The article presents the findings of primary research carried out in Ghana and Senegal, which revisited the main assumptions behind the African Rural Energy Enterprise Development (AREED) initiative (2002–2012), and other donor-backed programmes, designed to promote small and medium-sized energy enterprises (energy SMEs). These assumptions were (1) that the lack of affordable local financing presented the most significant barrier to setting up and expanding energy SMEs, and (2) that these barriers would be overcome by a ‘demonstration effect’ whereby successful businesses, supported by donor-backed programmes, could in turn influence the commercial financial sector to invest in energy SMEs, thus triggering a virtuous circle of growth and profitability.
In this section we identify the main lessons that can be learned from more than a decade of initiatives to support energy SMEs in various countries in sub-Saharan Africa, with a particular focus on the AREED project. Here, the overall aim is to analyse our answer to the question “what has changed?”
This research's focus on the ‘contributing factors’ is a deliberately broader term that incorporates the internal ‘success factors’ for energy SMEs, about which much has already been written. Indeed, the research findings presented in this article reaffirm most of what has been concluded in previous studies, including Kolominskas (2003); Mehlwana (2003); Denton (2006) and Napier-Moore (2006). These studies identified the lack of access to affordable finance as the being the predominant, persistent, barrier to establishing and scaling up a commercially viable energy SME sector, emphasising the lack of strong policy support from governments, poor business skills capacity and the high cost of many RETs as related cause-and-effect barriers.
While these issues continue to characterise, to a greater or lesser extent, the energy SMEs sectors in the countries studied for this research, it is more relevant to revisit the main assumption behind AREED and other donor-backed programmes designed to promote energy SMEs, i.e. that the reluctance of commercial financiers to invest in energy SMEs would be overcome by a ‘demonstration effect’. Where numerous energy SMEs are in operation and thus where a valid demonstration effect can be identified in Ghana and Senegal, there is a perceived paradox that serves to undermine commercial interest in investing in energy SMEs. The paradox is that the donor-supported businesses that were issued with concessional and/or flexible loans serve to demonstrate that these businesses depend upon such concessional terms, i.e. that they could not survive in ‘the real world’. While this assumption is widely regarded as self-evident by private investors, there are in fact other, more concrete, factors that act to undermine the demonstration effect. These include, inter alia, relatively high transaction costs of investing in SMEs; the inherently complicated nature of energy sector SMEs with longer supply chains and slower pay-back periods for capital-intensive technologies such as solar PV; rigid rules regarding the need to secure collateral.
These factors can be understood as structural issues that conspire to increase the financial risk of investing in energy SMEs and thus are not the product of ignorance on the behalf of the banking sector, which was assumed to be case (hence the need for a demonstration effect) by donor-backed programmes such as AREED. In both Ghana and Senegal, these factors are compounded by the high opportunity costs for banks where higher rates of return can be secured from investing in high-turnover businesses, for example those trading in high-volume, perishable goods. There is also a more general challenge faced by a range of SME entrepreneurs where such individuals and businesses are considered by banks to have an inherently higher risk profile, a factor which, to some extent, appears to be the product of ‘anti-SME’ discrimination, where investors favour larger corporate players operating under licence, often backed by strong branding, reputation and/or political connections.
To summarise: while ignorance of the energy sector doubtless continues to drive commercial apprehension in investing in energy SMEs, there are compelling structural reasons expressed by stakeholders that serve to perpetuate the development catch-22 that programmes such as AREED aimed to overcome. Here, a major point concerns the role of government. There is a predominant view among stakeholders, in both Ghana and Senegal, that government has been ineffective in designing and implementing tangible support for energy SMEs, despite politicians often providing strong rhetorical support. This point highlights an important status quo, and an issue that was itself one of the key rationales behind supporting energy SMEs in the first place, i.e. to by-pass government in efforts to supply sustainable energy technologies to low income consumers by supporting SMEs.
