2010 without the Protocol, this target represents a 29 percent cut.58
54
World Bank (2006) Clean Energy and Development: Towards an Investment Framework, World Bank Group
http://www.undp.org/energy/climate.htm
56
Arquit Niederberger, A. & Saner, S. (2005), Exploring the relationship between FDI flows and CDM potential,
Forthcoming in Transnational Corporations, 14 (1)
57
http://unfccc.int/kyoto_protocol/items/2830.php
58
http://ec.europa.eu/environment/climat/kyoto.htm
55
23 The major distinction between the Protocol and the Convention is that while the Convention encouraged
industrialized countries to stabilize GHG emissions, while the Protocol commits them to do so.
Recognizing that developed countries are principally responsible for the current high levels of GHG
emissions in the atmosphere as a result of more than 150 years of industrial activity, the Protocol places a
heavier burden on developed nations.
The Kyoto Protocol now binds 181 countries globally to the protocol but in terms of the global GHG
emissions these countries only stand for only 60 percent. The U.S. is the only developed country that has
signed but not ratified the Kyoto Protocol.59
2.6.2
Monitoring emission targets
Under the Protocol, countries’ actual emissions have to be monitored and precise records have to be kept
of the trades carried out. The UN Climate Change Secretariat keeps an international transaction log to
verify that transactions are consistent with the rules of the Protocol. A compliance system ensures that
Parties are meeting their commitments and helps them to meet their commitments if they have problems
doing so.60 The Kyoto Protocol was adopted in Kyoto, Japan, on 11 December 1997 and entered into
force on 16 February 2005.61
2.6.3
The Kyoto mechanisms
According to the Treaty countries must meet their targets primarily through national measures. However,
the Kyoto Protocol offers them additional means of meeting their targets through three market-based
mechanisms.62
1. Emission trading
2. Clean development mechanism (CDM)
3. Joint implementation (JI)
The emission trading, also known as the carbon market, is a key tool for reducing emissions worldwide. It
was worth $30 billion in 2006 and is growing. JI and CDM are the two project-based mechanisms which
feed the carbon market. JI enables industrialized countries to carry out joint implementation projects with
other developed countries, while the CDM involves investment in sustainable development projects that
reduce emissions in developing countries.
As the costs of emission reduction typically is much lower in developing countries than in industrialized
countries, industrialized countries can comply with their emission reduction targets at a much lower cost
by receiving credits for emissions reduced in developing countries as long as administration costs are low.
2.6.4
Clean development mechanism
The CDM allows Annex I countries (developed countries and economies in transition) and authorized
private entities to acquire credits for emission reductions resulting from the implementation of climate
protection projects located in developing countries. These certified emission reduction (CER) credits,
each equivalent to one ton of CO2, can be traded and sold, and used by industrialized countries to meet a
part of their emission reduction targets under the Kyoto Protocol. The projects, which cover a wide range
59
unfccc.int/files/essential_background/kyoto_protocol/application/pdf/kpstats.pdf http://unfccc.int/kyoto_protocol/reporting/items/3879.php
61
Ibid.
62
http://unfccc.int/kyoto_protocol/mechanisms/items/1673.php
60
24 of industries that produce greenhouse gases, must also contribute to the sustainable development of the
project host country. Private entities or governments can in this way use the credits to meet their domestic
or international climate protection obligations.
The CDM creates "win-win-win"63 synergies for:
•
•
•
the global climate system, by encouraging additional greenhouse gas emission reductions
the sustainable development of developing countries, by encouraging additional Foreign Direct
Investment (FDI) flows to complement local financing of projects that contribute to local
sustainable development
improved corporate performance for transnational corporations (TNCs) that utilize the CDM, e.g.
by creating opportunities for lower cost compliance with environmental legislation, expanded
markets for advanced technologies and new business opportunities
The CDM is the first global, environmental investment and credit scheme of its kind, which provides
standardized emissions offset instrument which may play an important role for the energy sector in
funding sustainable energy solutions.
63
Arquit Niederberger, A. & Saner, S. (2005), Exploring the relationship between FDI flows and CDM potential,
Forthcoming in Transnational Corporations, 14 (1)
25 3
Method
This chapter provides the reader with a brief philosophical and epistemological discussion about the
scientific dimensions of undertaking a research. Its aim is to provide the reader with an understanding of
the scientific method that has been adopted throughout this study and what outcomes this approach can
be expected to result in.
3.1 Scientific approach
There exist two traditional perspectives on how scientific knowledge is generated, positivism and
hermeneutics. A fundamental assumption of positivism is that there is an objective reality that can be
studied and defined. To avoid that the values of the researcher interfere with the research, the researcher
should remain distant and independent of what is being researched. The aim is to develop generalizations
that contribute to theory that enable the researcher to predict, explain, and understand a phenomenon.
The hermeneutic perspective views reality and knowledge as something relative and subjective. Multiple
realities exist in any given situation. To develop an understanding of a phenomenon the researcher should
be close to the object of research and based on empirical findings seeks to generalize findings by
discovering patterns or theories that help explain a phenomenon of interest.
Each of these perspectives is associated with a preferred research methodology. Quantitative research is
characteristic for the positivist perspective. The quantitative method emphasizes precise measurement, the
testing of hypothesis based on a sample of observations, and a statistical analysis of
quantitative/numerical data.
Qualitative research is characteristic for the hermeneutic perspective and emphasizes the use of
descriptions and explanations, derived from the experiences of people, as a means of understanding and
explaining phenomena from multiple perspectives.
This study adopts a hermeneutical view on knowledge, which means that information on how the private
sector works in developing countries is collected using a qualitative research methodology. By using this
research method the authors will be able to do an interpretation of the empirical and theoretical findings.
3.2 Method of reasoning
Abduction is a method of reasoning in which one chooses the hypothesis that would, if true, best explain
the relevant evidence. Abductive validation is the process of validating a given hypothesis through
abductive reasoning under which, an explanation is valid if it is the best possible explanation given the set
of data. Abduction can however produce results that are incorrect within its formal system which is why
abductive reasoning must be confirmed against several cases which requires a repeated process of
digesting empirical data using theoretical presuppositions, while constantly refining the theories.
3.3 Practical approach
To derivate the knowledge we have used abductive reasoning in a cyclical process where empirical
findings and theories evolves together, while refocusing and redefining the problem formulation. The
problem formulation started with a broad standpoint, namely private sector and development, following a
theoretical and empirical research, it then evolved into a more specific formulation and definition of the
scope. The theoretical research was conducted in order to gain understanding for the existing frameworks,
concepts and the context related to the problem. By carrying out an empirical study subjective views and
26 ideas were formulated, which together with the
theoretical study allowed for a deeper understanding
of the problem and what to focus on. Further
iterations of the research process followed in order to
obtain a meaningful pattern to lay ground for analysis
and conclusions.
In order to study how the market works in developing
countries and to learn how businesses work
successfully in these circumstances this research was
based on an empirical approach using case studies. In
the cases, common patterns were identified among
the business models described in order to compare
with preformed hypothesis about what patterns might
exist in these markets. The selected cases were
chosen from the GSB project portfolio and thus
describe business models that included the poor in
ways that could be profitable and that promoted
human development.
3.4 Sources
Figure 1 Outline of the learning process
The data collected can be divided into primary and
secondary sources. The primary data consisted of a first round of interviews, conducted in mid December
2007, with representatives from Sida, Ministry of Foreign Affairs and the Swedish Trade Council. This
was to gain general understanding of private sector engagement in developing countries and to identify
problems, knowledge gaps and to develop the initial problem definition. In a later stage of the research
process a second round of interviews that were phone-based with UNDP country brokers was carried out.
Ultimately, a survey was sent out to companies involved in the studied projects. As secondary sources of
information, academic literature, published articles, internal UN documents and working papers were
used, which were gathered throughout the whole project.
3.4.1
Interview method
Depending on the stage of the project process, the interviews would have different purposes and therefore
be differently structured. The initial interviews, which were carried out in mid December 2007, were
conducted as mentioned above to gain a general understanding for the research area and to receive advice
on valuable secondary sources. These interviews were semi-structured, with a qualitative approach,
allowing the discussions to lead into areas unknown to the authors.
The second round of interviews, conducted with UNDP country office brokers, was based on basic
knowledge of the projects gathered from the internal UN documents with the intention to receive an
overview of the projects’ current status. These were preformed though phone conferences and mail
correspondence from UN headquarter to country offices. In both rounds of interviews there were similar,
but specified questions prepared for the interviews.
Furthermore, a survey was carried out with standardized questions being sent out to all the companies
involved in the projects (see appendix II). The purpose was to obtain a personal opinion from the actors
involved and information complementing the data gathered from the internal documents about the issues
we wanted to highlight in our study.
27 3.4.2
Method for analysis
The data collected from primary and secondary sources of information were compiled and analyzed in
order to gain a comprehensive view of the research area and the projects. To give a clear description of
the projects they were written into case studies with uniformed headings to allow for a more simple
comparison. Combining the theoretical background with the collected data from the projects we looked at
each case study and defined, (1) what were the constraints and hurdles, (2) what were the actions taken to
overcome the problems, and (3) what were the impacts. After this we categorized our findings into
subgroups based on a common protocol and compared them to what previous literature has to say about
market constraints, frameworks and strategies. The protocol made it possible to analyze the case studies
systematically and look for patterns. The result was a strategy matrix, which summarizes the dominant
constraints and the strategies used to address them.
28 4
The market in developing countries and its actors
In this chapter the theoretical framework of this thesis is presented. It introduces the concept of the
“Bottom of the Pyramid” theory, its critics and its importance in understanding the market in a
developing country. The chapter also presents the framework “Making Markets Work Better for The
Poor” and describes how it has evolved from previous unsatisfactory market interventions in developing
countries.
4.1 The Bottom of the Pyramid (BOP) Theory
4.1.1
The BOP market
The concept of the “bottom/base of the pyramid” (BOP) originated from the article “Fortune at the bottom
of the Pyramid” written by professors C.K Prahalad and Stuart Hart.64 The BOP theory was then
subsequently expanded upon by both Prahalad in 2004 in “The fortune at the bottom of the pyramid”65
and one year later by Hart in “Capitalism at the crossroad”66. These three publications compose the
sources for the following chapter.
The basic thesis in the BOP theory is that there is an undeveloped and untapped market at the bottom of
the world’s economic pyramid – a multitrillion dollar market of 4 billion people living on less then $2 a
day.
These people, that in the past have been bypassed, represent a huge and largely untapped market.
Prahalad estimates their collective purchasing power to around $13 trillion67 and concludes that, with the
stagnation in the established markets of the world economy, the unmet needs of those at the base of the
economical pyramid may present the best opportunity for growth in the coming decade.
To succeed, the private sector needs to
focus on the BOP-market as an integral
part of their core business and it should
not be delegated to corporate
philanthropy or CSR initiative.
Tapping in to these overlooked markets
will require fundamental different
approaches than those of the developing
world as the products and service
currently offered at the top of the
pyramid are not appropriate for the
BOP market. Hence, succeeding in the
BOP market will require innovation in
technology, cost, distribution and
business models that are actually suited
to conditions at the base of the pyramid.
Figure 2 The economic pyramid
64
Prahalad, C. K. & Hart, S. L. (2002). The Fortune at the Bottom the Pyramid, Strategy and Business, 26(1). 54-67
Prahalad, C K (2004), The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits, Wharton
School Publishing
66
Hart, S. L. (2005), Capitalism at the crossroads: The unlimited business opportunities in solving the world's most
difficult problems, Upper Saddle River, N.J.: Wharton School.
67
Prahalad, C. K. & Hart, S. L. (2002), The Fortune at the Bottom the Pyramid, Strategy and Business, 26(1). 54-67
65
29 Companies need to learn how to see the barriers that constrain the poor from moving forward. It is
therefore necessary that MNCs conduct research and development (R&D) and market research
specifically focused on the poor and their local conditions, with a view to develop product by combining
MNCs global best practices with local capabilities and market demands.
4.1.2
The BOP framework68
The BOP approach is MNC-centered, since in its view only MNCs have the required knowledge,
management and financial resources and efficiency to make a real difference on the massive challenge of
poverty. At the same time the authors point out that MNC cannot develop the BOP market and solve the
problem of poverty alone. Despite MNCs’ powerful resources and capabilities, there is need for
collaboration with local government, civil society, development agencies and the poor themselves. Only if
these actors work together with a shared agenda can the opportunities at the BOP be unlocked.
By collaborating with the poor, civil society organizations, governments, the large firms can create the
largest and fastest growing markets in the world while increasing economical development and social
transformations. In that process, led by MNCs, a new market-driven paradigm for addressing poverty
would emerge.
Prahalad suggest that each local market will have different power balance and conditions for cooperation
between the actors in the framework and the actors will exist in various forms.
Figure 3 The BOP framework 4.1.2.1 Civil society and NGOs
Civil society is composed of voluntary civil and social organizations and has historically been the
strongest advocates for fighting the ills and injustices of the world’s poor. They have established
credibility and earned people’s trust by repeatedly assisting disadvantaged communities in the face of
poverty, natural disasters and conflicts. In many ways, this group is the one most in touch with BOP
issues. They posses deep knowledge of local condition and habits, and the constraints that keeps people
trapped in poverty. Many in this group see business as part of the problem and not the solution, and the
68
Prahalad, C K (2004), The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits, Wharton
School Publishing
30 positioning of business as a positive agent of change is often a difficult idea to accept. For the private
sector it is important to develop processes to include these groups as they are sources of local knowledge
about BOP customer behavior and can act as lead users of new services.
4.1.2.2 Private enterprise
MNCs have the required knowledge, management and financial resources to make a real difference on the
massive challenge of poverty. To succeed in the BOP market, they have to act in a responsible manner.
They have to build a business strategy that allows them to do business with the poor in ways that
simultaneously benefit low-income communities as well as the companies. Acting responsible will gain
the trust of the other actors, as many still se private enterprise as greedy profits-makers not to be trusted
on matters such as poverty. To succeed in the BOP-market companies have to offer products and services
to the BOP consumers, that meets their needs and to a cost that they can afford. Prahalad encourages
companies to approach this market with the BOP consumers’ interest at heart, while not losing sight of
profit, as that is the only way to make the projects sustainable over time.
4.1.2.3 Development and aid agencies
International organizations like the UN, the World Bank and national agencies like Sida are also
important actors in the BOP market, as they fund many programs and activities that improve the business
environment for economic activity and they have a deep knowledge of developing countries and its
people. These organizations can also act as platforms and facilitators for collaboration as they can bring
different actors together under international agendas and initiatives. Among some people in these
institutions, there is notable ambivalence and suspicion about bringing in the private sector in the sphere
of development. This might have its origin in distrust of the private sector’s concern for the poor or worry
that BOP projects might replace the work of governments and development programs. On the other side,
the private sector may hesitate before starting collaboration with these organizations as they are seen as
too ineffective and bureaucratic because of their different and slower decision processes. As there has
been a growing recognition that collaboration can be mutually beneficial, each side is starting to learn
about each other and the focus has changed from areas of friction to the points of common interest.
4.1.2.4 Governments
In the market framework the government in each country can take both a primary and a secondary role.
The government is seen as an external factor that influences the overall business environment in form of
laws, regulations, infrastructure, education etc. For companies working with large infrastructure and
energy projects the national government’s role is usually very important as they often partly are financing
the projects, providing infrastructure, and setting laws and regulations.
4.1.2.5 BOP entrepreneurs
Prahalad argues that large-scale and wide-spread entrepreneurship is at the heart of the solution to
poverty. For BOP entrepreneurs that are being hold back by poor business environment, working with a
MNC could help them get around some of the constraints and empowering them to their full potential.
From the point of view of the companies, they have much to learn from grassroots entrepreneurs because
they understand particular client-sets, distribution networks, and local conditions at the BOP level.
4.1.2.6 BOP consumers
Half of the world lives on less than two dollars a day and hundreds of million poor people struggle every
day for survival. The needs of these people have in the past been bypassed by the private sector. Prahalad
argues that if companies stop thinking of the poor as a burden, but as value driven consumers and creative
31 entrepreneurs, a whole new world of opportunities will arise. They need to see their engagement with the
bottom of the pyramid from a long-term perspective, as the BOP- market is an opportunity rather than a
reality and MNCs first need to respond to a number of major challenges to develop this market fully.
Potentially the company’s involvement will empower the poor and their communities, which will
improve the purchasing power and lead to a higher demand.
4.1.3
Market dynamics of the BOP-market
4.1.3.1 The poor have purchasing power
Individual income at the BOP is low, but given the huge numbers of people their aggregated buying
power is substantial.69 To a large extent the development of the BOP market is associated with the
creation of the capacity to consume for the poor people. MNCs can help release spending power by
reducing the poor’s cost of living through the displacement of expensive intermediaries and suppliers, by
improving income generation through the creation of jobs or empowering micro-entrepreneurs, and by
stimulating access to credit.
To unlock the purchasing power at the bottom of the pyramid, the MNCs must take into account that the
available purchasing power of BOP people has specific cash-flow characteristics: low, available for short
time, geographically scattered (in rural areas). Creating the capacity to consume is based on three simple
principles described as the 3 A:s. (1) Affordability: whether it is a single-serve package or novel
purchasing schemes, the key is affordability without sacrificing quality or efficacy. (2) Access:
Distribution patterns for products and services must take into account the poor’s living location and
working patterns and that the BOP consumers cannot travel great distances. This calls for geographical
intensity of distribution. (3) Availability: Often, the decision to buy for BOP consumers is based on the
cash they have on hand at a given point in time, therefore distribution efficiency is a critical factor in
serving the BOP consumer.
4.1.3.2 Poverty penalty
The poverty penalty describes the phenomenon that poor people tend to pay relatively more for goods and
services than wealthier populations, both in real terms and when assessed as a portion of their disposable
income.
In “The fortune at the bottom of the pyramid”
Prahalad presents data showing that the poor often
pay anywhere from twice to 20 times as much as
consumers at the top of the pyramid for basic goods
such as water, food, medicine, energy, phone service
and access to credits. At the same time the quality of
the goods to which they have access are substandard.
The poverty penalty results from that the BOPmarket often is very poorly served and dominated by
informal economy that is relatively inefficient and
uncompetitive. This allows providers to extract
monopoly rents. If large corporations, which can
Figure 4 Disruptive Innovations
69
Prahalad, C.K. (2004), The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits, Wharton
School Publishing
32 benefit from economies of scale and efficient supply chain-organization, choose to serve these high-cost
economies, they can break these monopolies by offering higher quality goods at lower prices while
maintaining attractive margins.
4.1.3.3 Ideal market for disruptive innovations and bottom up growth
The poor are, according to Prahalad, also very eager to adopt and utilize new technologies. The lack of
money and education does not prevent poor people from quickly learning to use advanced technologies.
Poor consumers may even accept the latest technology faster than some users of existing technologies,
who sometimes resist switching.
