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AFRICAN RURAL ENERGY ENTERPRISE DEVELOPMENT AREED POLICY REVIEW

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AFRICAN RURAL ENERGY ENTERPRISE DEVELOPMENT AREED POLICY REVIEW

POLICY RECOMMENDATIONS FOR ENERGY SME

    DEVELOPMENT IN AFRICA

A POLICY MAKERS PAPER

    May 2008

    F.O. Akuffo and G.Y. Obeng

    Kwame Nkrumah University of Science and Technology, Kumasi, Ghana

Submitted as background document in support of the presentation:

    “Expanding energy access through sustainable energy enterprises in Africa:

    Financing, capacity-building and policy aspects” by Lawrence Agbemabiese, United Nations Environment Programme, Energy Branch,

    Division of Technology, Industry and Economics

In support of:

    OPEC Fund for International Development

    Workshop on Energy Poverty in Africa

    9 10 June 2008, Abuja, Nigeria

    TABLE OF CONTENTS

    List of Acronyms and Abbreviations ............................................................... i Executive Summary ......................................................................................... ii

    1. Introduction ........................................................................................... 1 1.1 Background on AREED............................................................................................. 1

    1.2 Achievements and Challenges of AREED ................................................................. 3

    2. Policies for Enhancing Enterprise Development and Market Access . 7 2.1 Establish Relevant Policies and Institutional Framework for Energy SME

    Development ............................................................................................................. 7

    2.2 Build Human and Institutional Capacity in Energy System Management ................... 7

    2.3 Develop Functional Market Systems .......................................................................... 8

    2.4 Address Long Administrative Procedures to Enhance Energy Enterprise Creation. ..

    Error! Bookmark not defined.

    3. Fiscal Incentives for Energy SMEs ..................................................... 11

    4. Other Essential Policies ....................................................................... 12 4.1 Create Facilities to Foster Information and Knowledge Exchange ............................ 12

    4.2 Increase Public Confidence in the Energy Sector ..................................................... 12

    5. Conclusions and Policy Recommendations ........................................ 13

    6. References ............................................................................................ 14

     Policy Recommendations for Energy SME Development in Ghana, Mali, Senegal, Tanzania and Zambia. List of Acronyms and Abbreviations

    ADPME Agence de Développement des Petites et Moyennes Entreprises AMADER Agence Malienne pour le Développement de l'Energie Domestique

     et de l'Electrification Rurale

    AREED African Energy Enterprise Development

    ASER Agence Senegalaise d’Electrification Rurale

    BETL Biomass Energy Tanzania Limited

    BMZ Bundesministerium fuer Wirtschaftliche Zusammenarbeit

     (Federal Ministry for Economic Cooperation and Development) CBOs Community-based Organizations

    CEEEZ Centre for Energy, Environment & Engineering Zambia CWV Chavuma Waterfalls Venture

    E+Co Public Purpose Investment Company which developed the REED

    enterprise centered model

    Enda TM ENDA Tiers Monde

    ERIL Electrification Rurale à Initiative Locale

    GEDAP Ghana Energy Development and Access Project

    GEF Global Environment Facility

    GTEL Gladymanuel Trading Enterprise Limited, Ghana.

    KITE Kumasi Institute of Technology and Environment

    LPG Liquefied Petroleum Gas

    MDGs Millennium Development Goals

    NBSSI National Board for Small-scale Industries

    NGOs Non Governmental Organisations

    PSIs President’s Special Initiatives

    REA Rural Energy Agency

    REED Rural Energy Enterprise Development

    SEDB Small Enterprise Development Board

    SIDA Swedish International Development Agency

    SMEs Small and Medium-scale Enterprises

    TaTEDO Tanzania Traditional Energy Development and Environment

     Organisation.

    UNDP United Nations Development Programme

    UNEP United Nations Environment Programme

    UNF United Nations Foundation

    VAT Value-added Tax

    VEV Vent et Eau pour la Vie, Senegal

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     Policy Recommendations for Energy SME Development in Ghana, Mali, Senegal, Tanzania and Zambia.

    Executive Summary

Introduction

    The African Rural Energy Enterprise Development (AREED) programme was launched in 2001 under the joint auspices of the United Nations Environment Programme (UNEP), the United Nations Foundation (UNF), E+Co, and UNEP Risoe Centre and with funding from the UNF, SIDA, BMZ and the Dutch government. The goal of AREED is to promote energy efficient and renewable energy technologies (solar, biomass, wind, hydro, biofuels, etc.) in peri-urban and rural communities through small and medium-sized enterprises (SMEs).

    Though not initially envisaged, AREED is now in its second phase. The policy recommendations contained in this document are based on the initial phase of AREED, which ended in mid 2007. During the period under review, AREED was implemented in Ghana, Mali, Senegal, Tanzania and Zambia with five partner institutions, namely CEEEZ in Zambia, Enda TM in Senegal, Mali Folkecenter in Mali, KITE in Ghana, and TaTEDO in Tanzania.

