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Source: World Bank (1995b), pp17—21

Source: World Bank (1995b), pp17—21

According to the entrepreneur, the firm managed to retain collection rates of 95 per cent under its consumer finance scheme. But even with a perfect rate of 100 per cent, the entrepreneur was facing a much more fundamental issue -lack of capital.28

His profitability was good. He made a margin of 30 per cent on the system price, which he felt was 'not a magic number', rather it was the one that is most 'comfortable in developing the organization'.29 Plus he earned a 30 per cent margin on the consumer finance:

We have increased our prices over the last three years. Initially they were low to capture the market. Now presently the profit is nice. ... You can build a much stronger organization this way. You simply have to have a reasonable income. If the margin is 30 per cent on the system and 30 per cent on the finance, then that is the perfect profit for us.

As is the case with many small businesses, however, it was not the profitability of the business but the cash in the business that was the problem.

Under his consumer finance scheme, the down payment covered only part of the cost of the system. The entrepreneur had to find the rest until the customer repaid it month by month. As demand increased, he needed more capital to fund the consumer finance scheme. The business was sailing perilously close to the wind. By mid 1996, it could only make payment to its suppliers at the end of each month, once the customers had paid their monthly instalments.

The cash in the company simply was not sufficient both to allow for dramatic growth in his market infrastructure and to finance his customer base:

We manage a credit system and, in fact, nothing would have been possible without combining sales with credit. However, as the down-payment is only enough to meet 30 per cent of the system cost, and as the money is tied up in the loan for typically four years, from a company point of view, there is a shortage of working capital.

The entrepreneur achieved sales of 400-500 solar systems per month by the end of the 1994. At the time, these figures were unprecedented among solar businesses targeting rural markets. But ironically, they were too high. In order to correct the deteriorating cash position, the entrepreneur actually had to reduce the monthly sales to 200-250 for 1995 and 1996, which allowed the cash-flow situation to stabilize.

In a way, the entrepreneur was too successful. His finance scheme and market infrastructure were creating too much demand:

The strange thing is that the more sales we have, the less cash we have at our disposal due to the credit programme. It is stupid, but I could stop selling and use the money that keeps coming in to simply strengthen the organization.

The entrepreneur reported that 'we began the company with a personal investment of US$400,000-500,000' and that this was used to establish the first series of service centres and to design the wall-mounted display box.30 But this wasn't enough - he was seeking a further investment of US$2 million to try to improve his cash-flow position.

The entrepreneur first tried approaching the banks in Indonesia. But found it to be 'extremely difficult'. He didn't have much luck with the banks back in Europe either:

I would visit a bank and not even be allowed to finish my presentation. I went to a Dutch bank once and only got half way through the presentation when the manager stopped me and asked why I was wasting his time. That is the feeling in most banks about commercializing solar in rural areas, and I understand this. As a banker I would do the same thing. A banker simply likes the money in the way that they are used to. The bank is risk-averse and conservative, while selling solar is new in so many ways.

It was not a question of possessing inadequate security, since he had considerable collateral to offer in land and houses. Rather, his proposal 'was more or less rejected straight away'. The financiers told him that the loan requested was too small, and the proposal was too risky. But in the entrepreneur's opinion it was that it was just too innovative, too different:

It was a question of being a new company, with a new strategy, entailing a new concept and a new product. PV has always been a government-dominated area. The bank's perception of electricity is large-scale, oligopoly, involving the Government. By contrast I was presenting a proposal for small-scale electrification, which was fully private, for rural, perceived-to-be-poor people, who had never taken a loan before. The banks are used to working with one customer in electricity-generating projects. But here I was asking them to work with thousands if not millions.

And he continued, 'Presenting [our] proposal to the bank entails telling them about five "new" things at one time - it is not just one new thing. In the end you are simply "finished".'

Of particular significance was the entrepreneur's proposal to on-lend the bank's money to rural households. The entrepreneur found that 'the banks do not believe that we can handle a rural credit programme'. Independent confirmation of this assessment came from a World Bank consultant looking at the solar markets in Indonesia: 'From a bank's point of view, not only are the dealers relatively unestablished, but [solar] is a new business, in a not very attractive market segment.'31

The perceived risk of lending for rural credit was heightened by the duration of the entrepreneur's most popular credit package - four years. According to the same consultant, the banks in Indonesia have a 'rule of thumb that the longer the period of the contracts, the larger the losses'. Furthermore, both the product and the enterprise were viewed as unestablished: 'the banks do not see the panels as fully commercial (this is a pilot project)' and '[the enterprise] and even more so the other dealers are not seen as having a well-established track record'.

