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Anticipating a major technological breakthrough in markets in developing countries through a unique new
solar PV, industry actors in the 1990s had begun to ex- financing and technical assistance vehicle called SDG.
plore expansion of this technology to meet the energy The SDG initiative relied on IFC which mobilized
needs of the nearly two billion people living without GEF grant financing alongside private, government in-
electricity in the developing world. These people live in vestment bodies, and institutional capital in SDG’s So-
areas too remote, poor, and sparsely populated to sup- lar Development Capital (SDC) arm, a US$32 million
port the infrastructure investments needed to expand private equity fund. Several widely shared assumptions
conventional electrical grids. supported the approach behind this equity fund:
A joint initiative between the World Bank Group
together with a number of US-based charitable foun- • P
V performance and prices would improve as mass
dations sought to catalyze an “order of magnitude” im- production of cells and modules expanded, increas-
pact in the growth of PV businesses and dynamic PV ing the competitiveness of the technology.
Monitor shares key findings from in-depth reviews of IFC programs and projects conducted by external evaluators. The
reviews address the relevance, efficiency, effectiveness and sustainability of these programs. For more information about
the evaluation of IFC programs visit http://www.ifc.org/results.
• T
he market for PV systems, including rural households, US$28.75 million to three companies in Kenya, Indone-
was a sufficient basis for a growing, profitable business sia, and Bolivia between 2001 and 2004. The Kenyan in-
in many parts of the world, thus, justifying a global ap- vestee declared bankruptcy in early 2005. The Indonesian
proach. investment was terminated prematurely due to cancella-
• Potential returns on investment and scale of investments tion of a parallel World Bank/GEF funded PV solar home
were sufficient to justify a professional fund manager systems subsidy program to Indonesia. The Bolivian ven-
and fund governance structure. ture continues to grow, although with somewhat limited
impact to date on rural SHS delivery. Bolivia is also now
The IFC/GEF SDC portion of the SDG project had two being supported by a World Bank/GEF solar PV program
primary objectives: accelerate use of PV solar home sys- which was not in place at the time that the SDC invest-
tems and contribute to lowering carbon dioxide emissions ment was made.
in regions for intended investments. SDC was specifically SDC’s investment guidelines were not always appro-
to (a) act as a showcase for the PV solar home system in- priate for the unique situation often faced by the small and
dustry, (b) attract capital, and (c) demonstrate that un- medium enterprises (SMEs) characteristic of the rural, off-
electrified markets offered the potential for commercial grid solar PV sector—frequently sole proprietorships lack-
investment, given that lack of capital is one of the main ing audited financial statements or considered too small for
factors holding back massive growth. SDC was positioned investment. In addition, limited sectoral expertise among
to be at the forefront of building rural, off-grid PV solar SDC’s investment officers and their physical distance from
home system markets by engaging commercial capital to the investments impacted the guidance that SDC could
play a catalytic role in growing the PV industry in emerg- offer investees. Both factors limited SDC’s ability to iden-
ing markets. tify deals and support investments once made. Overall,
In 2006 Enterprising Solutions Global Consulting SDC’s achievements related to accelerating the use of PV
undertook an evaluation of SDC from startup through solar home systems and indirect environmental results re-
disbandment. Methodology consisted primarily of a desk lated to the reduction of carbon dioxide emissions were
audit and stakeholder interviews with one site visit to Ke- very disappointing compared with original expectations.
nya. Stakeholders included former Board members, in-
vestment officers, investees, and sector specialists. Review Rural PV service providers. These tend to be young,
of key SDC documents ranged from Board minutes and high-risk, low-margin firms needing patient capital with
IFC project records to annual and evaluation reports and low-return expectations. They typically lack management
publications on international PV experiences. expertise, systems for managing growth, market develop-
ment capacity, and customer service focus and are sensitive
EVALUATION FINDINGS to external factors, such as economic downturns, increased
In the mid-1990s, PV market fundamentals seemed prom- demand in other markets, and capacity of financing
ising and industry experts discussed the potential “com- institutions to provide adequate liquidity to grow a market.
moditization” of the industry, creating a market potential Profitability is often elusive in the rural solar home system
in the mind of SDC project formulators that was validat- industry, due to high system prices in emerging markets
ed by an independent feasibility study based on limited and high distribution costs, given low population densities.