    The purpose of this paper is to make recommendations for the attention of policy makers to address the constraints and challenges facing the development of energy SMEs in Africa.

Achievements and Challenges

    The AREED programme has achieved good results since its inception. It has succeeded in developing an ingenious plan of loan provision, building capacity in bankable business plan development, analysing market conditions and identifying efficient energy systems for SMEs. By June 2007, about 39 enterprises with market potential of 331,000 people, in various areas including wind pumping in Senegal, LPG distribution in Mali and biomass energy in Tanzania had benefited from over US$ 2

    million AREED financing. Experts estimate that AREED’s support to energy SMEs has yielded environmental benefits including annual savings of about 422,000 tonnes of carbon dioxide emissions and 263,000 tonnes of charcoal and firewood.

    In spite of the achievements and prospects, energy SMEs in Africa are facing several constraints and challenges including: lack of relevant policies and institutional framework to provide sufficient leverage for SMEs to tap into new energy business; lack of capacity building in energy system development and commercialization; limited rural energy market; inherently high initial cost of renewables and energy efficient products; and poor access to clean energy financing.

Conclusions and Policy Recommendations

    The review of the first phase suggests that AREED has high potential to contribute to the overall national development priorities, particularly the goal of widening access to energy services for under-served communities. However, there are several key policies and implementation frameworks that should be put in place to support the development of energy SMEs and clean energy systems market in Africa. Towards this end the following recommendations are made for the attention of policy makers.

Establish Relevant Policies and Institutional Framework for Energy SME Development.

    National governments should establish relevant policies and institutional frameworks and translate them into implementation strategies and budgetary support. They should also improve the policy environment of the private sector to foster stronger links with public sector decision-makers and make conscious political commitment to widen national energy access, particularly for peri-urban and rural communities.

     ii

     Policy Recommendations for Energy SME Development in Ghana, Mali, Senegal, Tanzania and Zambia.

    Build Human and Institutional Capacity in Energy System Management

    There is the political will to create a positive business environment for SMEs to function as the engine

    of growth for job and wealth creation in Africa and various institutions have been created for this

    purpose. However, the institutions are not fully effective.

    ? National governments should implement relevant capacity building programmes (training and

    international exposure in energy systems application and management) for SME support

    institutions. Governments should restructure SME support institutions (e.g. NBSSI in Ghana,

    SEDB in Zambia, etc.) by recruiting appropriate experts to their boards and providing

    logistical support to enable them build the capacities of SMEs and offer the needed technical

    and expert support.

Develop Functional Market Systems

    ? There is the need to develop functional energy markets, particularly in the rural areas, through

    explicit national policy incentives and procedures to guide and stimulate energy equipment

    development. In addition energy services should be packaged with income generating

    possibilities as this improves financial viability. This is demonstrated by the graphs showing

    the loan repayments made by 11 energy enterprises in Ghana and 4 energy enterprises in

    Tanzania.

? Government agencies, authorities, commissions and organisations mandated to manage

    various electrification funds and other energy-related funds should explore innovative

    interventions to reduce the costs of renewables and energy efficient technologies through

    increasing investments in product and market development.

    ? To address the lack of understanding of the financial systems and processes, energy ministries,

    departments and agencies should work closely with private sector actors to furnish local banks,

    particularly the commercial banks, with evidence-based data on costs and benefits of

    investments in clean energy technologies to raise awareness, increase acceptance and reduce

    the perception of risks in the energy business.

    ? To reduce high capital cost and investor risk, national governments should institute investment

    incentives: capital grants or third party finance arrangements where the government assumes

    risks or provide low interest loans.

     iii

     Policy Recommendations for Energy SME Development in Ghana, Mali, Senegal, Tanzania and Zambia.

    1. Introduction

    The African Rural Energy Enterprise Development (AREED) programme was launched in 2001 by the United Nations Environment Programme (UNEP). Though not initially envisaged, AREED is now in its second phase. This paper is based on the initial phase which was completed in mid 2007. During the period under review, AREED was implemented in five partner countries, namely, Ghana, Mali, Senegal, Tanzania and Zambia.

    AREED was created to promote energy efficient and renewable energy technologies in order to widen access to clean energy services by rural and peri-urban communities. The main instrument of AREED is the small and medium-sized enterprises (SMEs) and the key actors for achieving the objectives of AREED are the AREED implementing institutions in the partner countries, non-governmental organisations (NGOs), development organisations, national governments, financial institutions and SMEs.

    The AREED programme has achieved good results since its inception. However, it has also faced severe challenges due to inadequate national policies to support effective energy SME development as well as weakness in the programme implementation framework by AREED partner institutions, namely, CEEEZ in Zambia, Enda TM in Senegal, Mali Folkecenter in Mali, KITE in Ghana, and TaTEDO in Tanzania.