Given that an investment was not forthcoming, the entrepreneur reasoned that he should turn to organizations with more to gain:

The key is this: you have to go through parties that have an interest in cooperating with you. It is that logical and that simple. If you cannot get your money from a bank, then go to a party that actually has an interest in your work. For us that was the manufacturers. And their support has made the difference.

The entrepreneur perceived that solar PV manufacturers 'have their own "interest" in cooperating with us, as they ultimately have to move modules'. He identified a state-owned Italian manufacturer of solar modules that was willing to provide six-month, interest-free credit. The entrepreneur emphasized time and again that 'supplier credits make financing possible'; 'we would never have made it without the credit offered by [the supplier]'; 'without the supplier credits, it simply would not have been possible to launch this initiative'; and 'if the supplier had not trusted us, we would have been broke by this stage; this cannot be over-emphasized'.32

But supplier credits for the entrepreneur were more of a stop-gap. The big potential lay in securing the World Bank's 1997 Indonesia Solar Home System project. The entrepreneur had played a central role in lobbying for this project, and during the preparation process was asked to inform its design.33 Indeed, the World Bank manager who spearheaded the loan drew inspiration from the success of the entrepreneur.

The project, described in more detail in Chapter 6, targeted the sale of 200,000 solar systems over five years. Its two core components were working capital loans for firms selling solar (which would have improved the entrepreneur's cash flow), and a grant per solar system installed, disbursed directly to the firm responsible for invoicing the customer (which the entrepreneur could have used to further improve margins or reduce prices). Simply put, it would have been ideal for the entrepreneur, and for the firms that would have followed his lead.34

But then crisis struck. Just as the World Bank project was signed by the Indonesian Government, the Asian economic crisis sent the country reeling. With the rupiah plummeting, overnight the cost of a solar module in local currency virtually quadrupled. No longer able to afford to procure and sell modules, his sales came to a halt. This was soon followed by customer loans rapidly dropping off, and very quickly the business collapsed.

In a book that has as one its core theses the agency of entrepreneurs, it may seem strange to use a case study of a business failing. But this entrepreneur nonetheless had a profound effect on the future of solar diffusion. Not as it happened in Indonesia, but on an island just across the Indian Ocean - Sri Lanka. The World Bank project in Indonesia was inspired by the entrepreneur's initial success. And although it could not be implemented properly in Indonesia, it would find rebirth in Sri Lanka, where it would lead to unexpectedly high rates of diffusion.

Entrepreneurs in Sri Lanka

Unlike the entrepreneurs profiled earlier in the book, the three entrepreneurs in Sri Lanka had no prior solar experience. But they did bring what one of them described as the 'right combination of knavish energy and enthusiasm'.35 One of the entrepreneurs was trained in economics, one in engineering and one in marketing. All three of these disciplines found their use when it came to selling solar in Sri Lanka. But without any direct solar experience, there would be a lot of learning by doing; often the hard way.

When the entrepreneurs launched their business, they initially thought the market was in solar water pumping. Their idea was to come up with a mobile solar-power pump:

There was a lot of sun, a lot of people didn't have electricity, and this idea had potential and scope. We first thought of mobile solar water pumps for farmers, mainly for irrigation but with secondary use for lighting.

But when it came to making and selling a product, they found that instead the market was among the thousands of households that were using kerosene for lighting and battery charging for entertainment. Interestingly, a market survey they had commissioned had written off this segment - finding that the rural population was too enthralled to the promises of grid extension and low-cost electricity made by the politicians. But in practice, this is where they would find the market; and the market wasn't small - there were an estimated 2.5 million unelectrified households in Sri Lanka in 1986.

To tackle this potential market, the entrepreneurs would need to learn on their feet. They initially felt it necessary to manufacture solar panels to serve the local market, but later the last remaining entrepreneur of the original three would exit the manufacturing business to focus on sales. To reach the market, they initially tried to go through a big distributor of consumer durables, but decided in the end to focus on building their own small, tight-knit network of dealers and sales agents. They initially tried to work with a big bank for solar, and when this didn't work they tried their own consumer finance, and when this didn't work they would settle on cash sales.

Figuring all this out took time and money. The entrepreneurs had initially done well to raise start-up capital from two prominent development banks in the country. (We might observe here that the other entrepreneurs, in India and Indonesia, did not have the same success in encouraging banks to provide start-up capital.) Most of this money was sunk into the machinery to manufacture modules, as well as head-office expenses and managing 23 different teams that were organizing demonstrations and promotions for solar power.

