Much has been written about the COVID-19 health crisis and its socio-economic collateral damage. While the impacts of the economic crisis reach across multiple sectors and stakeholders, they’ve been particularly devastating for a sector that’s often touted as the backbone of the economy – local small and medium enterprises (SMEs). These businesses are facing a threat to their very survival in markets around the world. Their struggles mirror the experience of businesses during previous disease outbreaks like the Ebola virus, when local SMEs in West Africa suffered from business interruptions whose repercussions lasted for as long as two years. That crisis led to consequential negative shifts in local economies that have lasted to this day – and the COVID-19 pandemic seems likely to cause similar (if not worse) damage.
In particular, local energy enterprises with wafer-thin margins are facing severe challenges in accessing open calls for funding and other schemes due to their relative invisibility to investors. They are predominantly registered as proprietorships or private limited companies that sell, install and maintain products like solar lights, digital education tools, home appliances like grinders and butter churners, and livelihood systems such as milking machines, bread rolling machines, and so on. The end-users typically pay for these systems through cash, or via third party consumer finance loans from regional rural banks, cooperative societies, microfinance institutions, etc.
In part, the difficulty these enterprises face in accessing investments is due to their non-metro locations, and their lack of English language skills, advanced degrees at prestigious universities, and other qualifications prized by funders. This means they are left out of the purview of typical impact investors, and it also prevents them from accessing the “first come, first served” safety nets and stimulus programs offered by governments. Due to this lack of funding options, these enterprises are often forced to take on further debt from commercial lenders at very high rates of interest, which can deepen the pressures they face at this time of global economic uncertainty. There is also a dearth of information regarding the pandemic’s impact on locally led and owned energy enterprises, and a lack of representation by these enterprises in global conversations about how to support them. This is skewing the design of solutions aimed at the sector – and affecting which companies can benefit from them.
COVID 19 has demonstrated the importance of listening to and supporting these last-mile, local energy enterprises. These companies play an important role in providing needed energy services to the poor, in a customized and affordable manner, to improve their socio-economic conditions. And even though new companies could later emerge to take the place of any enterprises that fail during this crisis, that option is not ideal for the sector and its customers. It represents a loss of tacit knowledge of the product-market combination – the commercial sense of structuring the product and its pricing for the target customers who were hitherto deprived of energy access.
PRESERVING VS. REBUILDING SMALL ENERGY ENTERPRISES
Building these small local enterprises from scratch is a laborious and costly process – it’s far easier and more economical to provide critical resources now to save existing providers. Let’s explore a few reasons why:
Letting providers fail would increase the cost of essential services to the poor: Local energy enterprises provide electricity for lighting, agricultural needs like grinding and threshing, business services like printing and photocopying, and any number of other uses. These will all become costlier if local companies go under, disrupting supply chains, forcing low-income individuals and SMEs to travel further to access these services, and creating a further dent in their meager incomes. This would have an indirect cascading effect, which would cause immeasurable harm to local businesses and communities.
It’s difficult to rebuild human resources: The collapse of these SMEs would force long-term employees to seek work in other sectors, a huge loss to the energy sector ecosystem. These human resources have been painstakingly built over many years, and they represent a vast amount of field experience that could not be easily or quickly replaced.
It would be challenging to bring other stakeholders back: The collapse of multiple SMEs would disrupt the broader sector’s relationships with other stakeholders in the region, like suppliers, financers, etc. These players would lose faith in the local energy access industry, as widespread business failures would signal vulnerability. It would take enormous financial and human resources to get the sector back on track.
To avoid these issues and maintain the industry’s momentum, SELCO Foundation is sharing insights and solutions garnered from surveys and one-on-one calls we conducted with 33 local Indian energy enterprises from March to May 2020 as part of our incubation program. Below, we explore some of the challenges these companies are facing, followed by suggestions on how governments, incubators, investors, philanthropies and other stakeholders can support them in the near and medium term, so they can weather the rising challenges of COVID-19.
CHALLENGE 1: STABILIZING CASH FLOWS
Most of the enterprises we surveyed reported having reserves that would last till the end of April at best, with a few being able to stretch their resources til May. (Note: We have provided these companies with emergency relief money to meet their HR and fixed costs like rent through June 2020.) Some voiced fears about the loss of confirmed orders, the challenges of negotiating the release and clearing of payments for solar systems that have been installed but not paid for, and the vulnerabilities facing their staff and transporters who have continued to work during the pandemic. Given that many of these enterprises’ survival depends on maintaining relationships with customers and suppliers during these tough operating conditions, there is anxiety about being able to honour their commitments to deliver products and purchase supplies. But the single biggest concern was being able to pay their staff and technicians, and to provide guidance on safety measures amidst the lockdown and post-lockdown period. Being sick is an expense that none can afford.