This could be explained by Clay Christensen theory of “disruptive innovations”. Christensen explains in
this book “ The innovators dilemma” that disruptive innovation are products and services that are not
initially as good as those that historically have been used by consumers in mainstream markets and that,
therefore can take root only among nontraditionally consumers. Examples include transistor radios that
were initially adopted by teenagers, small cars by the cost-conscious, personal computers by artists and
academics.70
Hart and Christiansen argue that the base of the pyramid is the dials target market for new disruptive
technologies for at least two reasons.71 First, disruptive innovations in the BOP market compete against
non-consumption as they offer a product or service that otherwise would be left out entirely or poorly
served by existing products.
When companies brings a disruptive product to customers that have been poorly served or even actively
exploited, the customer is happy to have a simpler and more modest version of what is available in the
high-end market. The BOP consumers are more willing to adopt new technologies because they have
nothing to forget. Moving to wireless from nothing is easier than moving to wireless from a strong
tradition of efficient and ubiquitous landlines.
In addition to competing against non-consumption,
business models that are created for low-income
market can travel profitably to more places in the
economic pyramid than business models defined in
high-income markets. Low-cost structure needed to
serve the base of the pyramid presents the
Figure 3 The economic pyramid opportunity to add cost and features to products and
move the markets up to tiers of higher income
affluence. The farther down the income pyramid
that the technology is initially targeted, the more Figure 5 Upside growth of business model for BOP
upside growth potential exist over the life of
innovation. Mobile banking and fingerprint enabled ATM is examples of services developed for people at
the bottom of the pyramid that are now breaking through in industrialized countries.72
These examples show that BOP may not only be the best market to introduce disruptive innovation but
could also be a hotbed for developing new goods and services. Doing business with the poor is a drive of
innovation because it forces business leaders to think outside the box. The poor may demand different
products than higher-income customers. Products might need to offer different combinations of price and
70
Christensen, C. (1997). The Innovator's Dilemma, Harvard Business School Press 71
Hart, S. L. & C. M. Christensen (2002). The Great Leap: Driving Innovation from the Base of the Pyramid. Sloan
Management Review 44(1): 51-56.
72
UNDP (2008) Creating value for all: strategies for doing business with the poor.
33 performance, in order to increase affordability and offer the functionalities that fit their preferences and
needs. The 10 to 200 times improvement, that is needed in price performance, create a tremendous
challenge and a source of innovation.
4.1.4
Criticism of the BOP theory
For the last couple of years there have been a growing number of academic critiques of the BOP theory
among them Walsh73, Jose74 and Karnani75. One of the main critiques is the vague estimate of the size of
the BOP market. First, there is no consistent definition of poverty or discussion of how to choose the
income level to define the poor. In BOP literature the “poor” referees to people with an income level from
$1 a day to $2000 a year. Not using a consistent definition of poverty, the nature and scope of the problem
is not clear, and it will be difficult to prescribe solutions. People who consume less than $1 per day have
very different needs and priorities than people than consume more than five times as much. Drawing on
his own experiment with the Grameen bank, Yunus cautions against overly broad definitions of “the
poor” and argues that there is no room for conceptual vagueness if poverty alleviation efforts are to be
effective.76
Furthermore, with no clear definition of poverty it is impossible to measure the number of poor people.
But even after agreeing on a poverty line, there are intense debates about the exact number of poor people
and to estimate the size of the BOP market. The critics claim that Prahalad calculation of the BOP-size to
$13 trillion is grossly over-estimated. Karnani argues that the global market is less than $0.3 trillion, less
than 3 percent of what Prahalad suggested. Without an attractive, sizable market, the BOP argument
looses its force.
Furthermore Karnani argues that the difficulties of selling to the BOP market are underestimated which
makes it even more unlikely for companies to be profitable. The poor are often geographically dispersed
and culturally heterogeneous. This increases distribution and marketing costs, and makes it difficult to
exploit economies of scale. Weak infrastructure (transportation, communication, media, and legal) further
increases cost of doing business. Karnani concludes that the idea of a fortune at the bottom of the pyramid
is an illusion77, and concludes that none of the examples cited by the BOP proposition support the
recommendation that companies can make a fortune by selling to the poor.
Prahalad proposes that the MNCs should take the lead role in the BOP initiative to sell to the poor. But
questions have been raised about the suitability of MNCs for the BOP market. Karnani argues that since
the scale economies are very limited in the BOP market, as the poor are often geographically dispersed
and culturally heterogeneous, hence the profit opportunities are best exploited by small to medium sized
local firms. Karnani concludes that virtually all the example put forward by Prahalad are fairly small
NGOs or local firms. Karnani also raise the concern that if MNCs actually succeed in capturing the BOP
market they will have to compete with and outperform current small scale suppliers, which potentially
threatens the livelihoods basis of the poor people and undermines the very purchasing power that the BOP
argument hinges upon. For example, the move of British American Tobacco into India incense sticks
73
Walsh, J. P et al (2005). Promises and perils at the bottom of the pyramid. Administrative Science Quarterly,
50(3) pp.473-482
74
www.strategicmanagementreview.com/ojs/index.php/smr/article/view/12/18
75
Karnani, Aneel (2006), Mirage at the Bottom of the Pyramid. William Davidson Institute Working Paper No. 835
76
Philanthropy in the 21st Century: Conversations on the Power of Giving, Dr. Muhammad Yunus with Fareed
Zakaria
Wednesday, April 23, 2008, New York public library
77
Karnani, A. (2006). Mirage at the Bottom of the Pyramid. William Davidson Institute Working Paper No. 835
34 market displaced many women homework’s, who had previously made these by hand.78 This highlights
the need for a general equilibrium perspective and focus on both supply and demand side dynamics.
Karnani also criticizes Prahalad for focusing on the poor as consumers. Karnani argues that getting the
poor to consume more will not solve their problem, contrary to the BOP argument. The poor do not need
convincing to consume more; they want to consume more. Their problem is that they can not afford to
consume more. In fact, the poor obviously consume most of what they earn, and have a low savings rate.
Therefore it is a fallacy to claim that there is much ‘untapped’ purchasing power at the BOP.
Karnani argues that another fallacy of the BOP proposition is that single-serve package and novelpurchasing schemes make products more affordable. The poor might prefer small packages and
purchasing schemes because of convenience and managing cash flow. But this does not increase
affordability. Karnani makes a metaphor by stating that by the BOP logic, an easy way to solve the
problems of hunger and malnutrition would be to sell food in smaller packages thus making it more
affordable to the poor.
According to Karnani the only way to alleviate poverty is to raise the real income of the poor and there
are only two ways to do this: 1) lower the unit prices, which will in effect raise their income, and 2) raise
the income that the poor earn. Reduction of price can be done in three ways: 1) reduce profits, 2) reduce
costs without reducing quality, and 3) reduce costs by reducing quality. The BOP proposition insistent on
not lowering quality as it is disrespectful. To the contrary, Karnani argue that lowering quality is the only
realistic way to reduce price. He argues that selling cheap low-quality products does not hurt the poor.
Insisting on not lowering the quality actually hurts the poor by depriving them of a product they could
afford and would like to buy. Karnani also criticizes Prahalad for focusing on the poor as consumers. He
argues that there is a need to view the poor primarily as producers, and thereby raising the real income.
The poor often sell their products and services into inefficient markets and do not capture the full value of
their output. Any attempt to improve the efficiency of these markets will raise the income of the poor. For
poor farmers this could be done by integrating them in to the supply chain of larger companies or find
innovative ways to sell their product, for example through the Internet.
In various sectors of the economy, large enterprises are needed to exploit economies of scale. But lack of
good infrastructure results in geographically fragmented markets and firms that are too small to exploit
the scale economies. The government therefore needs to facilitate the creation and growth of private
enterprises through appropriate infrastructure as well as appropriate policies and institutions.
Even if not intentional, a by-product of the BOP proposition is to de-emphasize the role of the state in
providing basic services and infrastructure. Prahalad is quoted as saying “If people have no sewerage and
drinking water, should we also deny them television and cell phones?”79 Prahalad argues that the poor
accept that access to running water is not a “realistic option” and therefore spend their income on things
that they can get now that improve the quality of their lives. Karnani argues “Why do the poor accept that
access to running water is not a realistic option? Even if they do, why do we accept this bleak view? We
should emphasize the failure of the government and attempt to correct it. We need to give a ‘voice’ to the
poor, this is a central aspect of the development process.80
By emphatically focusing on the private sector, the BOP proposition detracts from the imperative to
correct the failure of the government to fulfill its traditional and accepted functions such as public safety,
basic education, public health, and infra-structure. Karnani concludes that while there has been a distinct
78
Jenkins, R (2005) ‘Globalization, Corporate Social Responsibility and poverty’, International Affairs 81(3)
www.ckprahalad.com/2006/01/27/selling-to-the-poor/
80
Karnani, A. (2006). Mirage at the Bottom of the Pyramid. William Davidson Institute Working Paper No. 835
79
35 shift in political ideology of the world towards an increasing role of the market (as opposed to the
government), providing the above functions still needs to be in the public domain, especially in the
context of the poor.
The private sector and NGOs are not an adequate substitute for the government and cannot fulfill its
functions on a large enough scale. They can however be useful catalysts and complements to the
government. It is in the interest of the private sector to exercise its influence to help ensure that the
government does fulfill its role effectively.
Other criticism of targeting the poor as consumers raised by academia and NGOs is that it could lead to
firms exploiting the poor. Karnani and Jose criticize that the concept of BOP not necessary discriminates
among the sources from which the profits are generated. It is questionable whether MNCs are serving a
need or creating a need where none previously existed. In “Doing Well By Doing Good” Karnani focuses
on this debate by examining the case of Fair & Lovely, a skin whitening cream marketed by Unilever in
many developing countries in Asia and Africa. 81 Unilever is frequently mentioned in the literature as a
socially responsible company that markets to the BOP. Karnani concludes that even thought Fair &
Lovely is indeed doing well; it is one of the more profitable brands in Unilever portfolios. It is, however,
not doing good.
It could be argued that the BOP initiative results in the poor spending money on luxury products such as
televisions, intoxicants and whiting cream that would have been better spent on higher priority needs such
as nutrition and education and health. Prahalad dismisses such arguments by arguing that the poor have
the right to determine how they spend their limited income and are in fact value-conscious consumers; the
poor themselves are the best judges of how to maximize their utility. Karnani argue that this is free
market ideology taken to an extreme. The poor in fact are vulnerable by virtue of lack of education (often
they are illiterate), lack of information, and economic, cultural and social deprivations. A person’s utility
preferences are malleable and shaped by his background and experience. This phenomena is described by
Amartya;
“The deprived people tend to come to terms with their deprivation because of the sheer necessity of
survival, and they may, as a result, lack the courage to demand any radical change, and may even adjust
their desires and expectations to what they unambiguously see as feasible… Social and economic factors
such as basic education, elementary health care, and secure employment are important not only in their
own right, but also for the role they can play in giving people opportunity to approach the world with
courage and freedom.”82
Karnani states that there is therefore a need to look beyond the expressed preferences and focus on
people’s capabilities to chose the lives they have reason to value.
In rich capitalist countries, governments impose restriction on free markets to protect consumers in
various ways, such as regulations related to labeling disclosure, truth in advertising, and marketing to
minors. Such consumer protection is inadequate in the developing countries and this is especially
problematical in the context of selling to the poor, who often lack the information and education needed
to make informed choices.
81
Karnani, A. (2007), Doing Well By Doing Good - Case Study: 'Fair & Lovely' Whitening Cream. Ross School of
Business Working Paper No. 1063
82
Sen, A. K. (1999). Development as freedom. New York: Anchor Books 36 Walsh et al. agree that the connection between the examples provided and the suggestions put forth in the
BOP theory and its supposed outcome, the eradication of poverty, is unclear.83 The focus on a limited
number of success stories and the exclusion of failures does not allow for comparison or to identify the
critical factors necessary for success. Virtually all critics agree that the examples provided by Prahalad do
not adequately support his claim of poverty reduction. The BOP literature offers little systematic
assessment of the links between selling to the poor and lifting them out of poverty. Thus it remains
unclear how BOP investment will alleviate poverty.
4.2 Markets for the poor, M4P
4.2.1
Engine of economic growth
Economic growth is essential for poverty reduction and today it is widely recognized that the private
sector, with companies, cooperatives and all types of business activities is the engine of economic growth
in most developing and developed countries. Private enterprises contribute to development directly
through creation of jobs and provision of goods and services to the poor, and indirectly through aggregate
income and wealth creation and generating tax revenues to finance social and economic infrastructure.
However, in many developing countries and countries in transition the foundations for private sector
activities are not in place and do not allow the poor to benefit from the economic growth.84 The ‘rules of
market operation’ and the legal and regulatory institutions necessary to support them are weak or nonexistent. Under these circumstances business environments obstruct or penalize entrepreneurship and
investment, rather than encourage it. In addition, the present large enterprises frequently stifle
entrepreneurial energy and initiative, taking advantage of weak institutional environments to protect
monopolistic or monopsonistic positions. The result is that markets, where they operate at all, tend to
favor existing elites and reinforce existing patterns of inequality and social exclusion.85
In order for the poor to benefit from the economic growth there are certain given conditions that need to
be in place, which include a political determination to distribute resources that are generated and that
there is a structure in which the private sector and public sector complement each other.
Although the world of “development” is blessed with many different schools of thought a dominant
strand of thought and practice, the Washington Consensus, has stood out.86 The key tenets of this
“market-friendly” approach are: fiscal discipline, low marginal taxes and broader tax base, competent
delivery of basic services, openness to trade and investment, liberalizing microeconomic reforms and
privatization of state enterprises.
4.2.2
Making Market Systems Work Better for the Poor (M4P) framework
There is little doubt that markets in developing countries often do not work well for neither poor
households nor does there exists a fortune for business to easily tap in on. Traditional development policy
tended to substitute markets with other modes of coordination, especially product and service delivery by
government. Previous interventions, led according to the Washington Consensus, have addressed the
macroeconomic environment, but not necessarily specific markets, and in particular not in the way
83
Walsh, J. P et al (2005). Promises and perils at the bottom of the pyramid. Administrative Science Quarterly,
50(3) pp.473-482
84
Sida (2003) Making Markets Work for the Poor- Challenges to Sida’s Support to Private Sector Development
85
UNDP (2007) Private Sector Strategy, Promoting Inclusive Market Development. (Draft, September 2007)
86
Ferrand, D. et al. (2004) Making Markets Work for the Poor"- An Objective and an Approach for Governments
and Development Agencies, DIFID
37 markets work for the poor.87
M4P is an approach that aims to accelerate pro-poor growth by improving outcomes that matter to the
poor in their roles as entrepreneurs, employees or consumers of markets. Organizations such as DfID,
ADB and ADB Institute have supported policy-oriented research projects called “Making markets work
better for the poor”. SIDA has adopted “Making Markets Work for the Poor” as its approach to support
for the private sector.88
The starting point for M4P is the work of New Institutional Economics (NIE) which, in contrast to the
Washington Consensus emphasis the importance of institutions. The NIE approach questions the
relevance of a perfectly competitive market, noting that information often is incomplete, asymmetrical,
costly to acquire and costly to use. Poor information introduces risks in undertaking transactions.
Transaction costs must then be incurred to acquire information and provide protection against these risks,
and market players must make decisions that allow for these risks and costs.
Institutions – ‘rules of the game’ – exist and evolve to reduce transaction costs and risks. The definition of
a market, according to NIE, is framed by the understanding that ‘Markets are institutions that exist to
facilitate exchange; that is, they exist in order to reduce the cost and risk of carrying out transactions’.89
In order to increase participation by the poor on terms that are of benefit to them the approach focuses on
changing the structure and characteristics of markets. M4P addresses the behavior of the private sector
and describes how to use market systems to meet the needs of the poor and how to support the private
sector through market mechanisms that bring about sustainable change.
Moreover, the ‘better’ is not to be understood in the sense of ‘better for the poor than for everybody else’
but rather in the sense of ‘better than so far’. The M4P literature points out that markets are often distorted
or rigged in a way that benefits only a small group of the already well-off, and that leveling the playing
field creates new opportunities for the not-so-rich.
The framework builds on recent approaches to providing goods and services for the poor through market
systems, and summarizes much of the recent thinking on how to provide assistance to the private sector.
M4P can be understood in three ways; (1) as a development objective; (2) as a framework for analysis and
understanding; and (3) as a practical framework for action.90
4.2.3
Components of a functioning Market
To ensure that the market works better, not only for the companies but also for the poor, it is important
that there exists a favorable industrial climate that makes growth possible in the country. It is recognized
that markets are deeply embedded in a set of non-market, social and political institutions. The way in
which the poor participate in markets is conditioned by economic, political, social and cultural factors as
well as the decisions to favor pro-poor or inclusive market policy in making explicit political choices.
The market functions best in a sound, industrial climate with components such as specific legislation to
safeguard ownership rights, competition, and an efficient finance market which can offer risk capital. A
stable micro climate (peace, democracy, stable currency etc) is also essential, and the economy must be
87
UNDP (2007) Private Sector Strategy, Promoting Inclusive Market Development. (Draft, September 2007)
Interview with Johan Åkerblom
89
DFID (2005). Making Market Systems Work Better for the Poor (M4P), (Discussion paper) ADB-DFID
90
Ibid.
88
38 open to trade. The DfID model for a functioning market consists of four components, shown in
the layers in the circle of figure 7.91
In the center of a functioning market is the core market where the forces demand and supply are the
necessary conditions. The demand is driven by Consumers who wish to buy products and services and
have the means to do so.
Consumers have differing levels of income and willingness to pay and therefore depend on a functioning
market. In a well functioning market, those who are able
to afford to pay the minimum cost of producing a product
will be served by producers while in distorted markets,
only the needs of the better-off are met.
The Producers meet the demand by supplying products
and services to the market. If the dynamics of supply and
demand promise sufficient returns, the companies will
themselves attempt to overcome the problem of weak
institutions and infrastructure. Later examples will
include industries within the energy sector.
In the first layer the core market is supported by
infrastructure and services that provide the physical
requirements of a market, as well as services needed to
market players and regulators. Governments and/or
private sector provide infrastructure and services such as
communication, transport, finance, bookkeeping, etc.
These are critical to a functioning market as the lack of
them may deter investors.
Figure 6 DfID’s market framework
In the second layer is the institutional context,
which is comprised of the rules and
organization, including informal norms that
coordinate human behavior. The institutional
environment is not fixed and in order for it to
function well it must be inclusive, and capable
of picking up feedback and signals from market
players. Institutions can vary from trust and
other forms of social capital at their most
informal through to conventions and codes of
private sector organizations and to the more
formal laws, rules, regulations, and regulatory
enforcement capacity. Common problems with
institutions, as mentioned before, relate to the
power of concentrated interests who are able to
shift rules and regulations in their favor. This
may result in barriers to market entry where
small and medium sized enterprises continue to
be deprived of the human capital, finance and
opportunities that they need to grow.