Initially, it looked promising. Through a combination of road-shows (to demonstrate the product) and building a network of dealers, the entrepreneurs increased sales to 150 units per month by August 1998. But then there was an island-wide strike called by the local communist party (JVP), and many businesses, including theirs, ground to a halt. At this point, it would have been easy for the business to be engulfed in the orgy of violence and chaos consuming the country. If their business and staff had been targeted as anti-JVP, it would have spelt the end.

To avoid this fate, the entrepreneurs resourcefully placed an ad in the newspaper asking young people to send in an essay about how solar technology could help their village. The response was more than they expected, and on the back of this they organized multiple three-day training programmes with 20 participants at a time, specifically targeted at the youth. As one of the entrepreneurs recounts: 'we felt among them would have been sympathizers or even JVPers, so we were able to break barriers in the village and continue to do business'. This initiative probably saved the business, and earned them the right to soldier on.

That said, there were many more obstacles to come. The entrepreneurs still had not figured out how to get consumer finance to their customer base. The large banks in the country were not interested or willing to take the credit risk. The entrepreneurs also knew they needed to build their market infrastructure. They did not have a dedicated channel to make stock and service available close to the customer. They had mobile promotional teams, and a few dealers, but not a dedicated and permanent channel. Moreover, the business was quickly running out of money.

So in what seemed like a coup at the time, the entrepreneurs concluded a deal with the largest nationwide retailer of consumer durables - Singer - to stock, sell and finance their systems, all under one roof. Singer had several hundred dealers around the country, not to mention their own dedicated Singer shops and financing facilities. The deal saw them selling 600 systems upfront to Singer, which was significant since they were not even selling 100 units per month at this time.

But the promise in this partnership was ultimately not realized. It seemed perfect: the entrepreneurs were bringing a new product that Singer could add to its portfolio of consumer durables sold in rural areas. But in line with the discussion in Chapter 2, and Schumpeter's contention that only a few people are 'able' to see the opportunity inherent in an innovation, Singer and their dealers just didn't see it.

What they saw instead was the hassle of selling door-to-door, developing installation and servicing procedures, and taking the risk on financing a product they knew nothing about. They were comfortable with most customers walking into their shops and selling and financing products that everyone knew - TVs, fridges, sofas and so on - and on which they earned a steady, consistent margin. In the end, it would be left to the entrepreneurs - individuals from outside the established consumer-goods industry - to 'see' the opportunity and persevere. Only the entrepreneurs properly understood the product, understood the potential and were singular in their focus to drive the market forward.

It was now 1991, and in the absence of a promising partnership with Singer, or a bank to finance customers, the entrepreneurs had established a tight-knit group of dealers that were selling systems on a cash basis. Through this network they could sell 300-500 systems per year. But this was not enough to cover their costs. Instead, to make ends meet they found a big project partner in BP, which was implementing a large 1000-system project. BP needed a local firm to take care of sales, installation and service, and the entrepreneurs' firm was selected to do so. And when the project ran into difficulties with money collection from the customers, the entrepreneurs were again called in to sort it out. The project provided them with a lifeline, enough to see them through another year.

But by 1992, the business was in trouble, and radical steps had to be taken. The company was not selling enough to cover costs, so two of the original founding entrepreneurs left the company. As one of the departing entrepreneurs said: 'We felt it was a drain on resources for all three to remain. [The third entrepreneur] continued to run the business.' But the departing entrepreneurs did not abandon the business. In a critical move, one of them encouraged a Malaysian businessman with whom he was doing another deal to take a 50 per cent stake in the company. The company's debts were all settled, it was renamed and it was effectively given a fresh lease of life.

At this point the third entrepreneur (hereafter 'the Sri Lankan entrepreneur' or just 'the entrepreneur') took control of the company. He knew what needed to be done - build a channel to the rural customer base and organize finance. But he had to run the operation on a shoestring. Although its debts were settled, the business did not have sufficient resources for expansion. The entrepreneur would end up putting his own money into the business to keep it afloat - a testament to his commitment.

In an effort to cut costs and improve focus, the entrepreneur got out of manufacturing solar modules. Instead he started to import modules from one of the larger global solar module manufacturers. Similarly, he consolidated around a network of 8-10 dealers, all of whom were selling solar systems either on a cash basis or through their own credit. And he sought out projects that would enable him to supply in bulk and cover his costs at one shot - for example a telecommunications project he landed in 1998, which helped the company finally turn a profit. But at times, probably out of sheer frustration, he tried bolder moves to see if he couldn't stimulate a bigger rural market, for instance selling to a village on credit terms and trying to collect money from them directly over time. Not surprisingly, he ended up unable to collect the instalments, and wrote off the loss - something he could ill afford at this time.