The purpose of this policy makers’ paper is to make appropriate recommendations for the

    attention of policy makers so as to address the constraints facing the development of energy SMEs in the partner countries and Africa in general. These recommendations are drawn from the experience and challenges in the implementation of the AREED programme. The policy makers’ paper includes background information on the AREED programme as well as a

    succinct summary of achievements and challenges facing the AREED programme, particularly in creating the enabling environment for the development and growth of viable energy SMEs that will serve the rural and peri-urban markets. The conclusions and recommendations focus on the roles of key policy actors and the respective instruments that could be adopted to achieve the identified goals.

1.1 Background on AREED

    The provision of electricity and clean fuels for both urban and rural populations is a major policy priority for all governments in Africa. However, in most sub-Saharan African countries access to electricity and modern fuels (liquefied petroleum gas (LPG), improved biomass, biofuels etc.) is skewed towards the urban population. The consequence is that majority of the rural and peri-urban populations depend on traditional fuels mainly firewood, charcoal and agricultural waste for cooking and heating; and kerosene and dry cell batteries for lighting and radio listening respectively.

    Governments in African countries have initiated programmes to promote clean energy services based on energy efficient technologies, modern fuels and renewable energy sources for electricity generation, cooking, domestic and industrial heating. These programmes, however, face major challenges including inadequate funding as well as weak institutional framework, implementation and management. Energy sector restructuring has been initiated as a recommendation to address these challenges. As part of measures to create the enabling environment for private sector companies to participate effectively in the provision of rural energy services, and introduce new technologies and decentralized renewable energy sources, governments have established new institutions and agencies. The Agence Malienne pour le

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     Policy Recommendations for Energy SME Development in Ghana, Mali, Senegal, Tanzania and Zambia.

    Développement de l'Energie Domestique et de l'Electrification Rurale (AMADER) has been established in Mali, Agence Senegalaise d’Electrification Rurale (ASER) in Senegal, Rural

    Energy Agency (REA) in Tanzania, Rural Electrification Authority in Zambia, and a new Rural Electrification Agency is proposed to be established in Ghana under the current World Bank funded Ghana Energy Development and Access Project (GEDAP).

    In support of the efforts of various national governments at ensuring access to clean energy services for all populations and recognizing the potential of energy as a cross-cutting input for sustainable socio-economic development, UNEP in 2001 launched the AREED programme. The overarching aim of AREED is to promote the development of energy efficient technologies and renewable energy sources (solar energy, biomass, wind, hydro, biofuels etc.) for the provision of clean energy services in peri-urban and rural communities, through the development and capacity enhancement of SMEs. The specific objectives of AREED are to: establish and strengthen enterprises (private sector, public-private partnerships) that offer clean energy services in mostly rural and peri-urban areas; increase the capacity of local NGOs and development organisations offering enterprise development services that are critical to small and medium-size energy enterprises during their start-up phase; and engage local and regional financial institutions investing in the clean energy sector so as to leverage the efforts of local, regional and national governments that provide support for business-like solutions to the delivery of sustainable energy services SMEs.

    The AREED programme was launched under the joint auspices of the United Nations Environment Programme (UNEP), the United Nations Foundation (UNF), E+Co, and UNEP Risoe Centre. Being the programme initiator, UNEP facilitates and mobilizes funding for the AREED programme; E+Co pioneered the enterprise development model and manages the rural energy enterprise development (REED) seed fund; while the UN Foundation and other agencies (SIDA, BMZ and the Dutch government) have donated funds to AREED.

    In the partner countries where the AREED programme is being implemented, there has been an acknowledgement of the potential contributions that SMEs can make to overall national development. In Senegal, the government has gone one step further down the institutional line to draw an SME charter. In Zambia, the government has indicated its intention to reduce the current barriers to the growth and expansion of SME development. The government of Ghana has created a special private sector Ministry. Moreover, private sector development is singled out as one of the President’s Special Initiatives (PSIs), targeted to contribute to economic development and poverty reduction. Mali and Tanzania have outlined a number of incentives in SME policy documents intended to boost entrepreneurial culture and lay the foundation for a strong and effective industrial base.

    In spite of the strong political will to make SMEs an engine of growth, little attention has been focused on energy SMEs as an instrument for widening access to clean energy services. Existing policies and regulations have provided little resources to stimulate growth in energy SMEs and this, to a certain extent, has constrained implementation of the AREED programme. Notably, the AREED partner institutions have made little inroads in engaging NGOs and development organisations, as well as local, regional and national governments.

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     Policy Recommendations for Energy SME Development in Ghana, Mali, Senegal, Tanzania and Zambia.