Figure 7 Sida’s Market for the poor model
91
DFID (2005). Making Market Systems Work Better for the Poor (M4P), (Discussion paper) ADB-DFID
39 Markets are institutions, which work by efficiently facilitating exchange. A well-functioning market
reduces transactions costs and risks between buyers and sellers. In such a market, while each component
will differ in form, there will be certainty and basic stability about how the components fit together. In
newer markets, the roles of the different players are often still in the process of definition. An inherent
characteristic of mature markets is their constant evolution in response to changing circumstances and the
feedback effects from other markets.
Another model for describing a functioning market is from Sida which also is based on the M4P
framework. It describes similarly to the previous model an outer circle including intangible factors, such
as formal and informal rules, and an inner circle with the tangible factors such as infrastructure and other
services (i.e. institutions). Both tangible and intangible factors are shaped by the government, the private
sector and organizations. 4.2.4
Criticism
The M4P approach is seen as an important move in developmental practice, both conceptually and
practically. Its critics do however not see it as a development strategy but a pragmatic proposition. They
believe it is evident that any society and economy will involve a combination of markets, hierarchies and
networks for its functioning. Critics state that when a given market does not work, the solution is not
more market but more hierarchy, and rather more effective hierarchy. By hierarchy critics mean that a
form of human organization, such as a government, institution, business, army and political or religious
movement, is needed in order to create effective interventions and to avoid counterproductive policies.
Markets will only function if property rights are secure, something that usually requires a strong state
with monopoly on the use of force.
The critique against the M4P approach can be divided into three conceptual weaknesses in the way it sees
the market, the poor and government.
4.2.4.1 First conceptual weaknesses: The market
What is seen as missing in most of the M4P literature is reference to the insight that there are three forms
of coordination: markets, hierarchies or organizations, and networks or communities. An important
observation is that in the real world it is unlikely that any pure mode of co-ordination will work. When a
market does not work, the adequate answer is not, more market but rather more hierarchy or organization,
for instance in the shape of an anti-trust body that dismantles monopolies that have spontaneously
emerged from market processes.
Another important issue with the M4P literature is that it does not provide a systematic treatment of
market failure or sustainable means of addressing them, i.e. imperfections that keep real world markets
from operating in the way assumed by simple microeconomics models.92Meyer-Stamer addresses this
problem by giving an overview of the main types of market failure summarized below and believes that
any effort to make market systems work for the poor must be based on a sound understanding of market
failure and the economic, political, social and cultural factors underlying it.
4.2.4.2 Second conceptual weaknesses: The poor
The M4P literature is conceived as somewhat blurred when it comes to describing the poor. It neither
92
Meyer-Stamer, J. (2006). Making market systems work? For the poor? Small Enterprise Development, 17 (4)
40 introduces different levels of poverty, nor does it explicitly explain whether it is based on a static or
dynamic concept of poverty. It also avoids the simple fact that the poorest of the poor will not benefit
from M4P because they have neither assets nor access to the labour market.
4.2.4.3 Third conceptual weaknesses: government
Developing countries suffer from the fact that their hierarchies tend to be weak; and this includes not only
government but also major private corporations. Advising government in a poor country that it should
make markets work as much as possible is a valid proposal but this advice does nothing to address the
weakness of hierarchies in that country. In order to have a strong market across the board you first need a
strong state. M4P framework establishes high requirements on the effectiveness of government structures,
yet it delivers no visible contribution to strengthening government structures.
The M4P literature names some types of market failure, such as public goods and externalities, market
power and economies of scale, asymmetric information, and the costs of establishing and enforcing
agreements. It does not, however, prove idea toolkit that would guide practitioners in identifying market
failure, understanding the underlying reasons, and finding efficient and sustainable means of addressing
it.93According to critics the next steps required in order to make sure that the potential of the M4P
approach could be realized are the following:
•
Develop a coherent conceptualization of market failure that is based in microeconomics and
economic sociology rather than marketing.
Assess the existing literature on poverty and consolidate it in a way that is digestible for development
practitioners.
Develop a concept of the interaction between the market, hierarchy and network that is immediately
useful for practitioners, for instance through a tool that helps them to check whether a given coordination task is best solved through market, hierarchy or network.
Develop toolkits for analysis of markets and market failure, and organize exchange of experience
among practitioners using them.
•
•
•
In the process of developing a market framework for the energy sector in developing countries, this thesis
will be using the M4P framework as a starting point. The framework will be based on case studies that
provide an understanding about how markets may fail and through what type of interactions practitioners
can solve the related problems. In addition to the market framework the goal is also to provide some
guidance for practitioners in how to identify market failures, understanding the underlying reasons and
finding means to addressing it.
4.2.5
Importance of addressing the causes to the problems
Providing solutions for business to overcome the barriers existing in developing countries and make
business commercially viable is an important step on the way to create sustainable business solutions. It is
however important to point out that this is only solving the problems and not the underlying causes of a
dysfunctional market.
When policies to support the development of markets are weak or non-existent it is crucial that
governments integrate carefully targeted policies into their poverty reduction strategy papers and other
national frameworks to ensure the expansion of private sector activity continues to aggregate economic
growth, enhance employment and consumption opportunities for the poor.
93
Meyer-Stamer, J. (2006). Making market systems work? For the poor? Small Enterprise Development, 17 (4) 41 Addressing these problems requires other types of intervention than what a programme such as the GSB
can provide. According to the M4P critics this involves addressing the form of coordination consisting of
hierarchies and organizations. While for UNDP it requires a commitment from governments and donors
to work together with the private sector to identify policy reforms that promote employment-incentive
growth and stimulate new markets for affordable goods and services at the “bottom of the pyramid”.94
This in turn requires new policies and more-inclusive policy making processes, including policy reforms
to promote the competitiveness of indigenous industries and their ability to trade, but also a renewed
emphasis on capacity building and strengthening measures for supporting market institutions.
UNDP works in partnership with other UN agencies and international development organizations to
achieve these objectives. Substantive priorities include sectoral policies to promote employment led
growth, private sector development in post-conflict environments, capacity-building support for effective
legal and market regulatory institutions and targeted support to strengthen the voice of the poor
entrepreneurs and producers in national policy reforms process.
4.3 Market constrains
The difficulties and constraints faced by companies entering markets in a developing country were
described in several times in the literature that was used for the literature study. Described below are the
most commonly mentioned market constraints, which were found in for example UNDP’s reports
“Creating value for all: strategies for doing business with the poor” and “Unleashing Entrepreneurship:
Making business work for the poor”, “Capitalism at the crossroads: The unlimited business opportunities
in solving the world's most difficult problems” by Hart and “The Fortune at the Bottom of the Pyramid:
Eradicating Poverty Through Profits” by Prahalad.
4.3.1
Corruption
In many developing countries, low salaries for public servants have been given as a reason why some of
these workers may engage in corruption. Corruption erodes the institutional capacity of government as
procedures are disregarded, resources are exploited, and public offices are bought and sold. At the same
time, corruption undermines the legitimacy of government and such democratic values as trust and
tolerance. Governments threatened by instability may be tempted to use corruption to ensure the loyalty
of the bodies that might help it to remain in power like the police, the army, the administration, etc.
4.3.2
Ineffective regulatory environment
The market in developing countries lacks the regulatory framework that allows business to work. People
and enterprises lack access to the opportunities and the protection that a functioning legal system offers as
rules and constraints are not enforced. No modern market can function without law.95
4.3.3
Informal sector
The informal economy refers to all activity that falls outside the formal economy regulated by economic
and legal institutions. The informal economy still tends to be the most important source of livelihood for
people in general and the poor in particular. A study by the Inter – American Development Bank found
that only 8percent of all enterprises in Latin America are legally registered. If they are informal, they
94
UNDP (2007) Private Sector Strategy, Promoting Inclusive Market Development. (Draft, September 2007)
De Soto, H et al., (2008) Making the Law work for Everyone , Vo 1, Report of the commission on legal
empowerment
95
42 cannot get investment finance, participate in value chains of larger companies, or sometimes even legally
receive services from utilities. Condemned to remain small, they cannot generate wealth or many jobs.
Nor do they contribute to the broader economy by paying taxes. Most face barriers to joining the formal
economy in the form of antiquated regulations and requirements, dozens of steps, delays of many months.
Another characteristic of the informal economy is the absence of property rights. The lack of an
integrated system of property rights makes it impossible for the poor to leverage their own informal
ownership into capital. Peruvian Economist Hernando de Soto for example, estimates that there are over
$9 trillion of unregistered assets in the rural villages and urban slums of the world that could be used to
collateralize loans and allow these poor to become part of the economic system.96 Poor people’s exclusion
from the law denies them an opportunity to improve their lives and it stunts the development of poor
countries. As a result, the poor have no choice but to accept insecurity and instability as a way of life.
4.3.4
Restricted access to finance
Poor people and small enterprises in developing countries cannot finance investments or large purchases
as the credit market are undeveloped and often poorly linked to these groups in the society. Furthermore
they are not able to protect assets and income against unpredictable events such as illness, draught, theft
or accidents.
4.3.5
Poor physical and social infrastructure
Developing countries often lack adequate physical infrastructure such as sanitation, water, roads,
electricity and telecommunication. Constrained means of transportation and poor distribution systems
result in exclusion of the poor in the market.
4.3.6
Poor market knowledge
Business and the private sector know too little about the poor. They lack the information about what these
consumers prefer, what they can afford and what products and capabilities they have to offer as
employees, producers and business owners.
4.3.7
Lack of knowledge and skills
The quality of education is poor in many developing countries. Poor consumers may therefore not know
how to use and benefit from a particular product effectively and the lack of knowledge and skills may
limit local entrepreneurs to deliver quality products and services.
96
De Soto, H. (2002) The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else.
Black Swan
43 5 Empirical Studies In this chapter the findings from the empirical study are presented in the form of case studies. The
findings stem from studying project documents, interviews with involved actors and questionnaires sent
out to the companies involved. Eight case studies are presented with a focus on perceived challenges and
solutions found. The case studies provide the information needed in order to, in the following chapter,
summarize these findings and build a framework for markets in developing countries.
5.1 Project Lokoho - E8
Company: Energy de Lokoho & Lokoho Rural
Company partner: E8 (EDF, RWE, Hydro Quebec) and EDM (49% and 51%)
Energy source: Hydro power
Project location: Madagascar, the North-East SAVA region
Target: 100 000 people
Project Partner: GTZ, ADER, JIRAMA, CARE, KfW, AFD and UNDP
Project start: Autumn 2008
Project status: Implementation
Investment: $23 million
Profitability: 17 % interest rate in 9 years
Situation: In Madagascar the majority of its 17.5 million inhabitants live close to or below the poverty
line. The annual per capita income was at around $ 260. Currently only one third of the population has
access to electrical energy. However, these figures mainly apply to urban areas. In rural areas the
electrification rate is even lower at 3 percent. A more widespread use, especially in rural areas is currently
limited by deficits in both production and distribution (grids).
The Malagasy government has declared rural electrification as a national priority. In order to achieve this
aim, government strategies focus on private-sector engagement and foreign investment, as the national
utility company Jiro Sy Rano Malagasy (JIRAMA) does not possess sufficient financial resources.
Lately, high oil and electricity prices have boosted the demand on fuel wood and charcoal, which
endangers the local forest and contaminate the water resources. Promoting renewable energy consumption
is a key priority for the Malagasy government in their work of electrifying the rural areas of the country.
In 2002 a modern electricity law, which promotes the decentralized supply of electricity and especially
the use of renewables, was introduced in Madagascar. This law provided for the establishment of the rural
electrification development agency (ADER). A National Electricity Fund (FNE) is the funding instrument
for ADER and it is intended to make it easier for rural communities to develop the necessary
infrastructure for renewable energy production and distribution.
Madagascar offers excellent possibilities for the utilisation of hydropower, which at present constitutes
the main source of electricity generation in the country. Nevertheless, a large potential for hydropower
still remains unexplored. The hydropower potential would be sufficient to significantly increase the
electrification rate and substitute the expensive diesel-fuelled power plants that generate the remaining
share of the electricity.97
97
GTZ, Project description - Lokoho Hydro for Rural Development (ppp)
44 In this context, the Malagasy government as well as international organizations favours small scale hydro
power plants with the participation of private investors and operators. This technical solution produces
few negative environmental impacts and is offered at a reasonable construction cost.
Objective: The aim of the project is to improve access to energy, support local economic development by
creating income for the rural population, and tackle deforestation by constructing a small-scale hydro
power plant and integrating the electricity generated into a comprehensive approach of rural development.
Solution: Created in the Rio Summit 1992, E8 is a non-profit international organization composed of
nine leading electricity companies from the G8 countries, which promotes sustainable energy
development through electricity generation projects and human capacity building activities in developing
nations worldwide.
Electricité de Madagascar (EDM), a Malagasy company active in the energy sector, is the local jointventure partner. E8 and EDM are creating a local independent power producer, Energie de Lokoho, and a
Rural Electricity Service Company (RESCO), Lokoho Rural, in which their participation amounts to
49percent and 51percent respectively. Power production and distribution will be transferred to Energie de
Lokoho and Lokoho Rural whose capacity will be developed by E8 throughout the project cycle.
The project consists in the provision of electricity infrastructure to serve rural communities, SMEs, and
social service providers in the North-East SAVA region of Madagascar, through construction of a 6 MW
hydro-power plant on the Lokoho river and its related distribution network. The power plant will be built
near the town of Andapa and the power distribution line will link the two medium-size towns of Andapa
and Sambava. About 20 villages around Andapa and on the line will be electrified. Both Andapa and
Sambava are major agriculture centres focused on export (vanilla, spices, etc.) and access to energy will
have an important impact on productivity and revenues. About 100,000 people are targeted by this
investment.98
In addition to the E8 companies and EDM, many other actors are involved, including GTZ (Deutsche
Gesellschaft für Technische Zusammenarbeit GmbH) which is an international cooperation enterprise for
sustainable development with the German Federal Ministry for Economic Cooperation and Development
as main client. The actors support the people in these villages to seize the opportunities created through
the provision of electricity, thereby assisting them to generate additional income. To this end, GTZ
provides technical assistance in the form of market analyses, concepts for the productive use of energy,
financing services, vocational training and additional aspects such as the maintenance of the transport
infrastructure.
Financing: Project Lokoho is financially supported by three of the nine companies (E8 + EDM), namely
Électricité de France (EDF), the German electric power and natural gas utility Rheinisch-Westfälische
Elektrizitätswerk AG (RWE) and Hydro-Quebec. Together the companies have invested $23 million
euros in local capacity and infrastructure in Lokoho Rural. The German government through KfW
provides loan to finance the remaining part of the investment cost. The internal rate of return of the
project for the investors is 17 percent after tax for repayment duration of 9 years.
Major Challenges and Solutions
• The required investment level was perceived as being too high to make the project commercially
attractive. These issues were largely resolved as the original plan to use expensive high tech
generators was changed, and more modest versions that leverage slow-moving river was bought in.
98
One Pager, Project Lokoho, Madagascar, GSB
45 •
Financing and guarantee issue occurred and became an obstacle to implementation of the project.
The UNDP Regional Representative was brought in for political intervention at government and
donor’s level. As a result KfW became the main funding partner for Project Lokoho’s loan. Thanks
to the intermediation work carried out by the Energy Director between the Project Lokoho team, the
Ministry of Energy and Mining, the Ministry of Finance and Budget and the JIRMA, all guarantees
requested by KfW will be provided.
Impact
• The energy produced will be substantially cheaper (up to 60 percent) than the one currently available
off the grid from diesel generator, petroleum lamp, candles, etc.
• JIRAMA is able to substitute the expensive, environmentally damaging and very unreliable
electricity from diesel generators and reduce use of wood, which will limit deforestation and indoor
air pollution.
• The project promotes energy independence in the region.
• The increased access to energy will support the development of the local economy, in particular
tourism and agriculture.
Scalability: As hydropower constitutes a relatively cost-effective option for rural electrification, the
project can serve as a blueprint for similar future projects in Madagascar or other developing countries.
UNDP and the Global Environment Facility (GEF) are already planning a project that will build on and
replicate the Lokoho approach.
5.2 Industrial Wind Energy Centre - Mad’Eole
Company partner: Malagasy and Swiss entrepreneurs
Energy Source: Wind Energy (1,2 MW)
Project location: Madagascar, Antisarana Region, Ramena
Target: 2 villages
Projects partner: Ministry of Energy, Secren GTZ, ADER, JIRAMA, IST-A, My Climate and UNDP,
Project start: 2009
Project status: Implementation
Investment: $4 million
Profitability: Mad’Eole estimates that they will start yielding profits from 2010
Objective: The goal of this project is to create an
international wind energy centre in Antsiranana, at the
northern tip of Madagascar. This will involve producing
wind energy for Antsiranana and electrifying two villages
in the region and producing parts of the wind turbines and
assembling them in Antsiranana.
Solution: Mad’Eole is a Malagasy start-up created in 2004.
It is privately owned by a pool of Malagasy and Swiss
partners with competencies in wind energy technology,
project management and communication. Other partners in
the project are Ministry of Energy, JIRAMA, ADER,
Institut Supérieur de Technologied’Antsiranana (IST-A),
Secren (a local engineering company), a German investor,
My Climate, GTZ, and UNDP.99
99
One pager, Industrial Wind Energy Center, Madagascar, GSB
46 Figure 8 Mad'Eole wind farm
Mad’Eole will set up the country’s first wind farm in Antsiranana, in Diego-Suarez region, at the northern
tip of the country, and sell it to the grid energy provider, JIRAMA, as an Independent Power Producer
through a Power Purchase Agreement (PPA). The wind farm will contain six turbines with a capacity of
200 kW each and will electrifying two villages in the region. For rural regions wind turbines with an
installed capacity of 5-10 kW will be set up including the necessary storage capacity.100
The wind turbines are imported from Germany where they are
replaced by larger wind turbines due to a re-powering project.
German engineers are travelling to Madagascar in order to train
local engineers on how to install wind turbines. The turbines for
the pilot sites will be imported entirely as "models" for
subsequent local production.
The turbines will then be produced locally within the framework
of a joint venture. Mad’Eole is working together with the ISTA
Figure 9 Mad'Eole wind farm
and the local shipbuilder, Societe d'Etudes de Construction et de
Reparation Navales (SECREN SA) to build up local knowledge.
Producing parts of the wind turbines locally will decrease their cost and th the affordability of wind
energy project in Madagascar and neighbouring countries.
Financing: The total investment costs for Mad’Eole will be € 3.5 million and will use a 50:50 mix of
public and private sector funding. The "public" fund is also including donations from foundations,
churches and private individuals from Switzerland. The public funds will indirectly result in the
subsidizing of electricity prices during the start-up phase.
An agreement has been signed with the NGO My Climate to buy all carbon credits generated through
wind energy production. Mad’Eole will yield profits from 2010, when it will start the repayment of
privately invested capital.