market intelligence, much of it extrapolated from sales in SDC’s private equity structure was also ill suited to ad-
industrialized countries. Market research for SDG that dressing the needs of small low margin and inexperienced
guided SDC’s establishment overestimated the growth po- PV firms operating in rural settings. Sustainable delivery of
tential and potential financial returns of the PV sector and PV services appears to require strong relationships among
underestimated the myriad factors required to achieve a key stakeholders—government, multilateral agencies, lo-
market breakthrough and rapid scale-up. Furthermore, a cal business networks, NGOs, and so on—to create an
project formulation process driven more by the needs of enabling environment for successful rural PV solar home
the project sponsors than those of potential recipient firms systems delivery. Many practitioners now believe that
in the developing country market, coupled with an overly subsidies are necessary at an early stage to compensate for
complicated implementation structure and poor market the high upfront costs of developing profitable distribu-
fundamentals contributed to less than desirable results. tion networks in rural areas. Only a combination of these
However, the “disconnect” between project design factors can result in a market that generates sufficient de-
and market reality ultimately led to disbursement of mand for PV services to support the growth of profitable
only US$650,000 of SDC’s total committed capital of PV businesses in rural areas.
• T he potential for equity investments in SMEs may be SDC’s experience showed that the rural, off-grid, solar PV
limited in developing countries. The failure to make industry in emerging markets is a low-margin, high-risk
equity investments through SDC and the experience of business requiring significant time and resources in which
other private equity funds strongly suggest that private to build sustainable rural PV delivery networks crucial to
equity in SMEs may not yet be the catalytic capital in- gaining consumer confidence and market share.
vestment solution for developing countries. The family- SDC’s original market analysis gave perhaps too much
owned character of many developing country businesses weight to capital as the key limiting factor necessary to
is not conducive to outside investment, and low valua- catalyze rapid and effective growth of PV solar home sys-
tions of firms often mean that any sizeable investment tems delivery businesses in rural, off-grid areas in emerg-
would reduce owner equity to levels unacceptable to ing markets. As in most industries and perhaps more so
them. Domestic capital markets also tend to be very in such an immature sector, achieving commercial returns
small and the opportunities for exit are minimal. also requires strong business support mechanisms (e.g.,
• Diversification to renewable or clean energy using market intelligence, stakeholder collaboration, and a sup-
broader investment criteria allow a fund to be more portive regulatory environment). SDC was exemplary in
flexible and finance projects that best fit each market’s its cross-sectoral collaboration and innovative financing
needs. Single-focus funds in contrast are high risk. A during start-up, but failed to come even close to achieving
broader clean energy focus that is not restricted only to “order of magnitude” impacts on the rural, off-grid, PV
solar home system firms may provide the best flexibility solar industry in emerging markets.
to finance solar PV and other rural renewable energy SDC’s experience suggests that innovative financing
projects. and grants from institutions such as GEF and IFC will
• Targeting financing on one country or region is a more remain important in helping build the solar PV indus-
efficient way to develop a PV solar market than pur- try’s capacity to the point of absorbing the private capi-
suing a global focus. By increasing general awareness, tal necessary to propel the industry forward to meet the
decreasing production and delivery costs, and concen- demand of millions of people in emerging markets living
trating know-how, economies of scale, and synergies can without electricity. In addition, retail-level subsidies will
develop in both customers’ perceived value and cost re- likely continue to play a catalytic role in developing new
ductions. markets, at least until businesses are able to reach sufficient
scale to become profitable. In some cases, service provid-
Fund Management ers may require ongoing subsidies to ensure service deliv-
ery to distant clients where service provision may never
• L ocal management and oversight of investment will ulti- be profitable. SDC’s experience suggests that IFC consider
mately be critical to successful investments in emerging contracting established, regionally based, specialized fund
market SMEs. Successful managers must have excellent management companies for any future similar initiative. It
sectoral and regional experience and will be better posi- also underscores the need for making investments where a
tioned to offer substantive support to investees. coordinated approach to industry building engages policy
• Streamlining processes is essential to increasing efficiency makers and financing organizations, as well as industry ex-
in high-risk, low-return markets, thereby limiting time perts.