CHALLENGE 2: CREATING NEW REVENUE STREAMS
Typical solar end-users own, or are employed by, informal businesses – often in agriculture. These customers have also faced disruptions to their income, which will have a ripple effect for solar businesses. Indeed, end-user financing for solar products has been brought to a standstill. Combined with a significantly lower risk appetite among financial institutions that issue fresh loans, this has forced solar providers to get creative in finding new sources of revenue. In a business that depends on regular face-to-face connections with groups of individuals and collectives, online communications platforms like Zoom offer little value to these enterprises. In light of these limitations, many have quickly adapted to explore alternative channels to build a pipeline of sales that are relevant to the immediate COVID need, such as pairing with local organizations to provide solar-powered, energy-efficient sewing machines to produce masks, provide lighting for police check-posts or COVID screening points, power health care facilities, etc.
CHALLENGE 3: BUILDING LOCAL SUPPLY CHAINS
The pandemic has exposed a weak link in long and convoluted supply chains. Another issue is a pile-up of inventory that can’t be distributed until after the lockdown. Local transport and delivery of both supplies and solar products – particularly in hard-to-reach communities – will be severely delayed, given that special passes may be required, and the local transport of essential goods might take priority over the delivery of solar products. The entrepreneurs we surveyed expressed fears over escalations in supply and delivery costs as a result of limited supplies and large demand, which would essentially edge out the smaller enterprises that cannot afford these higher prices.
CHALLENGE 4: ACCESS TO FINANCIAL RESOURCES
While India’s central and state governments have announced programs to support businesses during COVID-19, accessing them has not been easy. One limiting criteria is that to be eligible for these schemes, a business must be an existing borrower at a formal financial institution. Beyond these government programs, domestic philanthropy has stepped in – but these efforts have mostly involved challenges to design and develop COVID-focused health care innovations. Therefore, funding options for solar distribution companies are few and far between.
SOLUTIONS TO HELP SOLAR ENTERPRISES MEET THE COVID-19 CHALLENGE
Since funding is a core element to each of these challenges, that’s where SELCO Foundation has focused its efforts. While a “relief fund” for solar enterprises is essential, different types of relief are necessary for different purposes. That’s why the foundation has identified the various types of funding these businesses need, to better inform potential funders of the areas where they can focus their support. Currently, the need for traditional or refundable grants is paramount, given the uncertainty about revenues and the question of when income-generating activities will be possible among the low-income end-users solar companies serve.
Below, we summarize a few other areas funders should focus on, to help these enterprises through the crisis.
Emergency Liquidity: Providing funding to help companies make payments to critical stakeholders (e.g.: smaller vendors, contract workers, local transporters).
Crisis Mentorship: Offering access to personnel who can assist local energy enterprises with proposal writing, mentorship, branding, etc.
Transport Support: Compensating companies for additional transport costs – including the procurement of government passes – related to the transfer of raw materials or installation material. This is being undertaken by enterprises themselves, since local transporters are restricted, or are pursuing more lucrative larger transport orders.
Employee Welfare Support: Covering the fixed costs required to retain staff, pay office rents, and purchase additional requirements like food, shelter and protective gear – which can be difficult to procure in remote areas.
Supply Chain Disruption Support: Compensating companies for the escalation in the price of goods as a result of limited stock with suppliers, which is leading to short-term price hikes.
Credit Enhancement Support: Covering the down payments, interest payments or guarantees required by lenders, to help unlock funding for end-users and solar enterprises from risk-averse local financial institutions.
Working Capital Refundable Grants: Offering interest-free “loans” or refundable grants to help enterprises:
Program Designs to Stimulate Alternative Revenue Channels: Designing grant programs that enable local solar companies and other SMEs to create and/or deploy innovative solutions to pressing health, livelihood or agriculture issues – including providing solar power to health facilities or COVID clinics.
These sorts of funding solutions are vitally important, but non-monetary support is also crucial to helping solar enterprises survive this crisis. Financial support in itself means little without complementary mentorship and hands-on support in this difficult time. Some suggestions include:
COVID-19 has drawn attention to the critical need to support the recovery of local energy enterprises and other SMEs, so they can not only survive in the near-term, but also thrive in the years to come. It is essential that governments, funders and other sector stakeholders design a response that considers the unique needs, and unique value, of these crucial drivers of the economy.
SELCO Foundation has prepared a checklist targeted at building resilience in local energy enterprises. For more information please click here.
Sarah Alexander is a Senior Advisor at SELCO Foundation.
Photos courtesy of SELCO Foundation.