Major Challenges and Solutions
• Mad’Eole had problem with getting the PPA signed and to obtain the
independent producer concession. In order to overcome this obstacle
quickly in order not to lose the investors, GSB Brokers intervened at
Ministry of Energy and Mining’s level. The energy director worked
with the director of JIRAMA and was able get the PPA to sign in a
couple of weeks. The energy director also helped Mad’Eole to obtain
the concession by removing it from the competing company (Vergnet
SA, a filial to Fraise SA) that had been holding it for 5 years without
acting on it.
• High investment cost was overcome by UNDP’s role as a broker
through the GSB programme which helped building partnerships
between Mad’Eole and local and international development partners
(IFC SME Solution Center, GTZ, EU Energy Facility, ERM
Foundation, etc), in order to gain access to finance.
Figure 10 Mad'Eole wind turbine
Impact
• The decrease in the use of diesel and wood fuel will lead to decrease in greenhouse gas production
and deforestation. Each turbine will reduce around 450 tons of CO2 equivalents per year, leading to
100
Project proposal, Industrial Wind Energy Center, Madagascar, GSB
47 •
•
•
•
•
an overall emission reduction of 11,700 tons of CO2-eq. in the first 7 years after the start of
electricity generation.
The resources of drinking water in the rural areas of the region will be protected by eliminating the
primary cause of the reduction in drinking water, the production of charcoal.
Technology transfer and capacity building to a local company for producing parts of the wind
turbines locally for the first time in Madagascar.
The previous dependence on imported oil for the generation of electricity will be reduced, something
that will promote the energy independence in the region.
More and cheaper electricity will be available to local customers.
The creation of long-term work places for both qualified personnel and less qualified workers in the
subcontracting area will help reducing local poverty. Increase electricity access will also stimulate
the local economic development, in particular in agriculture and tourism (rice, other agriculture
products, ecotourism, etc.).
Scalability: Mad’Eole hopes to use this project as a first step in a wider scheme aiming at supplying the
market around the Indian Ocean with wind turbines of high technological quality, partially incorporating
local production and know-how. Therefore, this project is the starting point for a technology transfer that
will encourage and enable other communities to adopt similar carbon neutral energy initiatives. In the
close future Mad’Eole hopes to be able to replicate the scheme in Fort Dauphin, a town on the southern
coast of Madagascar, where energy demand is high due to mining operations. Mad’Eole also hopes to
proceed with the electrification of 15 other villages selected in partnership with ADER.
5.3 Marsabit Wind Farm Project- Gitson Energy
Project name: Marsabit
Company: Gitson Energy Limited Inc
Energy source: Wind Farm
Project location: Northern part of Kenya
Target: 400,000 Household
Partners: GOK, GH, IFC, GE Energy, UNPD
Project status: Implementation
Project start: 2008
Investment: $200 million.
Profitability: It will take 2-3 years to generate revenues
Situation: In Kenya, less than 5 percent of the 34 million habitants have access to electricity. The rural
areas are the most affected. Kenya has a liberalization policy in place aimed at expanding the energy
sector and affording the demands of those in great need of energy. The Government of Kenya (GOK) is
encouraging investment in the Energy sector by offering several incentives to investors including a 10year tax holiday.
According to the studies conducted 2002 by Ministry of Energy in Kenya, Marsabit is among the highest
potential areas for wind farming in Kenya. The average wind speed in this area is approximately 12
meters/second and makes Marsabit one of the areas in the world with the highest potential for wind
farming.
Objective: Gitson Energy will generate power from wind and pass it on to Kenya Power & Lighting
Company (KPLC) for distribution. This project is expected to greatly impact development in Kenya as a
whole and eastern province in particular. This province is underdeveloped and needs to be industrialized.
The project will serve the purpose of enhancing transport and communication infrastructure in this
province and ultimately result in fuller integration into the Kenya economy.
48 Solution: Gitson Energy Limited Inc is a start-up energy provider headquartered in Irving, Texas, whose
objective is to undertake wind farming and provide energy to the Kenyan market. This project will enable
Gitson Inc to supply the local utility company KPLC with electricity that can connect over 400,000
homes.
The company will partner in a number of strategic alliances including GE that supplied the wind turbines.
Financing: The total budget for this project is approximately $200 million. The Government of Kenya
(GOK) has through the local utility company KPLC, guaranteed the market of electricity generated by
Gitson Energy Limited by signing a long-term PPA.101
In Gitson’s projection they expect the company to be commercially viable for the first day of operation.
This is because electricity is a scarce commodity in Kenya and the government of Kenya just revised and
increased tariffs in March 2008. It will take 2-3 years to generate revenues but in the meantime the
company is also pursuing Carbon Credit trading for this project. IFC have recently established a fund for
African countries to pursue carbon credit trading.102
Major Challenges and Solutions
• The political turmoil that followed after the General election in 2007 made it hard to obtain a firm
commitment of funding. To mitigate this, Gitson Energy with help of GE, approached Multilateral
Insurance Guaranty Agency (MIGA) and the World Bank that insures against risks in unstable
countries. Gitson Energy is now insured through MIGA which will ensure that the investors not will
lose money because of political instability and conflicts.103
• According to Gitson, owner of Gitson Energy, political interference and rivalry between various
parties and personalities posed serious challenges and great risks of delaying the project: Gitson
Energy maintained non-political stand on local and national politics and followed clear set of anticorruption guidelines. Gitson stated “We are an energy
company and not a political party”.
Impact
• As one of the most marginalized and arid areas of Kenya
this region is classified as a hardship area by Kenya
government. Marsabit resident’s import food and goods
from central and Eastern Kenya and there’s not much
development but the area has a lot of potential. The 240
km Isiolo –Moyale highway, that currently takes 7
hours, will be paved before transportation of the heavy
and expensive wind turbines. This investment will be
made by Gitson Energy in collaboration with the local
government. The highway forms a major link between
Johannesburg to Cairo and its upgrade will increase the
Transafrica movement of goods, services and people.
The people of this region will reap from this investment
by getting their travel times reduces as well as gaining
access to cheaper food and goods as the transportation
cost will be reduced.
• Gitson Energy ensures the installation of “step-down” Figure 11 Photovoltaic panel
101
Gitson energy Ltd (2007), Project Proposal to the Coordinating Group, UNDP GSB
Questionnaire for business leaders of companies studied, Gitson, G.
103
Ibid.
102
49 •
•
•
•
generators such that about 2percent of the created energy “stays” in Marsabit and surroundings. This
will have huge local benefits for attracting further investment, due to reliable energy. Currently, the
Marsabit area has 700 electricity accounts in a district of 150,000 inhabitants. Attracting more
investment (e.g. the opening of a planned juice manufacturing and a meat processing plant) will lead
to job creation. Livestock rearing is very popular in this area and by equipping the locals with
electricity there’s a chance of value addition by repackaging the meat instead of transporting live
animals all the way to Kenya Meat Commission plant in Athi River.104 Increased access to electricity
will also help small and medium local enterprises to thrive, for examples in the light industry sector.
Environmental degradation will greatly be reduced since the population can access power to cook
without using firewood.
Additionally, Gitson Energy has reached out to various entities including USAID for help in
addressing some of the pressing problems in the area, such as access to water.
Improved access to electricity will help students to do their homework without having to worry about
the kerosene that may run out at night.
The government has had problems to provide security to this remote part of the country. With
increased access to electricity from the Gitson energy they will invest in outside lighting, something
that will have a positive impact on the security in the neighbourhoods.105
Scalability: There is according to Gitson Energy every opportunity for scalability.106
5.4 Rural Electrification in Mali: Improving Energy Accessibility to the Rural
Poor
Situation: Mali is among the poorest countries in the world and about 64 percent of the population lives
below the poverty line. Only 10 percent of Mali’s 12 million inhabitants have access to electricity, a
figure that comes down to 2 percent in rural areas.107
Most of the electricity in Mali is generated either by coal or through hydro-turbines. Diesel-operated
power generators provide the remaining part. For the small proportion of people with access to electricity,
the price is higher than other countries in the region due to structural aspects: Mail´s neighbouring
countries are globally more developed and have gas resources.
In 1991 the Malian government, with input from the World Bank, promulgated the Poverty Reduction
Strategy Paper outlining key areas requiring attention in order to achieve the target of 5 percent annual
economic growth. The government concluded that rural electrification, for its role in household
electrification as well as in water procurement through wells- should be prioritized.
French electricity utility, EDF, decided in the early 1990 to explore the possibility of bringing electricity
to rural areas of developing countries through the development of RESCOs. EDF had three key criteria
which orient its strategy: profitability, sustainability, replicability of the project, including the fact that the
companies created with local partners should be ultimately owned and run by local actors. RESCOs are
also designed to have strong links with their communities.108
104
Meeting notes between Abdulrahman Olhaye, GSB Programme Analyst, and Stefan Engels, Kenya GSB Broker,
July 18, 2007
105
Questionnaire for business leaders of companies studied, Gitson, G.
106
Meeting notes between Abdulrahman Olhaye, GSB Programme Analyst, and Stefan Engels, Kenya GSB Broker,
July 18, 2007
107
EDF (2005) RURAL ELECTRIFICATION PROGRAMME IN MALI (Senegal River zone) 108
EDF (2006) EDF ACCESS PROGRAM “Access to Energy and Services” For the populations in developing
countries
50 In the mid-1990s, EDF began to explore ways to help electrify Mali´s rural areas sustainable and
profitably. The company implemented socio-economic, technical and environmental feasibility studies on
rural electrification in the country in partnership with the French Environmental Agency ADEME and the
private energy companies Total and Nuon. In 1999 and 2001 the partners formed Mali’s first RESCOs,
called Koraye Kurumba and Yeelen Kura. 109
Objective: The RESCOs aim was to bring affordable energy to the rural areas of Mali.
Solution: The RESCOs are independent Malian companies with Malian managers. EDF and its partners
provide strong support through training programmes, technical assistance, development of appropriate
equipments and support to management. EDFs goal is eventually to transfer all shares to trained Malian
managers.
When EDF’s RESCOs were created, there was no regulation of energy provision in Mali. Together with
the support of the World Bank, they convinced the government to set up a new legal framework. The
Malian agency for development of household energy and rural electrification, with support from the
World Bank, KfW and the African Development Bank, worked to develop a supportive legal, regulatory
and fiscal environment for rural electrification by private operators and arbitration of potential conflicts
between operators and local communities.
5.4.1
Koraye Kurumba
Company: Koraye Kuruba
Company partner: EDF (70%) and Total (30%)
Energy Source: Photovoltic kits (50-100 w) and disel generators
Project location: Kayes region, west Mali
Target: 10200 people (2006)
Projects partner: ADEME, World bank
Project start: 1999
Project status: Running
Investment: $2.5 million
Profitability: planned 10% over 15 years, now looks like 4,5%
The first RESCO, Koraye Kurumba, was created in 1999 by EDF (70 percent) and Total (30 percent) in
association with Malian immigrants in France. Koraye Kurumba operates in the Kayes region, in the west
of the country along the border with Senegal and Mauritania.110
The services offered by Koraye Kurumba were basically domestic but also collective through public
lighting, water pumping, health centres and schools in four villages selected by request of the Malian
immigrants in Paris. Approximately 90 percent of the electricity is provided through small low-voltage
micro-networks powered by small diesel generators and the remaining 10 percent is provided through
photovoltic (PV) kits of 50 to 100 W. 111
Different service kits are offered in order to satisfy the needs of the local population, including 2 to 18
lamps per kit. Fees are paid according to fixed rates depending on the service chosen and with payment
periods adapted to the needs of each customer.
109
EDF (2005) RURAL ELECTRIFICATION PROGRAMME IN MALI (Senegal River zone)
EDF (2006) EDF ACCESS PROGRAM “Access to Energy and Services” For the populations in developing
countries
111
EDF (2005) RURAL ELECTRIFICATION PROGRAMME IN MALI (Senegal River zone)
110
51 RESCOs set their own tariffs rate and are computed to make service affordable while ensuring that the
company can cover its operation costs. Two major factors held tariffs rate down; fixed monthly rates do
not require the installation and monitoring of individual meters, and secondly, since customers electricity
needs are relative modest, so are the installations themselves.
Financing: EDF and Total provides the total investment cost is €0.75 million through their respective
shareholdings (70 percent and 30 percent) without any other external grant. The services are sold free of
value-added tax since 1 August 2004.
This program has been set up in association with Malian immigrants. About 70 percent of customers were
helped in the payment of the connection fees and monthly fees by their relatives in France. A majority of
the customers are now paying the monthly fee on their own.
5.4.2
Yeelen Kura
Company: Yeelen Kura
Company partner: EDF (50%) and Nuon (50%)
Energy Source: Photovoltic kits (43-129 w)
Project location: Koutiala region, Southeast Mail
Target: 30000 people (2006)
Projects partner: ADEME
Project start: 2001
Project status: Running
Investment: $2.5 million
Interest rate: planned 10% over 15 years, now looks like 9%
The second RESCO, Yeelen Kura
was
created
in
2001.
Its
shareholders are EDF (50 percent)
and the Dutch energy company
Nuon (50 percent). The French
Agency ADEME also joined the
partnership to train and support
local operators in the operation of
electricity infrastructure.112
Yeelen Kura operates in a dozens of
villages in the cotton area, in southeastern Mali, on the border with
Burkina Faso. This area was chosen
because it is the most economically
active, which would attenuate
Figure 13 Neighbors gathering to watch a game of football in the village of somehow the numerous barriers and Konseguela
risks faced by the RESCOs in
addressing low-income markets in
rural areas.113
112
113
Ibid.
WBCSD (2007) Electricité de France (EDF) Providing services to rural populations
52 Yeelen Kura provides energy services both to households and to schools, medical centres, local
communities and companies. Energy is produced by photovoltaic kits of 43 to 120 W installed in each
household. Each dwelling is fitted with a solar home system comprising a solar panel, a battery and a
controller. The battery can be used night and day, and can store enough power to last up to five days. To
ensure a sustainable source of drinking water, solar pumps are also being set up in Koury and will be run
and maintained by Yeelen Kura114.
In addition to the solar technology, Yeeleen Kura has set up approximately 15 local energy stores. Each
store employ at leased one person responsible for installing, maintaining and repairing solar home system
in their area, as well as tracking accounts and collecting fees. Customers usually pay once a month, but
Yeelen Kura allows some flexibility for farmers, whose resources come in bulk amount during specific
times of the year, by providing annual payment options.
Financing: The total investment cost was €2 million. The major part, €1.7 million, was provided by EDF
and Duon in equity (50 percent and 50 percent).115
Major Challenges and Solutions
• The poorest members of the local communities cannot afford
the tariff rates as they currently exist.
• To initially establish the RESCOs required various government
authorizations, requiring significant time and energy to go
through bureaucratic proceedings. The Malian government,
with assistance from the World Bank, has since then created a
more supportive institutional framework.
• As the two companies operate in areas characterized by low
population density, transaction costs have been high.
• Clients often had high performance expectations for their new
electrical system, but little knowledge of the maintenance
required. EDF therefore trained customers on system
installation, maintenance and prevention.
• Rural Mali lacks experienced business managers. Thus, EDF
had to embark on significant programs to train local RESCO Figure 14 Installation of panel managers and village leaders on the new electricity models,
while communicating to villagers of the necessity of tariff charge.
• For both RESCOs, many customers install their own systems in order to save money, which has
resulted in unsafe installations. The RESCOs now offer microfinance to spread the cost of
professional installation over several months.
• Because of the economical difficulties in Mali, the RESCOs had to reduce tariffs in order to attract
costumes. Amader, the Malian Agency for the Development of Household Energy and Rural
Electrification, used international donor money to subsidize up to 70 percent of the investment
expansions of the RESCOs, enabling the companies to cut tariffs approximately in half and serve
much more of the population. If the companies’ profit margins begin to exceed 20 percent, Amader
will begin reducing the amount of the subsidy.116
• Lacks of risk cover mechanisms.
• Lack of security for employees and partners.
114
Ibid.
Ibid.
116
EDF (2006) EDF ACCESS PROGRAM “Access to Energy and Services” For the populations in developing
countries
115
53 Impact
• Partly as a result of the RESCOs experience, a new legal framework has been developed, enabling
private operators to provide electricity. In 2006, the government signed agreements with over 50
small-scale providers, thus enabling additional private energy provision at the village level.
• By 2006 Koraya Kuramba had connected 510 households, or approximately 10,200 people. Yeelen
Kura had connected 1,700 household, for a total of about 30,000 rural people.
• The two RESCOs have created more that 50 local jobs, a figure that may double as operations
expand. In addition to these new jobs, new business opportunities have emerged in the energy value
chain.
Scalability: Backed by a new institutional framework and international donors, the model is designed to
ensure profitability, sustainability, replicability and local ownership, and is to be expanded beyond the 24
villages that are currently provided with the service. 117
5.5 Energy for Poverty Alleviation - Gikoko Kogyo
Company: PT Gikoko Kogyo
Energy source: small-scale digester to generate biogas
Project location: Indonesia, Pasuruan district, East Java Province
Target: 7000 people and 14000 cows
Partners: UNDP, JBIC, Municipality, carbon credit banks
Project status: running
Project start: 2008
Profitability: $4 million
Situation: In Indonesia one third of the population live without
electricity, and 80 percent of the households without electricity live in
the rural areas. The countryside of the Pasuruan district, East Java
Province, is famous for its dairy cattle farming. Nestle is the big buyer
of the milk production in this region. The Nestle factory in Kecamatan
Kejayan (South of Pasuruan city), has established a large network to
purchase their milk through local dairy cattle farming corporative inside
and outside Pasuruan.118
The number of cattle is continuously increasing and in 2007, there were
over 50,000 dairy cattle and 65,000 beef cattle in Pasuruan. The total
amount of the Animal Manure Waste can be estimated as around 900
ton/day.
For each household, around 2-4 cows are supporting their life and the
farmers live in close proximity to the cattle without proper animal waste Figure 15 Cattle farm management system. Mostly the farmers have poor living conditions.
They do not have access to electricity but use firewood for cooking, and
use well water which is located within the same compound as the livestock are kept. The lack of
sanitation causes diary farmers to suffer from polio, skin disease, dengue fever, dysentery and diarrhoea
and cows who suffer from mastitis infection.119
117
Ibid.
Project proposal - Energy for Poverty Alleviation, Indonesia, GSB
119
Ibid.
118
54 Objective: The objective is to install a proper treatment system for cattle manure waste in Lelok village
in the Pasuruan district and to convert the waste into useful biogas which will replace the use of firewood
and kerosene as fuel to cook and boil water, resulting in net reduction of CO2 emission.120
Solution: PT Gikoko Kogyo Indonesia is an engineering
company in the area of waste management, energy
recovery systems and carbon credit project development,
operating in Indonesia since 1993. The principal
shareholders are Japanese and Hong Kong investors.
The facility that will be created consists of a small-scale
digester to generate biogas that is a very simple-designed
and low-cost facility. Biogas technology captures the gas
that is generated from the anaerobic fermentation.