    1.2 Achievements and Challenges of AREED

    The AREED programme has achieved good results since its inception. It has succeeded in

    developing an ingenious plan of loan provision, building capacity in bankable business plan

    development, analysing market conditions and identifying efficient energy systems for SMEs.

    By May 2006, AREED had approved about US$ 2 million for 33 enterprises with a potential

    market base of about 224,000 people in over 40,000 households in the five partner countries -

    Ghana, Mali, Senegal, Tanzania and Zambia. By June 2007, about 39 enterprises with market

    potential of 331,000 people in various areas including wind pump in Senegal (Box 1), LPG distribution in Mali (Box 2) and biomass energy in Tanzania (Box 3) had benefited from AREED financing [1]. AREED’s investments during 2000-2006 are also presented in Box 4.

    Box 1: Vent et Eau pour la Vie (VEV) in Senegal This enterprise supplies potable water to rural populations through wind pumping system. The enterprise is currently the main actor in the maintenance and installation of Wind pumps in the

    rural areas of Thies, Louga, Diourbel and other surrounding villages. The enterprise also takes part

    in the sensitization of the population on the management of the pumps and access to potable water.

    According to the annual activity report, VEV repaired many wind systems and installed new wind

    pumps. Difficulties faced by the enterprise include the inability of some rural communities to find a

    good management system. Some wind pumps are not functioning because of lack of funds to pay the repair expenses.

Box 2: SODIGAZ: Butane gas distribution in Mali

    Since 2003, SODIGAZ has been repaying, on schedule, the loans contracted from AREED. The

    financial state of the enterprise is good in spite of the arrival of two competitors in the distribution of butane gas. During the first quarter of 2005, the enterprise realised 380 million FCFA as

    turnover by selling 10 500 bottles of butane gas, subsidised by AMADER. In 2005, SODIGAZ

    obtained from E+Co a second loan dispensed in two tranches to purchase 25 000 bottles of butane gas to supply rural populations.

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     Policy Recommendations for Energy SME Development in Ghana, Mali, Senegal, Tanzania and Zambia.

    Box 3: Biomass Energy Tanzania Limited (BETL)

     Making cement is an energy intensive business where energy is often supplied by fossil fuels. In

    Tanzania, however, the Tanga Cement Company Limited (TCCL) wanted to source some of their energy

    from biomass and turned to Peter Gathercole, a mechanical engineer with 24 years experience, who is

    also the founder and Managing Director of Biomass Energy Tanzania Limited (BETL). BETL is an

    energy service company based in Dar es Salaam. BETL began operations on receipt of a US$ 50,000

    AREED investment in June 2003. The AREED partnership provided BETL with business planning

    support and assisted in filling in certain gaps in the operational structure of the business. The company

    was established primarily to develop the business of turning waste products with no value into marketable products. The company aims at producing thermal energy from solid biomass that is environmentally

    friendly. It developed a concept of providing industrial clients with alternative fuel source from the

    biomass. Since then, the company has been sourcing and supplying a range of agricultural and other

    biomass wastes, for use as fuel.

    Mr. Gathercole believed he could profit from a Tanzanian law that demands that production industries remove biomass waste, which is not only expensive but also a potential environmental hazard. TCCL on

    the other hand, chose to follow international trends by using biomass waste for their thermal needs in the cement production process. Such a policy led them to commission the engineering department to design

    and build a suitable facility at the plant so that large volumes of biomass could be utilized. The policy also

    resulted in cost savings to TCCL and reduced greenhouse gas emissions, while giving a 40% gross profit

    margin to BETL. Similar opportunities exist in Tanzania, and the business model and knowledge can be

    replicated in other AREED countries such as Ghana where large-scale deposits of biomass (from sawmills) are currently unused. BETL has signed a new two-year contract, increasing volumes from 500 tonnes per month (Original contract) to 1200 tonnes per month. BETL has also begun a small pilot project

    in the Kigamboni suburb in Dar es Salaam with a group of women to begin carbonizing coconut husks.

    BETL will buy the carbon from them as a source of raw material for briquettes.

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     Policy Recommendations for Energy SME Development in Ghana, Mali, Senegal, Tanzania and Zambia.

    Box 4: AREED Investments 2000-2006 Eco'HomeBetween 2000 and 2006, AREED granted loans to a number of clean energy enterprises to finance their business

    concepts, commercialization or expansion in the partner countries. The bar chart below demonstrates the energy

    Gladymenterprises and amounts (in US Dollars) financed.

    AREED Investments 2000 - 2006 Lambark

    Seeco

    Anasset

    M38

    Aprocer

    Kalola Farms

    AME

    Energie R

    BETLEnterprises

    VEV

    Chavuma

    Rasmas

    Ubwato

    Energie R II

    RCI

    -50,000100,000150,000200,000

    Size (US$)

     Proof of Concept Commercialization Expansion

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