Biogas consists of 60-70 percent of methane, 30-40
percent of carbon dioxide and others. The methane, main
contents of the biogas, can be used for cooking and
lighting. The landfill site will include a water sanitation
system. 121
Figure 16 Cattle manure at cattle farm
Gikoko have established an Energy Service Community Coop to involve local government, investors, rich
milk cooperative members and the poor farmers as stakeholders, working out energy and water supply
model, sanitation and food production. The poor farmers will transport the loose manure to rich farmers
and swapped with solid manure that they transport to the landfill in exchange for affordable biogas and
clean water. Properly sanitised drinking water for the cows and for human consumption reduces the health
risk and increase milk productivity for the cows. The rich farmer will use the loose manure as fertilizer
for growing elephant grass used to feed the cows. 122
A community development program partly financed by Gikoko has developed food production business
by women, for example tofu production using biogas.
Figure 17 Digester facility 120
One Pager - Energy for Poverty Alleviation, Indonesia, GSB
PT Gikoko Kogyo (2007) Pontianak Landfill Gas Flaring Project –Social Assessment Due Diligence Report
122
Ibid.
121
55 Financing: Gikoko will invest the total amount of $4 million for the required facility on their own cost
and recover the cost based on carbon credit trading revenue and partially by social development funds.
The investment is anticipated to yield 900,000 tons of Certified Emission Reduction worth more than $12
million by year 2012. The company shares 10percent of its revenue for waste management re-investment
and another 7 percent for Community Development Program.123
123
Sakoda, K. (2007) GSB Pipeline with Gikoko/JBIC In Pasuruan, East Java, Indonesia – Carbon Credit trading
Business using Cattle Manure Waste, GSB
56 Major Challenges and solutions
• Most carbon funds have minimum size in terms of annual yield of credit in CO2 equivalent of 50,000
tons. Animal waste manure may only produce small carbon credit. Therefore, the project needs to
expand in order to achieve scale of economy as cost of CDM registration is very high.124
• The farmers with the lowest income level could not afford the relative low energy and water utility
charges. Gikoko has therefore invested in a community development program to promote
commercial activity of the farmers to raise their income.125
• Lack of risk covering mechanisms.
Impact
• The project has improved health of community and decreased the cases of disease and illness.
• The cow milk production has increased due to access to sufficient clean drinking water.126
• Increased commercial activity, such as food production, and raised income for farmers.
• Improved situation for fishing community downstream whose stock before was decimated every
rainy season as rain carry loose waste from the Lekok village via the ditch into the sea.127
Scalability: To achieve economy of scale, Gikoko plans to replicate the project in Lekok. Communities
in West and Central Java, South Sumatra and Bali stakeholders are identified for future replication of this
technical design and sustainable development business model.128
5.6 PEC Luban: Using Straw as an Engine for Sustainable Local Economic
Growth
Project name: PEC LUBAN
Energy source: Straw fire boiler (8 MWh)
Project location: Luban, Poland
Project Partner: PEC
Partners: REKA A/S
Project status: running
Project start: 1998 (completed in 2001)
Profitability: €1,6 million
Situation: Poland’s energy economy has traditionally been dominated by coal and the country’s reserves
of hard and brown coal are the biggest in the region. To encourage renewable energy production, the
Polish Government has introduced a “Green Power Purchase Obligation” (GPPO) which requires power
companies to purchase electricity or heat from renewable sources. Poland’s strategic goal is to increase
the share of renewable energy to 7.5percent by 2010 and to 14 percent by 2020. At the moment, energy
produced from renewable sources accounts for approximately 4.2 percent of Poland’s total energy
production. Of the various types of renewable energy, biomass energy accounts for more than 98 percent
of renewable energy production in Poland and is recognized as the primary area for further development
over the next 10-20 years.129
124
Monthly Reports - Energy for Poverty Alleviation, Indonesia
GSB, (2007) Exit report for Growing Sustainable Business in Indonesia
126
Ibid.
127
Monthly Reports - Energy for Poverty Alleviation, Indonesia
128
GSB, (2007) Exit report for Growing Sustainable Business in Indonesia
129
Rok, B. (2007) PEC Luban: Using Straw as an Engine for Sustainable Local Economic Growth, Growing
Inclusive Markets, UNDP 125
57 The city of Luban is situated in the southwestern Poland. In the beginning of the nineties
the local city governance was looking to
modernize the town’s energy system. PEC
Luban, the municipal energy company, provided
district heating by using two coal-fired boilers.
As the boilers were not equipped with any
pollution abatement technologies, they were
generating a large amount of greenhouse gas
emissions and air pollution.
Objective: The main goal of the investment
were to reduce the emission of harmful air
pollution caused by coal combustion in boilers,
to limit the heat consumption of the city and to Figure 18 Straw‐fired boiler
provide the new ecological technology of heat
production from straw-fired boiler.
Solution: The straw-fired boiler plant was constructed as an upgrade and extension of the existing coalfired boiler plant. This solution has allowed the exploitation of existing technological infrastructure such
as heating substations and the implementation of a new safe multi-fuel heat production system. 130
The first boiler system was manufactured by the
Danish company REKA A/S. After the first
contract, REKA A/S sold the license and their
knowledge for producing larger boilers and related
equipment to polish companies. The total installed
power capacity from the boiler amounts to 8 MWh
with an efficiency of 84 percent. The energy
released from burning straw is considerable, where
1.5 tons of straw generates the energy equivalent of
one ton of coal.131
PEC Luban’s employee collects waste straw from
farmer’s fields and bale it into large straw bales.
The straw is transported to the boiler warehouses
Figure 19 Transportation of straw bales
where it is then delivered into the boiler rooms. In
the boiler rooms the large straw bales are placed on
the automatic feeding line. At the end of this line there is shredder which cuts straw into pieces that are
automatically fed into the boiler. The boiler has controls for the air intake for combustion and allows for
separation of the leftover ash. The ash left over from burning straw can be utilized as a mineral fertilizer.
Financing
To be implemented, biomass systems require rather significant investments. For PEC Luban it was
impossible to cover necessary investment costs by themselves. The company began to explore different
alternative financing options and it was not until 1998 that the total investment cost of €1,6 million was
secured and that the implementation of the project began. PEC Luban used its own funds (€0.6 million),
a subsidy from EcoFund (€0.7 million) and a preferred loan from Voivodeship Fund for Environmental
130
Ibid.
Kazai, Z. (2006) Examples to follow- Successful Renewable Energy Investments from the Visegrád Group
Countries
131
58 Protection and Water Management in Wroclaw (€0.3 million). Both of these external financers supported
the project as the construction of the straw-fired boiler plants was seen as environmentally friendly energy
solutions.132
The operating costs for straw-fired boiler plant are not significantly different from the operating costs for
boiler plant fuelled with coal dust. In the case of straw, the cost of fuel, including transportation costs, is
around 20 percent lower. 133
Major Challenges and solutions
• The greatest challenge was to secure financing for the high investment costs. As coal remains price
competitive (not factoring in environmental costs, local income nor employment benefits) changing
the current coal boilers to new straw fired boilers relied on financing from the Government. But
higher coal prices and further strengthening of environmental standards in Poland will accelerate the
price-driven conversion of boilers from coal to biomass. The overall trend is clear– biomass will
decrease in costs while the cost of coal will increase.
• Biomass energy development is strongly influenced by policies and incentives, yet there is no
coherent policy to support bio-energy in Poland. Even though the GPPO have positively influenced
the development of biomass, this is counteracted by that there is not yet real price competition
between various sources of energy because energy tariffs for heat are under the control of the Office
of the Energy Regulatory Authority. This lack of level playing field causes, for example, gas prices
to be relatively low compared to biomass.
• Another barrier is the amount of locally available straw and the need to convince local farmers to
invest in equipment for collecting and baling straw. This has been difficult, because farmers in the
area are too poor to invest in the equipment on their own.
• The project didn’t succeed in carbon trading the CO2 emissions reduction as the volume of reduced
CO2 was considered too small.134
Impact
• As the use of straw is more labor intensive than coal, it has created jobs in an area with high
unemployment rate. PEC Luban itself has 60 employees who are responsible for collecting the straw,
operating the boilers and maintaining the heating system. In addition it has generated extra income
and contributes to the livelihoods of small farmers, as they can sell the straw that would otherwise be
considered waste.
• PEC Luban’s utilization of straw resulted in the reduction of the amount of coal used in the heating
system by about 2,500 tons per year. This has had a positive impact on the natural environment as it
reduces the CO2, SO2 and NOx emissions.135
• The project has transferred knowledge for producing straw boilers and related equipment to polish
companies.
• During the implementation of the project, PEC Luban was involved in different initiatives on
environmental education for students, academics and professionals from the heating industry. More
than 2000 people from the entire country visited Luban in order to understand the possibilities of
using straw for heating. Hence, PEC Luban has had a demonstration effect and increased the
knowledge and interest for renewable energy in the country.
132
www.managenergy.net/products/R424.htm
Rok, B. (2007) PEC Luban: Using Straw as an Engine for Sustainable Local Economic Growth, Growing
Inclusive Markets, UNDP 134
Kazai, Z. (2006) Examples to follow- Successful Renewable Energy Investments from the Visegrád Group
Countries
135
Rok, B. (2007) PEC Luban: Using Straw as an Engine for Sustainable Local Economic Growth, Growing
Inclusive Markets, UNDP
133
59 •
The heating costs for the final consumers could be reduced by 15 percent, thanks to the
modernization and the shift to biomass.
Scalability: It is technically possible to completely replace the coal-fired boilers and generate heat
entirely from straw; however, this remains a longer-term possibility due to barriers mention above.
5.7 LYDEC: Providing Electricity to Casablanca’s Shanty Towns
Project name: Lydec
Energy source: primary Oil
Project location: Morocco, Casablanca
Target: 30000 households
Project Partner: Community, Casablanca gov. EDF
Project status: Running
Project start: 1997
Investment: $6.6 million
Profitability: 10-15% interest rate in 30 years, the project reached break even after 7 years
Situation: In Casablanca, the biggest city in Morocco, 30 percent of the 4.5 million inhabitants were in
the 1990s living in slums. In these shanty towns, water was supplied through street fountains, public
standpipes and wells or tanks were used for sanitation. Electricity in these areas was also scarce, and
shanty towns’ inhabitants resorted to illegal leaks and network connections, which resulted in accidents,
some of which were fatal.136
In 1997 the new Government decided to remove the unplanned shanty towns in Casablanca and transfer
all inhabitants to other areas. As a reaction to the Government's plan to demolish and depopulate the area,
the local inhabitants, in cooperation with elected parliamentarians representing the area, wanted to pose
alternative solutions to the problems. The initiative aimed to improving the area's housing, environmental
and urban conditions in order to stop and
invalidate the removal decisions. The
company LYDEC got involved and was
given the responsibility to ensure access to
electricity housing units and for lighting
open spaces.137
Objective: The main objective was to
provide access to electricity to the shanty
towns of Casablanca, as a way to improve
living conditions and to invalidate the
removal decision.
Solution: In 1997, LYDEC, signed a 30year contract to manage the areas of
electricity networks. The traditional
mission of a public service supplier,
which consists in serving every customer, Figure 20 Electrification network in low‐income area of Casablanca 136
UNIDO & WBCSD (2002) LYDEC (Suez): electricity for low-income neighborhoods, Morocco Developing
Countries and Technology Cooperation - Ten Business Cases
137
Djerrari, F. (2005) Casablanca – Multi utilities concession, Lydec
60 leads to operation difficulties and to excessive costs that are not affordable by the low-income population.
An alternative to overcome these hurdles is a structure of shared management designed to involve the
community in the project. LYDEC adopted this principle in the form of a collective of sub entities,
managed by a street representative chosen by the
inhabitants. These part-time roles were suitable for
individuals with a reputation for honesty and good
relations among the community. Responsibilities
included technical support, reading electricity meters,
and collecting payments from each household. Such
innovative agreements, established with these street
representatives, allowed LYDEC to enhance its
relationship with the local community.138
It was also necessary to reduce the investment cost.
This was made possible through the delegation of parts
of the work to the neighbourhood electricians, whose
expense structure is lower than those of a larger sized
company.
Figure 21 Electricity meter
LYDEC’s faced several skill shortages at the onset of
its management. Likewise, suppliers and subcontractors suffered similar skill deficiencies, thereby
rendering work of low quality that did not meet LYDEC’s performance requirements. In striving for
better customer services, LYDEC provided managerial and technical training to street representatives, as
well as electricians, which led to vast improvements in service quality and overall performance of the
firm.
Financing: The investment cost to provide electricity access to 30,000 households in the shanty towns
was $6.6 million. LYDEC’s investments were shared with residents who paid approximately $130 for
each service connection provided. Although the company made losses during the first 30 months of the
concession, the company is making profits since 2000.139
Major Challenges and Solutions
• Financial challenges were encountered due to limited Government spending and dishonesty of street
representatives who sold the services to inhabitants at 20 percent more than its original cost.
• Several socio-cultural challenges were also faced during this development project, because it was
difficult to gain peoples’ confidence and support. In one district, people didn’t want to take
electricity meters to measure consumption and insisted to bring their own devices. There were also
conflicts between block representatives and individual families in reading electricity meters.
• In the beginning LYDEC had problems gathering information on the habitants’ needs and
preferences. This problem was overcome when the model with street representatives was introduced.
• LYDEC struggled with a workforce and suppliers that was poorly qualified. To overcome this
problem LYDEC invested in a training centre which led to vast improvements in service quality and
overall performance of the firm.
• The project aim, to bring energy to the shantytowns of Casablanca, was contrary to the wishes of the
relevant government authorities, which tried to block the initiative as a means of pressuring the
inhabitants to evacuate the area. LYDEC had to spend lots of time dealing and negotiate with
authorities to be able to implement the project.
138
Ibid.
Hatem, T. (2007) LYDEC: Providing Electricity, Water & Sanitation to Casablancas’s Shanty Towns, Growing
Inclusive Markets, UNDP
139
61 Impact
• The LYDEC project has increased the percentage of people having access to electricity by 20percent.
30,000 families have been “legally electrified”. Since 2004, the Moroccan authorities also entrusted
LYDEC with Casablanca’s street lighting, increasing the security in the neighbourhoods.140
• Breakdowns have been reduced by approximately 50 percent.
• LYDEC created several direct jobs for local electricians, as well as about 1,250 representative
positions. LYDEC’s projects also contributed to the creation of indirect jobs by stimulating the local
economy and the creation of commercial and production activities, and micro-enterprise
opportunities. This is enabling integration of the shanty towns into the city’s economic activity.
• In providing access to electricity services, LYDEC improved living conditions of Casablanca’s
inhabitants. This access also improved conditions for children’s education, allowing them to study
throughout the evening, whereas before they depended on public lighting provided on streets or used
candles and gas lamps. Better education for mothers also improved maternal health and increased
child survival rates. 141
• Electricity connections have also reduced major risks attributed to illegal connections to networks
and associated safety risks.
• Furthermore, electricity services have reduced household energy budgets from $17 per month to $6
per month.142
• The model was presented and transferred in international forums and conferences, as well as through
exchange visits with interested parties. This way the project have had a demonstration effect showing
how a multi-utilities public-private partnership with local community involvement could yield better
living conditions and improve customer services for poor segments of the society which fit with their
needs and simultaneously provided services at a lower cost.
Scalability: The company has noticed a strong request for information from other utilities in Morocco,
other developing countries and international institutions such as the World Bank. LYDEC’s achievements
are recognized as providing an example to follow at the local, regional and international levels. LYDEC’s
management model in Casablanca has been further adopted in other infrastructure projects and utilities in
the country, ex Tangier-Tetouan and Rabat.143
140
UNIDO & WBCSD (2002) LYDEC (Suez): electricity for low-income neighborhoods, Morocco Developing
Countries and Technology Cooperation - Ten Business Cases
141
Schechla, J. (2005) Bashku Unplanned Area Rehabilitation Initiative Anatomies of a Social Movement: Social
Production of Habitat in the Middle East/North Africa, HIC-HLRN 142
UNIDO & WBCSD (2002) LYDEC (Suez): electricity for low-income neighborhoods, Morocco Developing
Countries and Technology Cooperation - Ten Business Cases
143
Schechla, J. (2005) Bashku Unplanned Area Rehabilitation Initiative Anatomies of a Social Movement: Social
Production of Habitat in the Middle East/North Africa, HIC-HLRN
62 6
Key findings
In this chapter the key findings of this thesis are presented and explained. It summarizes the major
challenges, solutions found and impacts. How companies have done to overcome the challenges is then
presented in a matrix. Thereafter, by interpreting the empirical results from the case studies and in light
of the theoretical framework used in this thesis, this chapter presents a new market framework which lays
the foundation for an analysis.
6.1 Major challenges found
The projects studied in this report all faced difficult challenges. This result shows that the market in
developing countries does not have an easy accessible fortune as Prahalad predicted and confirms that the
difficulties in developing countries are largely underestimated as stated by the critics of the BOP theory.
The major challenges found in this study were lack of; finance, legal frameworks, political stability,
coherent public policy, health, security, human capacity, information, infrastructure, trust and climate
change. The most common challenges in the case studies were finding finance to cover the investment
cost, the low income of the costumers and the lack of education at the local level.
While most of the challenges found in the case studies were similar to those identified during the initial
literature study, some challenges specific to the energy sector were found. This is the case with the most
common problem, the challenge of finding finance to the project. As large up-front investment and low
expected profits characterize energy and other infrastructure project, it is difficult to find investors.
Figure 22 Overview of challenges found 63 6.1.1
Investment cost
In many of the cases studied the combination of high investment costs, which is characteristic for energy
and other infrastructure projects, lack of access to loan and risk covering mechanisms together with lack
of means to pay by consumers made it hard to make the project commercial viable.
Projects in rural areas are especially difficult to finance as a lower population density, difficult terrains
and lower consumption characterize them. Many electrification projects in rural areas are not commercial
viable. This is the case both in developing countries and in developed countries. For example, the
electrification of the north part of Sweden was largely subsidized in order to make the investment viable.
This was also the case in Lokoho, Mad’Eole, the RESCO’s of Mali and PEC, which all needed donors or
government funding to make the projects viable. The dependence on donor funding can be problematic as
building relationship and matching relationship with available funding opportunities can be very time
consuming. For PEC Luban, it took 6 years to secure the finance before the implementation of the project
could begin.
6.1.2
Purchasing power
Even with extensive subsidizes, the poorest members of the local communities are sometimes unable to
afford the tariffs rate, as described in the case of the RESCO’s in Mali.
6.1.3
Ineffective legal framework
Lack or inadequate legal and regulatory framework occurred as a problem in several of the cases studied.
In Madagascar Mad’Eole had problems obtaining the independent producer concession. A competing
company, Vergent SA, had been holding the concession for 5 years without acting upon it and was
thereby blocking other companies to enter.
Another example was when EDF’s Rural Energy Services Companies (RESCOs) was created in Mali. At
that time there was no regulation of energy provision in the country. Hence, establishing the RESCO
required various government authorizations and significant time and energy from the managers was spent
to go through bureaucratic proceedings. Without regulation of the energy sector it is was hard to make
risk assessment or prediction of the future of the market.
6.1.4
Political instability
The fact that it can take more than a decade for infrastructure investments to reach break-even also makes
them vulnerable to political instability, which may result in strikes, demonstrations, violence and coup
d’état. Another problem with political instability is frequent changes in public policy and that political
parties may interfere in the private sector to win allies. This was the case for Gitau, owner of Gitson
Energy. The political turmoil of the Kenyan general election in 2007 made it not only harder to get access
to finance but also posed a serious challenge to the project due to political interference of rivalry parties
that tried to use the project as a way to benefit themselves. It is important that governments make longterm policies that have broad support over the political spectra. This will create stable and predictable
business environments that build confidence among investors.
6.1.5
Lack of public policy coherence
Poland lacks a coherent policy to support bio-energy. Even though the GPPO have positively influenced
the development of biomass, this is counteracted by lack of real price competition between various
sources of energy. Energy tariffs for heat are under the control of the Office of the Energy Regulatory
64 Authority. This lack of level playing field causes, for example, gas prices to be relatively low compared to
district heating and other energy media including biomass such as straw which were the fuel chosen by
PEC Luban. As gas prices are kept low, bio fuel often need subsidize to be able to compete.
6.1.6
Health problems
For companies working in developing countries, health problem of their employees and suppliers can be
an obstacle. In Indonesia the lack of proper treatment for cattle manure waste caused serious health
problems such as polio, dengue fever and dysentery.
6.1.7
Insecurity
The lack of security for employees and partners can be a problem in developing countries as high levels
of poverty makes stealing for survival more likely. Installation, service provision and fee collection can
therefore be a problem in areas with high level of violence, especially for an outsider it can be extra
problematic. This was the case in the shanty town in Casablanca and in poor areas in Kenya, where
security issues where seen as a problem.
6.1.8
Lack of human capacity
Lack of local competence and technologies can be an obstacle for companies that are working in
developing countries. Working with people that lack basic skills and knowledge, businesses may find it
difficult to ensure good quality standards of production. This was a problem that occurred in several of
the cases studied, for example for LYDEC in Casablanca were it became clear that the local employees,
suppliers and subcontractors were poorly qualified and thereby rendering a work that didn’t meet
LYDEC’s performance requirements. In Poland there were no local companies with the technology and
know-how for straw fire-boiler, similarly situation occurred in Madagascar for Mad’Eole which are
establishing the first wind farm in the country. On the consumer side, the poor sometimes do not
understand the value and use of a product and are therefore unable to fully benefit from it. Another
problem is if the consumers lack knowledge of installation and maintenance requirements. This was a
problem for the two RESCOs in Mali, were many customers installed their own system in order to save
money, something that resulted in unsafe installations and breakdowns.
6.1.9
Lack of information
Business often lacks detailed information about the markets in developing countries, especially in rural
settings and gathering information can be very difficult. Intermediary systems that typically consolidate
and supply this kind of information are frequently missing which makes it difficult for business to assess
the demand and preference of the consumers and thereby the viability of a particular venture. This was a
problem for LYDEC in Casablanca, which had problems to estimate the needs and preferences of the
consumers in the shanty towns. Communicating the benefits of the service, educating consumers on how
to install and maintain the electricity kits, and communicating the necessity of tariff changes was
perceived difficult for the RESCO’s in Mali.
6.1.10
Poor infrastructure
Poor physical infrastructure and low population density characterize many rural areas in developing
countries. It adds substantially to the high transaction costs of doing business in developing countries.
Rural areas are especially affected, but also urban slums may lack important infrastructure networks. This
includes functioning roads, transportation and logistics systems, dams and irrigation systems, water and
electricity supply, sanitation and waste collection systems, as well as data networks. Lack of
65 infrastructure was a problem for Gitson Energy in Kenya. The wind farm will be set up in the northern
part of the country, which is one of Kenya’s most marginalized areas. The road to this area was in a bad
stage, which would have posed a great risk of damage on the heavy and expensive wind turbines if they
were to be transported on the road.
6.1.11 Non technical losses & lack of trust
Service sectors such as energy and telecom companies many times experience non-technical losses due to
illegal connections, non-paying consumers and illegal activity of employees. In Casablanca LYDEC had
problems with dishonest street representatives that where selling the service to inhabitants at an additional
20 percent of the actual price and putting the difference in their own pockets.
Social-cultural differences can make it hard to gain local people’s support and confidence. In Casablanca,
LYDEC had problem with customers that didn’t have confident in the company’s electricity meter and
insisted in bringing their own devices.
6.1.12 Climate change
Seven cyclones struck Madagascar during 2007, killing at least 150 people and leaving hundreds of
thousand people homeless, and without livelihood, as farmers’ crops, orchards and animals as well as
fishing communities’ boats and nets have been destroyed. In addition basic infrastructure such as roads,
bridges, schools and health centers have been damaged or destroyed. Cyclones are common in
Madagascar, but in recent years they have grown in intensity and frequency. 2007 was the worst in 20
years and during 2008 strong cyclones are continuing to strike the island. IPCC have investigated the link
between rising sea temperature caused by climate change and the intensity and frequency of cyclones and
have found that climate change is likely to make the tropical cyclones more intense. Even if the scientific
community is not united, a growing number of researchers have found similar results. For Mad’Eole the
growing intensity and frequency of cyclones in the area have been a concern. The wind-turbines are
certified for wind speeds up to 241 km/h, a speed that some of the latest cyclones have exceeded.
6.2 Solutions found
The main solutions that were used to overcome the challenges that the
projects were faced with in the case studies, could be found within three
categories; collaborations, incentives and adaptation and innovation.
Incentives ‐ GPPO ‐ Funding ‐ CDM ‐ Tax‐holiday ‐ PPA ‐ Feasibility study Figure 23 Overview of solutions found Collaboration ‐ Policy dialog ‐ Partnership ‐ Knowledge transfer 66 Adaptation/innovation ‐ Technical solution ‐ System solution ‐ Scale down ‐ Financial solution ‐ Financing schemes ‐ Micro‐loan ‐ Fix‐tariffs rates ‐ Social solution ‐ livelihood project ‐ Embedded distribution 6.2.1
Collaboration
When local and foreign companies and governments, international development institutes and NGOs
work together they can combine each others resources and capabilities to create benefits for the company
as well as for the society. Collaboration between different actors were used to overcome challenges such
as lack of access to finance, poor legal framework and lack of skilled local workforce.
6.2.1.1 Policy dialog
Engaging in policy dialog with the local government can be a way to improve the environment for doing
business such as financial access, regulatory framework, infrastructure, education and public health
service.
An example of when a company engaged in policy dialog with the local government to overcome the
absences of a legal framework was EDFs RESCOs in Mali. When the project started there was no
regulation of energy provision in Mali. EDF together with the World Bank then convinced the
government to set up a new legal framework. The Malian agency for development of household energy
and rural electrification, with support from the World Bank, the KfW and the African development bank,
worked to develop a supportive legal, regulatory and fiscal environment for rural electrification by private
operators and arbitration of potential conflicts between operators and local communities. After the new
framework was adopted, more than 50 new local energy companies signed agreements with the
Government to start their operations. This has created business opportunities for small firms and
expanded access to electricity among citizens.
Another example is when Mad’Eole had difficulties to obtain the independent producer concession. A
competing company had been holding the concession for 5 years without acting upon it and with no shortterm plans to act upon it. In order to overcome this obstacle, in order not to lose the investors, GSB
Brokers intervene at Ministry of Energy and Mining’s level. The obstacle was removed within a couple of
weeks.
In opposite to the cases above where policy dialogs and political interference was a solution to problems
that had occurred, two of the cases showed that government and political interference was in itself a
problem. According to Gitau, owner of Gitson Energy, political turmoil in the general election 2007 made
it not only harder to get access to finance but also posed a serious challenge to the project due to political
interference of rivalry parties that tried to use the project as a way to benefit themselves. Gitson Energy
tried to avoid collaboration at the political level and maintains non-political stand on local and national
politics. Gitau stated “We are an energy company and not political party”.
In Casablanca, LYDEC also had problems with the Government, as their project to bring energy to shanty
towns was contrary to the wishes of the relevant Government authorities, who tried to block the initiative
as means of pressuring the inhabitants to evacuate the area. LYDEC had to spend lots of time dealing and
negotiate with authorities to be able to implement their project.
6.2.1.2 Partnership/joint-ventures
Developing countries often have difficult market conditions and in order to succeed companies need to
engage in partnership and collaboration with partners that can capture capabilities and resources that one
company could not provide alone.
This is the case in Lokoho rural, a joint-venture between the local company EDM and e8. The partners are
creating a local independent power producer, Energie de Lokoho and a Rural Electricity Service
67 Company (RESCO), Lokoho Rural, in which their participation amounts to 49 percent and 51 percent
respectively.
The two RESCO’s in Mali have similar arrangement. Koraye Kurumba was set up as a partnership
between with the French environmental agency ADEME, and its partners Total and Nuon, and the second
RESCO, Yeelen Kura was created as a partnership between ADEME and EDF and Nuon.
Mad’Eole is privately owned by a pool of Malagasy and Swiss partners with competencies in wind energy
technology, project management and communication.
6.2.1.3 Knowledge transfer
An obstacle in developing countries is that local companies, entrepreneurs and consumers may lack
knowledge and capabilities. To overcome this obstacle the knowledge transfer and training were used in
almost all cases studied.
To overcome this problem many of the projects studied are characterized by collaboration between
foreign and local partners. In Mad’Eole the first wind turbines were imported from Germany as "models"
for subsequent setup of a local company for producing parts of the wind turbines locally for the first time
in Madagascar. German engineers traveled to Madagascar in order to train local engineers on how to
install wind turbines.
Another situation where a project was leveraging knowledge and expertise from an external actor to
overcome lack of capability was when the PEC Luban project in Poland transferred knowledge from
Danish companies for producing straw boilers and related equipment to polish companies.
In striving for better customer services, LYDEC provided managerial and technical training to Street
Representatives, as well as electricians. LYDEC’s interest in improving the skills of its local workforce
was initiated when it faced several skill shortages at the onset of its management, struggling to deal with a
workforce that was poorly qualified. In 1999, the renovated training centre was launched and offered
training for Sub-contractors and suppliers. The centre also addressed both basic and computer illiteracy.
6.2.2
Incentives
In many of the case studied the combination of high investment costs, which is characteristic for energy
and other infrastructure projects, lack of access to loan and risk covering mechanisms together with lack
of means to pay by consumers made it hard to make the project commercial viable. By using economic
incentives the government and international development organizations can make renewable energy and
rural electrification projects more attractive to the private sector.
6.2.2.1 Green Power Purchase Obligation
To encourage renewable energy production, the polish Government has introduced a “Green Power
Purchase Obligation” which requires energy suppliers to purchase a certain minimum of electricity or heat
from renewable sources. Poland’s strategic goal is to increase the share of renewable energy to 7.5
percent by 2010 and to 14percent by 2020. Failure to comply with this legislation leads, to enforcement of
penalty.
6.2.2.2 Funding
When PEC changed from the old coal boilers to new straw fired boilers they relied on subsidy up to 43
percent to finance the investment. They were getting access to subsidies through the Eko Fundusz
68 (ecofund), a Polish financial institution, which manages the Debt for nature swap fund. The idea is to use
part of polish dept to the Paris Club, an informal group of official creditors whose role is to find and coordinate sustainable solutions to the payment difficulties experienced by debtor nations, in environmental
protection investment in Poland. The following countries agreed to convert part of their debt: USA,
France Switzerland, Sweden, Italy and Norway. In total the funds at stakes are over $570 million. The
fund was established in 1992 and was the first initiative in the world pertaining to the conversation of the
state-guaranteed debt for ecological purpose (the so-called “debt-for-environment swap”) Financial
support is in the form of non-returnable grants of up to 50 percent of the total cost of the project.
In Poland, PEC were except for subsidies from Ecofund getting access to a preferred loan from
Voivodeship fund for Environmental protection and water management, a earmarked fund with the
objective to provide financial assistance to activities related to protection of environment. The fund offers
a wide scope of financial products such as low-interest loans, subsidizes and supplements to bank loan
interests.
The Mad’Eole project had a 50:50 mix of public and private sector funding. A National Electricity Fund
(FNE) is the funding instrument for ADER and it is intended to make it easier for rural communities to
develop the necessary infrastructure for electricity production and distribution.“Public funds” also include
donations from foundations, cantons and towns/cities, the churches and private individuals from
Switzerland.
As a guarantee issue occurred and became an obstacle for the implementation of the Lokoho project the
KfW, the German government-owned development bank, became the main funding partner for Project
Lokoho’s loan.
6.2.2.3 CDM
In our cases many of the projects used renewable energy sources and could get additional founding from
carbon credits from the CDM. Mad’Eole has signed an agreement with My Climate that will buy all
carbon credits generated through wind energy production.
Gitson and Gikoko Kogyo also rely on carbon credit trading for financing its project. Gikoko Kogyo's
directors and staff have received capacity building in CDM and Kyoto Protocol since 2003, and formed a
partnership with the World Bank's Carbon Finance Unit to develop carbon credit projects.144 Recovery of
investment into the installation of anaerobic digesters will therefore partially be by CDM carbon credit.
Greenhouse Gas emission will be measured and verified for issuance of Certified Emission Reductions
(CERs) to be sold to carbon credit buyer who need to offset their emission reduction to comply with
national, European Commission or Kyoto Protocol's commitments. The investment is anticipated to yield
900,000 tons of Certified Emission Reduction worth more than $12 million by year 2012.
Most carbon funds have minimum size in terms of annual yield of credit in CO2 equivalent of 50,000
tons. Animal waste manure may only produce small carbon credit. Programmatic approach is needed to
expand the project in order to achieve scale of economy, as cost of CDM registration is high. Other
projects such as PEC, were applied but did not receive the credits as there are only tangible profits in CO2
emission of changing to straw firing boilers.
The minimum size of 50, 000 tons CO2 reduction is mention as one of the reasons why CDM has not been
as successful in supporting sustainable development projects in Africa as intended. Out of the 850 CDM
projects that had been carried out to 2008, less than 3 % were in Africa. Another explanation may be that
144
http://www.gikoko.co.id/content/history.html
69 since Africa is the continent with lowest CO2 emissions it is also the continent that offers the fewest
opportunities for reduction projects.145
6.2.2.4 Tax holiday
As a way to encouraging investment in the energy sector the Government of Kenya (GOK) is offering a
10-year tax holiday. The Malian government are offering similar incentives and the RESCO’s services are
sold free of value-added tax since August 2004.
6.2.2.5 Insurance
The political turmoil that followed after the General election 2007 in Kenya made it harder to obtain a
firm commitment of funding from a major fund that finances wind farms in Africa. To mitigate this
Gitson Energy with help of GE approached Multilateral Insurance Guaranty Agency (MIGA) that insures
against risks in unstable countries. Gitson Energy Ltd worked with MIGA and was able to regain
investors’ confidence.
6.2.2.6 Purchase Power Agreement
The Government of Kenya (GOK) has through the local utility company KPLC, guaranteed the market of
electricity generated by Gitson Energy Limited by signing a long-term purchase power agreement.
6.2.2.7 Funding for feasibility studies
To gain access to information about the market extensive feasibility studies often need to be made. The
Japan Bank for International Cooperation (JBIC) funded feasibility studies for Gitson Energy and Gikoko
trough the GSB initiative and supported the creation of a viable business plan by leveraging their
knowledge and expertise.
6.2.3
Adaptation and Innovation
As the demands and conditions are different in developing countries, companies need a fundamentally
different approach to create innovative solutions to adapt the products and processes to the specific
market circumstances. Technical, financial and social innovations to adapt business models to local
conditions were used by the private sector.
6.2.3.1 Technical solutions
System solutions
An example of technical adaptations to local conditions was to use system solutions which often allowed
for more than one problem to be solved.
One example was Gikoko of Indonesia, were the problem with cow manure waste causing health
problems to people and animals. To solve the waste problem and the lack of energy in the area Gikoko’s
invested in small-scale digester to generate biogas from the waste. This way both the waste and energy
problem was solved simultaneously.
145
High level energy conference, Access
to modern energy in Sub-Saharan Africa- Electrification and the private sector
contribution, Stockholm, Sweden, October 13-14 2008
70 Similar model is used by PEC in Luban, a town in the country side of southwest Poland. PEC invested in
straw- fire-boilers and used the straw from surrounding farmers that used to be considered as waste
Scale down
Since customers’ electricity needs in many of the projects were relative modest, some companies adapted
their installations to more modest versions in order to lower the investments cost as well as the price to
the consumers. This was done in Madagascar by Mad’Eole were the required investment level initially
was perceived as being too high to make the project commercially viable. Mad’Eole solved this problem
by using slow-moving hydro generators that were less technical advanced and therefore less expensive.
This solution was brought forward by critics to the BOP theory which argued that lowering quality was a
way to reduce price and make the products more assessable and that this was not disrespectful to the poor,
rather the contrary.
6.2.3.2 Financial solutions
Flexible financial scheme
Low-income level of the poor makes it hard for companies to be viable. For companies to make their
product and services accessible to the poor they need to find new financial system.
Both RESCOs in Mali offers customers to pay fees on a payment frequency that suits them. Customers
usually pay once a month, but Yeelen Kura allowed some flexibility for farmers, whose resources come in
bulk amount during specific times of the year, by providing annual payment options.
Micro-loan
The RESCOs in Mali are offering microfinance to its consumers so they can spread the cost of
professional installation over several months.
Fix-tariffs rates
In addition to a flexible payment scheme, the RESCOs in Mali are using fixed monthly rates according to
the service chosen. With fix tariffs rates there is no requirement of installation and monitoring of
individual meters, something that cut the cost of the service.
6.2.3.3 Social solutions
By finding social business models engaging with local communities, companies were for example able to
overcome constrains like lack of information about the market and lack of local competence. Using
people from the local communities as employees helped to overcome the lack of security problem and
became a good way of gaining access to information about consumers’ preference and needs. It also
contributes to local job creation, which in addition contributes to the rise of income in the communities,
and also raises the demand for more energy. This is a good example of the positive outcomes that can
result when a company and societies goal aligns and the two mutually strengthens each other.
Livelihood-project
In addition to the partners of Lokoho, the e8 companies and EDM, several other actors are involved in the
Lokoho project, such as GTZ, CARE, KfW, AFD and UNDP. GTZ supports the people in these villages
to seize the opportunities created through the provision of electricity, thereby assisting them to generate
additional income. To this end, GTZ provides technical assistance in the form of market analyses,
concepts for the productive use of energy, financing services, vocational training and additional aspects
such as maintenance of the transport infrastructure.
71 The Pasuruan district had problems with cow manure waste, causing health problems to people and
animals. To solve the waste problem and the lack of energy in the area, Gikoko invested in small-scale
digester to generate biogas from the waste. In addition, Gikoko established an Energy Service Community
Coop (ESCCOP) to involve local Government, investors, rich milk cooperative members and the poor
farmers as stakeholders and work out combine sanitation, cooking, food production, energy and water
supply model.
The generators use solid manure as feedstock for biogas production. Loose manure from the poor was to
be swapped with solid manure from rich farmers to be used as fertilizer for growing elephant grass used
to feed the cows. The farmers then deliver the solid manure to the Gikoko facility where they get methane
in exchange. The methane can be used for cooking and lighting. The energy is also used to sanitize
drinking water for the cows and for human consumption, to reduce health risk and increase milk
productivity for the cows.
Poor farmers were also supported to diversify their production. One example was the food production
business run by women, were they used the methane gas to cook and produce soy based tofo and tempe.
This brought a well-needed extra income for these families. By adapting the model to the local
circumstances Gikoko is able to solve the waste problem and bring energy to poor communities and at the
same time support extra income-generation for local farmers.
As the use of straw is more labor intensive that coal, it has created jobs in an area with high
unemployment rate. PEC Luban itself has 60 employees who are responsible for collecting the straw,
operating the boilers and maintaining the heating system. In addition it has generated extra income and
contributes to the livelihoods of small farmers, as they can sell the straw that would otherwise be
considered waste. This way the farmer got extra income and PEC received cheap fuel delivered to its
plant.
Embedded distribution
By engaging in local networks, companies can bypass weak regulatory environments as well as
inadequate physical and social infrastructures to increase access, trust, and transfer of skills and bringing
local entrepreneurs into the formal sector. Using people from the local communities as employees helps to
overcome the problem of lack of security and may be a good way of gaining access to information about
consumers’ preferences and needs. It also contributes to local job creation. Local employees are often less
expensive, in addition, this model contributes to the rise of income in the communities.
In Casablanca, LYDEC used a structure of shared management designed to involve the community in the
project. This principle was adopted here in the form of a collective of sub-entities, managed by a street
representative chosen by the inhabitants. These part-time roles were suitable for individuals with a
reputation for honesty and good relations among the community. Responsibilities include providing
technical support, reading electricity meters, and collecting payments from each household. On average,
each street representative acts on behalf of twenty households.
LYDEC’s use of street representative was the key factor for the company to get information to and from
their consumers. One example was that people did not want to use the companies’ electricity meters to
measure consumption but insisted to bring their own device. In this case the company used the street
representatives to communicate with its consumers which helped to reach an agreement.
Similar to distribution models were used by Gitson energy in Kenya as well as in the RESCO’s in Mail,
where people from the villages were employed by the companies to run local energy stores. Each store
employs at least one person responsible for installing, maintaining and repairing solar home system in
their area, as well as tracking accounts and collecting fees.
72 6.3 Matrixes
6.3.1
Challenges and solutions
Bright fields show what type of solutions that are used for a certain type of problem. Dark fields show
solution/problem combinations that were most frequent. For a complete version, including the total set of
solutions, see appendix III. Solutions
Incentives
Collaboration
Adaptation and
Innovation
Problem
Investment cost
Purchasing power
Ineffective legal framework
Political instability
Lack of public policy coherence
Health problems
Insecurity
Lack of human capacity
Lack of information
Poor infrastructure
Non technical loses and lack of
trust
Climate change
Figure 24 Overview of challenges and solutions
6.3.2
Solutions and actors
Bright fields show what actors that have been involved in a certain type of solution. Darker fields show
solution/actor combinations that were most frequent. For a complete version, including the total set of
solutions, see appendix III.
73 Solutions
Collaboration
Incentives
Adaptation and
Innovation
Actors
Local Government
Forign government/ bilateral
development agencies
International Development
Institute
Private sector
Local comunity
NGO & civil society
Figure 25 Overview of solutions and actors 6.4 Impacts
The energy projects in our case study have had many positive impacts on the local communities through
increasing the percentage of people having access to electricity, improving customer services and
providing services at a lower cost. In the cases studied the electricity cost was significantly reduced, by
Lokoho and LYDEC with as much as 60percent. In Casablanca, LYDEC reduced breakdowns by
approximately 50 percent. In addition to these primary impacts, the projects also contributed with
secondary impacts, such as: positive environmental impact, employment, transfer of technology and
know-how, development of local community and region, health and safety, regulatory framework,
demonstration effect and energy independence. These large positive impacts confirm how important
access to energy is for economic growth and its essentiality for human development and poverty
eradication.
Many of the impacts that were generated were also direct improvements of the challenges they initially
faced and were often integrated with other problems. Lack of infrastructure, electricity and water, poor
health, lack of education, low income-level, lack of security and political instability is all interconnected
problems. Solving one of these problems, for example by giving people access to electricity, will have
positive synergy effects on the remaining problems, generating a dynamic positive spiral of change.
6.4.1
Positive environmental impact
As most of the projects studied are based on renewable energy, they will decrease the use of diesel, oil,
coal and wood fuel which will lead to decrease in greenhouse gas production, indoor air pollution and
deforestation. For example, PEC Luban’s utilization of straw resulted in the reduction of the amount of
coal used in the heating system by about 2,500 tons per year. This had a positive impact on the natural
environment as it reduces the toxic emissions.
74 6.4.2
Employment
Many of the projects are situated in rural areas, with high unemployment rates. The local jobs created by
the projects are therefore much needed. LYDEC created jobs for local electricians and over 1250 street
representatives. In addition to these direct jobs, new business opportunities have emerged in the energy
value chain. In Poland, PEC Luban’s investment in straw fire boilers has generated extra income and
contributes to the livelihoods of small farmers, as they can sell the straw that would otherwise be
considered as waste.
6.4.3
Transfer of technology and know-how
As technological progress is one of the major sources of economical growth, as it drives productivity,
technological transfer and capacity building to developing countries it is extremely important. Many of
the projects studied are characterized by collaboration between foreign and local partners. The idea is
often to together create a company that ultimately should be owned and run by local actors. During the
project, technology, knowledge, including managerial capabilities, is transferred and capacity is built up
locally. In Mad’Eole the first wind turbines were imported from Germany and German engineers were
traveling to Madagascar in order to train local engineers how to install wind turbines. The turbines for the
pilot sites will be imported entirely as "models" for subsequent setup of a local company for producing
parts of the wind turbines locally for the first time in Madagascar. In Poland, the PEC Luban project
transferred knowledge from Danish companies for producing straw boilers and related equipment to
polish companies.
6.4.4
Development of local community and region
The increased access to energy has accelerated the development of the local economies. In Madagascar,
GTZ helped the people to seize the opportunities created through the provision of electricity by Lokoho´s
hydropower plant, thereby assisting them to generate additional income. GTZ provides technical
assistance in the form of market analyses, concepts for the productive use of energy, financing services,
vocational training and additional aspects such as the maintenance of the transport infrastructure. In
Indonesia, Gikoko Kogyo’s small-scale digesters for cattle waste, generated biogas that was used to
sanitise drinking water and for cooking. This resulted in increased cow milk production due to access to
sufficient clean drinking water and development of food production business by women. In addition, it
helped fishing community downstream whose stock in the past was decimated every rainy season as rain
carry loose waste from the village.
Through the projects other infrastructure than the energy service was sometimes made available for the
local community and region. This will have a positive impact on the local economy and regional growth
in Kenya, the 240 km Isiolo –Moyale highway was built to be able to transport the wind turbines. This
investment will be made by Gitson Energy in collaboration with the local government. The people of this
region will reap from this investment by getting their travel times reduced as well as gaining access to
cheaper food and goods as the transportation cost will be reduced.
6.4.5
Health and safety
Another secondary effect of the energy projects is an improvement of health and safety in the
communities. The Gikiko Kogyo project improved sanitation and health in the community, by solving the
waste management problem causing diseases such as polio, skin disease, dengue fever, dysentery and
diarrhoea and the negative health effects from indoor air pollution of firewood.
75 As a result of LYDEC’s provided access of electricity to shantytowns in Casablanca, illegal connections
and the associated safety risks has dramatically declined. Many projects also provided public lightning,
something that increases the security in the communities.
6.4.6
Regulatory framework
Lack of regulatory framework can be an obstacle for companies in developing countries. Partly as a result
of the RESCO’s projects in Mali, a new legal framework has been developed, enabling private operators
to provide electricity. With the World Bank support, Mali has developed regulatory mechanisms and
financing schemes for energy companies. In 2006, the government signed agreements with over 50 small
providers, thus enabling additional private energy provision at the village level.
6.4.7
Demonstration effect
Another impact of the energy projects studied is the demonstration effect it creates, i.e. increase the
likelihood for new entrants being attracted to the market segment as a result of the example set by the
project. During the implementation of the project, PEC Luban was involved in different initiatives on
environmental education for students, academics and professionals from the heating industry. More than
2000 people from the entire country visited Luban in order to understand the possibilities of using straw
for heating. Managers from PEC Luban, together with representatives of “Polish Heating” Chamber of
Commerce, organised several conferences on bio energy. Hence, PEC Luban has had a demonstration
effect and increased the knowledge and interest for renewable energy in the country.
The business model used in LYDECs project in Casablanca was presented in international forums and
conferences, as a successful example of how a multi-utilities public-private partnership with local
community involvement could yield better living conditions and improve customer services for poor
segments of the society which fit with their needs and simultaneously provided services at a lower cost.
6.4.8
Energy independence
These energy projects also bring a positive socio-economic impact by promoting energy independence in
the regions. This makes the country less vulnerable to fluctuation in global oil-prices as well as improving
the trade balance.
6.5 Market framework
Markets have several different dimensions in whish it can be analyzed. The essence in making business
work is for the main players to understand the market and it constrains, have a vision of the future and
take consequent actions. Components that were found to be critical for a functioning market in the case
studies lie in the market’s three key dimensions.
1. The core market
2. Institutions and supporting services/infrastructure
3. Conditions for sustainable development
In these dimensions there are three main supporting actors, in addition to consumers and producers, with
different goals who network amongst each other in order to generate maximum added value:
1. Government
2. NGOs and civil society
3. Development agencies
76 Distribution of
Resources
Environment &
Climate
Supporting Services
Information
NGO
Public
Services
Infrastructure
Capital
Market
Peace
Consumer
Justice
Development
Agencies
Labour
Market
Market
Producer
Trade
Market
Business
Laws
Regulations
Standards
Education
Macro
Economy
Rules
Health
Political
Stability
Government
Figure 26 Overview of challenges and solutions
6.5.1
The core market
The core market can be seen as the micro level of intervention where the focus is to create functioning
markets. It is the central part of the framework and the supply-demand set of transactions. It is the
provision of goods and services from producers to paying costumers. The focus in this first dimension is
to gain an accurate picture of the overall market including capital and labour market, and its performance,
trends and structures. Producers need to have access to functioning capital markets in order to finance
investments costs as well as labor markets with skilled labor. The consumers need to have enough
purchasing power and financial services to turn their needs in to effective economic demand.
If the poor’s participation in the market is not direct, the route through which the market can affect them
needs to be identified. This can be accomplished through growth benefits which leads to increased
77 spending and transfers from government, or it can more directly involve the poor by providing secure
employment or better services from improved business competitiveness. Addressing this usually requires
an examination of the wider environment of institutions, services and infrastructure.
6.5.2
Institutions and supporting services/infrastructure
Supporting services
and infrastructure
required in a market
Formal rules and
mechanisms
enforcing the rules
Rules
Business services
Contract protection
Property protection
Consumer protection
Weights and measures
Health and safety laws
Competition laws
Tax laws
Banking law
Electricity acts
Telecommunication acts
Land use and ownership
laws
Quality standards
Registers
Business consulting
Accountancy
Training
Design
Advertising
Network brokering
Computer services
Security
Accountancy
Market research
Technical information
Equipment maintenance
Formal mechanisms
Public services
Commercial justice
institutions
Government systems of
regulation
Inspection and licensing
Inland revenue authorities
Company and land registers
Industry regulators
Local government tax offices
Self regulation mechanisms
in business associations
Business statistics
Public health
Information
Regulation
At a meso level leys the institutions and supporting
services and infrastructure. The core market is shaped
by its immediate environment, which in turn is shaped
by institutions. Institutions are the structure and
mechanisms of social order and cooperation
governing the behavior of a set of individuals
(visualized by the lower semicircle of the second layer
in the market framework). The focus here on a sound
and clear legal framework (regulations, standards and
business laws) and the enforcement mechanisms both
formal and informal that impose the markets. An
adequate legal and regulatory framework and
enforcement strengthens competition and reduces risk
for company as they know that competition laws and
property and contracts protection will be respected.
Infrastructure
Institutions are, in general, central concern for
governments who set up the framework and enforce
rules. However, the private sector through
membership associations may be more effective at
developing industry-specific regulations where
ownership rests firmly with
the industry.
Electricity
Telephones
Roads
Water
Services and infrastructure also have a central role to
play in a functioning market for the poor. Adequate
physical infrastructure, like roads, can support poor
Figure 25 Institutions and supporting services/infrastructure
rural populations’ inclusion and integration in the
markets. Information and knowledge about potential consumers are increasingly central to business
competitiveness and allowing firms to specialize, reduce costs and innovate. However, a complicated fact
in trying to define market services is that markets are interdependent and where one ends another one
begins is not always clear. Therefore, the means through which services are provided may also be a
market.
Understanding the institutional framework is to understand the formal rules and mechanisms, and the
informal institutions impinging on the market. Within the institutional framework one also needs to
understand the offered services and how the market experiences them.
6.5.3
Conditions for sustainable development
Markets are deeply embedded in and dependent on the society in which it exists. A health society
provides a sound foundation for the market to function and for companies to be successful. At a macro
level there is a set of non-market, social and political institutions and factors that are important
components of a functioning market. Education, health care and equal opportunities are essential to a
productive workforce. Good governance, political stability, policy coherence and security bring
78 confidence to investors and the business community. A healthy natural environment is a fundamental
prerequisite for sustainable human and economic development.
6.5.4
Networks for maximum value added
Interventions from donors, governments and NGOs are critical in order to bring the poorest of the poor
into the markets as well as to support companies that face difficulties and constrains. They may provide
support through developing capacity, provide new business linkages or collaborative working
arrangements.
In order for business to succeed in corporate social integration in developing countries, it needs to
identify, prioritize, and address the social issues that matters the most or the ones which can make the
biggest impact. Business leaders that manage to make the right choices and build focused, proactive, and
integrated social initiatives in line with their core business will be positioned to succeed, especially in
markets that require new business models and untraditional partnership. It is when business goals align
with civil society’s goals that the most productive relationships are created.
Collaborating with facilitating actors such as the GSB can help reduce risk and enhance the chances of a
successful outcome. However addressing more problems more deeply rooted in the market structures and
try to create a structural change will require a government intervention. Due to the nature of the GSB
programme, belonging to UNDP’s Private Sector Division that creates policies for private sector
development, has on occasions been able to provide such an intervention (in for example reforming
energy regulations) in order to resolve problems. Whoever the intervening actors are these different roles
needs to be set and the responsibilities among them need to be clear. 79 7
Conclusions
In this chapter the purpose and research areas of this thesis are once again described as a reminder of
what the aim of the study is. Then, the findings and results are summarized according the three research
areas described in the introduction, and finally, this chapter brings up remaining questions that may
provide areas for further research.
The aim of this study was to increase the knowledge on how the private sector can create commercially
viable business models in developing countries that are suited for the conditions and needs of the people
at the bottom of the economical pyramid. The study’s primary target group has been anyone who
considers entering a market in a developing country.
This study has focused on business within the energy sector as energy is a key factor for development and
with emerging challenges that arise with climate change this sector holds an important role for
development and in creating a sustainable future.
A criterion has been to study cases that are both commercially viable and have a developing impact for
the poor. The eight projects that have been studied in this thesis were therefore chosen from UNDP’s
Private Sector Division because they claim to emphasize the two qualities. In order to increase the
knowledge about how the private sector creates commercially viable business in developing countries the
study has been divided into three research areas. Results from these studies have shown common patterns
and several conclusions have been drawn which are summarized below.
(1) Develop a framework for analyzing and describing the market and it’s actors in developing
countries for the energy sector.
Using the M4P framework as a foundation for our analysis, the study established that the causes for
underdevelopment in a market can be found in its three key dimensions; the core market, institutions and
supporting services/infrastructure, and in the necessary conditions for sustainable development. In these
dimensions three main supporting actors in addition to the producer and the consumer can be found;
Government, NGOs and civil society, and development agencies.
The core market is the provision of goods and services from producers to costumers. The focus in this
first dimension is to gain an accurate picture of the function of the overall market including capital and
labour market, and its performance, trends and structures.
At a meso-level lays the institutions and supporting services/infrastructure. Institutions are the structure
and mechanisms of social order and cooperation governing the behavior of a set of individuals. The focus
here is the set of rules, such as regulations, standards and business laws, and the enforcement mechanisms
that are imposed on markets. Institutions are central concern for governments who set up the framework
and enforce rules. However, the private sector may be more effective at developing industry-specific
regulations where ownership rests firmly with the industry.
At a macro-level there are certain conditions for sustainable development that need to be fulfilled.
Markets are deeply embedded in a set of non-market, social and political institutions and components.
Education, health care, good governance, political stability, policy coherence, security and a healthy
natural environment is a all fundamental prerequisite for sustainable markets as well as for sustainable
human and economic development.
To overcome many of the occurring obstacles and to create maximum value added networks among actors
are important. Interventions with the main actors such as governments, development agencies and NGOs
80 are critical in order to bring the poor into the markets and to support companies facing difficulties and
constrains from a non-functioning market. These actors they may provide support through developing
capacity, provide new business linkages or collaborative working arrangements. For effective
collaboration the different roles needs to be set and the responsibilities among the different actors need to
be clear. (2) Study the constrains and solutions in the market
The major challenges found in this study were lack of; finance, legal frameworks, political stability,
coherent public policy, health, security, human capacity, information, infrastructure, trust and climate
change. The most common challenge was finding finance to cover the investment cost as large up-front
investment and low expected profits characterize energy projects.
The main solutions that were used could be found within the three categories; collaborations, incentives,
and adaptation/innovation.
When local and foreign companies and government, international development institute and NGOs
collaborate they can combine each other’s resources and capabilities to create benefits for the company as
well as for the society. These solutions included policy dialogues, partnerships and knowledge transfer.
Economic incentives were used by local and foreign governments as well as by international development
institutes in order to improve access to capital and allow for renewable energy projects which in turn led
to electrification of poor communities more viable. These solutions included Green power purchase
obligations, funding, CDM, tax-holidays, insurances, PPAs and funding for feasibility studies.
Technical, financial and social innovations to adapt business models to local conditions were other
solutions used by the private sector. These included system solutions, scale down projects, financial
schemes, micro-loans, livelihood projects and embedded distribution.
(3) Discuss how to create dynamic markets were the poor are included and that promotes a
sustainable use of the planets natural resources.
It is today widely recognized that in order to create sustainable solutions to address poverty, development
needs to be built on economic activity and growth by involving the private sector. However, it is
important to take into consideration that the market, the principle for the organization of economic
activities around the world, is not designed to solve environmental or social problems and may actually
have a worsening effect on degradation, poverty and inequality. Without proper oversight and guidelines
the market therefore has the potential to be destructive.
On a national and local level, many governments do a good job of imposing restrictions on free markets
to protect employees, consumers and the environment. This is especially true in the industrialized world,
where capitalism has a long history and where democratic government has gradually implemented
reasonable regulatory systems. However, many developing countries suffer from the fact that their
hierarchies tend to be weak and lack regulations or enforcement mechanisms, which often results in the
market favoring existing elites, and reinforce existing patterns of inequality and social exclusion.
In order to create a market were the poor are included and that promotes a sustainable use of natural
resources there is a need for an effective hierarchy. The state needs to create a framework and structure
for the market that enforces property rights, a fair distribution of resources and protects the environment
against degradation. It also needs to facilitate economic growth through appropriate infrastructure as well
as appropriate policies and institutions. This ensures the development of a healthy society. This however
81 implies that the state is strong and works as it is supposed to. In some situations where the state is weak or
dysfunctional other types of hierarchies may prevail and take the responsibility of structuring and
developing the market.
The private sector holds, together with the state, an important and large role in developing the markets in
developing countries, but also to ensure the well being of societies and that our planets resources are used
in a sustainable way.
7.1 Remaining questions and areas for further research In the course of this study a number of questions have emerged, however due to lack of time and
resources these could not be investigated and answered as part of this paper.
The study was carried out from a private sector perspective and partly from a UN perspective, as the
selected cases were chosen from the GSB project portfolio and the work was done primarily at UN head
quarters in New York. In the course of this study it became obvious that the challenges found in
developing countries where far too great to be overcome by the private sector alone, even with support of
the UN. Therefore it would have been valuable to study the problem from other important actors’ view
points, for example local governments, NGOs and aid agencies.
It would have been interesting to study what the most important reasons for why companies chose not to
enter markets in developing countries are and also to study projects that were not commercially viable and
were not success stories.
To get a deeper understanding of the market in developing countries and to what extent the energy
projects have an impact on poverty, it would have been valuable to study the local communities and see
what the actual outcomes were from the poor’s perspective.
Another issue is that even though the different market interventions were found to have a positive impact
the rural electrification projects, the effectiveness and the optimal structure of these interventions were
not investigated or compared with other types of solutions. It is, for example, becoming increasingly
agreed upon that CDM has not been as successful in supporting sustainable development projects in
Africa as intended. Possible explanation could be that many energy projects in Africa are small scale and
most carbon funds have minimum size in terms of annual yield of credit in Carbon Dioxide. Another
explanation may be that since Africa is the continent with lowest CO2 emissions it is also the continent
that offers the fewest opportunities for reduction projects. Further research in this area would be valuable
in order to reconstruct the CDM and to make it more suitable for African conditions.
For a market to function, hierarchy was found to be of extreme importance. But what the most effective
form of hierarchy is, for example between a strong government, local institution or an international
institution, has not been established. As the market for the private sector is becoming increasingly global
there might be a need for a new global hierarchy with force to implement global market rules based on
global perceptions and agreements.
82 8
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Emmerii, L, (2005) How has the UN faced up to development challenges, Forum for development studies
Sen, A. K. (1999). Development as freedom. New York: Anchor Books.
Sida (2007). Sidas samverkan med svensktnäringsliv – Riktlinjer och handlingsplan GD-beslut 16 april
2007(PowerPoint)
Sida (2003). Making Markets Work for the Poor. Challenges to Sida’s Support to Private Sector
Development
Sida (2003). Challenges to Sida’s Support to Private Sector Development - Making Markets Work for the
Poor. Private Sector Development Report.
Sida (2007). Riktlinjer och handlingsplan för Sidas samverkan med Sveriges näringsliv, Sida Promemoria
Stiglitz, J. E. (2002). Globalization and Its Discontents. New York: W.W. Norton and Company
Swedish Parliament (2005) Sveriges politik för global utveckling, skr. 2005/06:204
UNDP (2003). Millennium Development Goals: A Compact Among Nations to End Human Poverty,
Human Development Report 2003.
UNDP (2004). Energy and Environment for Sustainable Development, Partnerships with the Business
Sector February 2004.
UNDP (2004). Unleashing Entrepreneurship: Making business work for the poor
UNDP (2004). Water supply and energy services for the poor: Rules make markets. UNDP/BDP Energy
and Environment Group
UNDP (2007). Fighting climate change: Human solidarity in a divided world. Human Development
Report 2007/2008.
UNDP (2007). Private Sector Strategy - Promoting Inclusive Market Development (Draft strategy report)
UNDP (2008). Creating value for all: strategies for doing business with the poor
UNDP (2008). Capacity Development: Empowering People and Institutions Annual Report 2008
85 UNDP (2007). GSB Operations Manual, (Draft, October 2007)
UNDP (2007). Private Sector Strategy, Promoting Inclusive Market Development. (Draft, September
2007)
Utting, P. (2003). Promoting Development through Corporate Social Responsibility - Does it Work?
Global Future, Third Quarter, 2003
Walsh, J. P et al (2005). Promises and perils at the bottom of the pyramid. Administrative Science
Quarterly, 50(3) pp.473-482
Warnholz, J. (2007). Poverty Reduction for Profit? A Critical Examination of Business Opportunities at
the Bottom of the Pyramid. Working Paper 160, University of Oxford
WBCSD (2004). Facts & Trends to 2050: Energy & climate change,
WBCSD (2006). Powering a Sustainable Future: Policies and measures to make it happen,
WBCSD (2007). Investing in a Low-Carbon Energy Future in the developing World,
Wilson, C & Wilson, P. (2006). Make poverty business: increase profits and reduce risks by engaging
with the poor. Greenleaf Publishing
World Bank (2006). Clean Energy and Development: Towards an Investment Framework, World Bank
Group
World Bank (2007). Working for a World Free of Poverty, Brochure, World Bank Group
World Bank (2008). BUSINESS AND POVERTY - Opening markets to the poor, Outreach Development,
Putting Knowledge to Work for development, 10(2)
Yunus, M. & Weber, K. (2007). Creating a World without Poverty, Social Business and the Future of
Capitalism. NY: PublicAffairs
8.3 Project documents, PSD, UNDP Project proposals:
Energy for Poverty Alleviation, Indonesia
Gitson Energy Ltd, Kenya
Industrial Wind Energy Center, Madagascar
Project One Pagers:
Energy for Poverty Alleviation, Indonesia
Industrial Wind Energy Center, Madagascar
Project Lokoho, Madagascar
Monthly Reports:
86 Energy for Poverty Alleviation, Indonesia
Indonesia, May 2007
Indonesia, June 2007
Madagascar, November 2007
Other Relating Project Documents:
Djerrari, F. (2005) Casablanca – Multi utilities concession, Lydec
EDF (2005) RURAL ELECTRIFICATION PROGRAMME IN MALI (Senegal River zone)
EDF (2006) EDF ACCESS PROGRAM “Access to Energy and Services” For the populations in
developing countries
Gitson energy Ltd (2007), Project Proposal to the Coordinating Group, UNDP GSB
GSB, (2007) Exit report for Growing Sustainable Business in Indonesia
GTZ, Project description - Lokoho Hydro for Rural Development (ppp)
Hatem, T. (2007) LYDEC: Providing Electricity, Water & Sanitation to Casablancas’s Shanty Towns,
Growing Inclusive Markets, UNDP
Kazai, Z. (2006) Examples to follow- Successful Renewable Energy Investments from the Visegrád Group
Countries
Mad’Eole Association (2004) Dossier Du Projet et Planification
Mail between Abdul and Stefan, July 18 2007
Meeting notes between Abdulrahman Olhaye, GSB Programme Analyst, and Stefan Engels, Kenya GSB
Broker, July 18, 2007
PT Gikoko Kogyo (2007) Pontianak Landfill Gas Flaring Project –Social Assessment Due Diligence
Report
Rok, B. (2007) PEC Luban: Using Straw as an Engine for Sustainable Local Economic Growth, Growing
Inclusive Markets, UNDP
Said, T, GE Support Letter
Sakoda, K. (2007) GSB Pipeline with Gikoko/JBIC In Pasuruan, East Java, Indonesia – Carbon Credit
trading Business using Cattle Manure Waste, GSB
Schechla, J. (2005) Bashku Unplanned Area Rehabilitation Initiative Anatomies of a Social Movement:
Social Production of Habitat in the Middle East/North Africa, HIC-HLRN
Teune, B. (2007) The Biogas Programme in Vietnam; Amazing results in poverty reduction and economic
development, SNV Vietnam Biogas Programme Division
UNIDO & WBCSD (2002) LYDEC (Suez): electricity for low-income neighborhoods, Morocco
Developing Countries and Technology Cooperation - Ten Business Cases
87 WBCSD (2007) Electricité de France (EDF)Providing services to rural populations
8.4 Seminars High level energy conference, Access to modern energy in Sub-Saharan Africa- Electrification and the
private sector contribution, Stockholm, Sweden, October 13-14 2008
IPCC panel how won the Nobel Prize. Columbia University, New York, USA, January 2008
Philanthropy in the 21st Century: Conversations on the Power of Giving, Dr. Muhammad Yunus with
Fareed Zakaria, United States, New York public library, April 23, 2008,
8.5 Internet About the United Nations- Introduction to the structure and the work of the UN,
URL:www.un.org/aboutun/, Viewed: 12.02.2008
Bill Gates: World Economic Forum 2008 (2008)
URL:www.microsoft.com/Presspass/exec/billg/speeches/2008/01-24WEFDavos.mspx Viewed
08.10.2008
CPCB, Central Pollution Control Board (2006),
URL:www.cpcb.nic.in/wast/municipalwast/Waste_generation_Composition.pdf , Viewed 14.08.2008
Directorate General for Energy and Transport of the European Commission Case Study: Straw for heating
in Lubañ, Poland URL: www.managenergy.net/products/R424.htm Viewed 20.05.2008
Gikoko- making CDM projects come true, URL:www.gikoko.co.id/content/history.html, Viewed
23.06.2008
Grameenphone, URL:www.grameenphone.com/, Viewed 02.04.2008
Guidelines under Articles 5, 7 and 8: Methodological Issues, reporting and review under the Kyoto
Protocol, URL: unfccc.int/kyoto_protocol/reporting/items/3879.php, Viewed 06.20.2008
How to Help Change Someone’s Life, URL: www.protectingfutures.com,Viewed 14.08.2008
International AIDS Vaccine Initiative, URL: www.iavi.org/, Viewed 20.05.2008
IPCC Fourth Assessment Report, URL: www.ipcc.ch/ Viewed 09.08.2008
Jose, P. D. (2006). Rethinking the BoP: A critical examination of current BoP models.
URL :www.strategicmanagementreview.com/ojs/index.php/smr/article/view/12/18
Kyoto Protocol - important tool for sustainable development, URL:
www.fao.org/Newsroom/en/news/2005/89781/index.html, Viewed 09.08.2008
Kyoto Protocol, URL: http://unfccc.int/kyoto_protocol/items/2830.php, Viewed 09.08.2008
88 Kyoto Protocol Status Ratification (2006) URL:
unfccc.int/files/essential_background/kyoto_protocol/application/pdf/kpstats.pdf , Viewed 09.08.2008
Lokoho Hydro for Rural Development (ppp), URL:
www.gtz.de/en/weltweit/afrika/madagaskar/15456.htm, Viewed 13.04.2008
MORI (2004), Waste management & recycling research, URL: www.mori.com/publications/jl/wastemanagement.shtml, Viewed 15.04.2007
Selling to
05.01.2008
the
Poor
(2006)
URL:
www.ckprahalad.com/2006/01/27/selling-to-the-poor,Viewed
TB Alliance- Global Alliance for TB drug development, URL: www.tballiance.org/home/home.php,
Viewed 07.05.2008
The Brent Spar, URL: www.greenpeace.org/international/about/history/the-brent-spar, Viewed
06.10.2008
The Kyoto Protocol, URL: http://ec.europa.eu/environment/climat/kyoto.htm, Viewed 09.08.2008
The Marshallplan, URL: usinfo.state.gov/products/pubs/marshallplan/, Viewed 25.08.2008
The Mechanisms under the Kyoto Protocol: Emissions Trading, the Clean Development Mechanism and
Joint Implementation, URL: unfccc.int/kyoto_protocol/mechanisms/items/1673.php, Viewed 09.08.2008
U.S. EPA, U.S. Environmental Protection Agency (2007), URL:www.epa.gov/epaoswer/nonhw/composting/science.htm, Viewed 29.08.2008
United Nation Development Program, Environment and Energy URL:www.undp.org/energy/climate.htm
Viewed: 15.09.2008
United Nations for partnership, URL: www.un.org/partnerships/, Viewed 28.03.2008
World Bank Updates Poverty Estimates for the Developing World (2008),
URL:econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/0,,contentMDK:21882162
~pagePK:6415401~piPK:64165026~theSitePK:469382,00.html, Viewed 18.10.2008
World Business Council for Sustainable Development, URL: www.wbcsd.org, Viewed 04.04.2008
89 9
Appendices
9.1 Appendix I: Statistics Energy consumption by Region, 2005-2030
2005
50,7
Eastern Europe
109,9
Asia
22,9
Middle East
14,4
Africa
23,4
Latin America and Caribbean
Total
221,3
Source: EIA/ International Energy Outlook 2008
2030
69,1
240,8
36,8
23,9
38,3
408,8
Number of poor for various poverty lines by region, 2005
$ 1,00
$ 1,25
$ 2,00
16,0
23,9
50,1
Eastern Europe and
Central Asia
530,1
932,4
1839,9
East and South Asia
6,2
14,0
23,2
Middle East and North
Africa
299,1
384,1
551,0
Sub-Saharan Africa
27,6
45,1
98,7
Latin America and
Caribbean
Total
879,0
1399,6
2597,8
Source: Source: Chen, S.& Ravallion, M. The Developing World Is Poorer Than We Thought, But No Less
Successful in the Fight against Poverty (The World Bank Development Research Group, August 2008)
9.2 Appendix II: Questionnaire for business leaders Company Name:
Entrepreneur/business leaders Name and title:
1.
2.
3.
4.
5.
6.
7.
8.
What were the main challenges/obstacles that needed to be overcome in order to achieve a win win
enterprise model?
How did the company/companies have to rethink the business model to overcome obstacles in the market?
What was the role of GSB in overcoming these challenges, or in the project as a whole?
How were partnerships or networks important in this project?
Thinking about the impact of the project – what are the outcomes for the poor?
How long will it take/has it taken before the company experiences revenues?
How long will it/has it taken for the company to be commercially viable on its own? What will the internal
rate of return be?
What are your plans for the future? Are there opportunities for expansion, replication or scaling up? If not,
what are the main constrains?
Please also collect pictures to send to HQ.
90 9.3 Appendix III: Matrix Adaptation and Innovation
Collaboration
Incentives
Solutions
Technical
Policy
dialog
Problems
Investment cost
Partnership
Knowledgetransfer
Me, Lo
GPPO
Funding
CDM
PEC
PEC,
K&Y, Me,
GK,Lo
Me,
GK, Ma
Taxholiday
Insurance
K&Y,
Ma
PPA
Feasibility
study
Ma
GK, Me, Ma,
Lo
System
solutions
Social
Financial
schemes
Microloan
Fixtariffs
Livelihoo
d project
Embedded
distribution
K&Y
K&Y
K&Y
GK, Lo
Ly, K&Y, Ma
Me, Ly
Purchasing power
Legal framework
Scale
downs
Financial
Me, Ly
Me,
K&Y
Political
instability
Ma
Public policy
GK
Health
GK, PEC
Security
Ly, K&Y, Ma
Human capacity
Ly, Me, K&Y
Lo
Information
Infrastructure
Ly, K&Y
GK
GK
Non technical
loses /lack of trust
Ly
Climate change
Me
ME,
K&Y,
GK
Projects
Me, GK,
Lo
Ly, Me, K&Y
PEC
PEC,
K&Y, Me,
GK
Me,
GK, Ma
K&Y,
Ma
Ma
Ma
GK, Me, Ma,
Lo
GK, PEC
Me, Ly
K&Y
K&Y
K&Y
Lo, GK
Blue fields show what type of solutions that are used for a certain type of problem. Dark blue fields show solution/problem combinations that were most frequent
Project Name: Lokoho (Lo), Mad’Eole (Me), Marsabit (Ma), Koraye kurumba &Yeelen Kura ( K&Y), Gikoko Kogyo(GK), PEC Luban (PEC), Lydec (Ly)
91 Ly, K&Y,Ma
Adaptation and Innovation
Collaboration
Solutions
Technical
Policy
dialog
Actors
Local Government
Incentives
Partnership
Scale
downs
Financial
schemes
Microloan
Fixtariffs
Livelihood
project
Embedded
distribution
Ly, Me,
K&Y
GK,
PEC
Me,
Ly
K&Y
K&Y
K&Y
Lo, GK
Ly, K&Y,Ma
Ly, Me,
K&Y
GK,
PEC
Lo, GK
Ly, K&Y,Ma
Lo, GK
Ly, K&Y,
Ma
Me,
K&Y
GPPO
Funding
PEC
Me,
PEC,
K&Y
Foreign government/
bilateral development
agencies
K&Y
PEC,
Me,
GK,
K&Y
Lo
International
Development Institute
Me,
K&Y
GK
Private sector
Me,
K&Y
Me,
GK, Lo
Local community
NGO and civil society
Prodject
ME,
K&Y,
GK?
Lo
Ly
Me,
GK, Lo
Ly, Me,
K&Y
PEC
CDM
Insurance
PPA
Feasibility
study
Social
System
solutions
Knowledgetransfer
Taxholiday
Financial
Ma
Me,
GK,
Ma
Me
Me
PEC,
K&Y,
Me,GK
Me,
GK,
Ma
Ma
K&Y,
Ma
Ma
GK, Me
Ma
GK, Me
GK,
PEC
Me,
Ly
K&Y
K&Y
K&Y
Blue fields show what actors that have been involved in a certain type of solution. Dark blue fields show solution/actor combinations that were most frequent.
Project Name: Lokoho (Lo), Mad’Eole (Me), Marsabit (Ma), Koraye kurumba &Yeelen Kura ( K&Y), Gikoko Kogyo(GK), PEC Luban (PEC), Lydec (Ly)
92 9.5 Appendix IV: Maps Kenya Madagascar
Indonesia 93 Mali
Poland Morocco
94