The entrepreneur needed something else, something that would lead to a more dramatic shift in the marketplace. Thus, as early as 1993, he started lobbying the World Bank to develop a solar project.36 After four years of market studies and reviews, the World Bank was ready to launch the 1997 Energy Services Delivery Project, which would effectively mimic the Indonesia project: a grant per solar system installed (starting at US$120 for a 50-watt system) and lines of credit for companies and banks to on-lend to solar customers. It was an attractive policy framework, and it caught the eye of Shell Solar.

At the end of 1998, one of the founding entrepreneurs contacted Shell Solar to see if there might be a potential for a partnership in Sri Lanka. Shell Solar was just starting its process of investing in the rural markets, and Sri Lanka was a key target country. After roughly a year of initial meetings, feasibility studies and due diligence, Shell Solar was ready to invest. On top of the amount received for acquisition of the business, Shell Solar invested more than US$2 million over the next two or three years. Moreover, the entrepreneur would be retained by Shell Solar as its managing director in the expansion phase. He now had at his disposal the resources to build the market infrastructure he knew the market needed, but which earlier he could not afford.

It is important at this point to note the beneficial effect of Sri Lanka's policy on foreign direct investment. Unlike India, where the entrepreneurs faced controls and delays on 100 per cent foreign ownership, Sri Lanka had no such barriers. Instead it had a 'fast track' system through the Board of Investments. Because Shell Solar committed to invest a certain amount of equity in the new venture, it was able to fund the company and close all formalities within just a couple of months of completing the acquisition.

While finalizing the negotiations and acquisition with Shell Solar, the Sri Lankan entrepreneur was working on a new consumer finance arrangement. The American entrepreneur (from the India case study), through his earlier promotional activities in Sri Lanka, had encouraged an NGO called Sarvodya to enter the solar market. Now their micro-finance arm, Sarvodya Economic Enterprises Development Services (SEEDS), was in the business of not only lending for solar but selling solar. The Sri Lankan entrepreneur sensed that the managing director of SEEDS was not pleased with their performance as a seller of solar, and he pursued the partnership in earnest.

By mid 1999, after a year of trial and error, the SEEDS managing director was getting the sense that when it came to selling solar, they were in the wrong business. SEEDS had earlier established two of its own sales and distribution points, hired staff to sell, install and service systems, but soon found that they were not able to manage sales, installation and service of solar to the standard they had hoped for. So when the Sri Lankan entrepreneur approached the managing director, himself an innovative leader, and made a compelling case that SEEDS would do better to focus just on financing solar, the managing director took note.

In May 1999 the entrepreneur signed a preliminary letter of intent with SEEDS. And once Shell Solar had actually finalized the acquisition in September 1999, there was that much more credibility. The entrepreneur was able to make a convincing pitch that he was serious about investing in an extensive market infrastructure to sell, install and service solar home systems in large numbers, and that the systems sold would be of good quality, that warranties would be honoured and that a certain number of after-sales visits would be done for free. To prove his point, he could point to pictures of new, Shell Solar centres - branded branches - already established in some market towns of Sri Lanka, staffed with trained technicians and sales people, already selling into the market. Finally, after several months of negotiations, the managing director of SEEDS agreed to step back from selling solar themselves, and formed an alliance with the entrepreneur to finance solar customers in December 1999.37 This agreement would go on to revolutionize the solar industry in Sri Lanka.

Figure 5.36 Typical solar home

Figure 5.39 Solar system powering road-side shop (also serving as home)

It is not surprising that the entrepreneur's success in coaxing SEEDS into the market made the difference. Once in the business of financing solar, SEEDS found that 80-90 per cent of the solar loans they disbursed were for the longest duration possible - this was similar to the experience of the entrepreneur in Indonesia. Until 2003, SEEDS offered a five-year loan at 24 per cent interest with 20 per cent down-payment. At the prevailing prices from 2000 to 2003, customers typically paid - US$100-120 as down-payment and US$10-15 per month over five years for a 50-watt system with five or six lights. With these terms of finance, SEEDS found that roughly 700,000 unelectrified homes could now afford to buy solar.38 So again it is not surprising that after SEEDS entered the market, the demand for solar dramatically increased.

With Shell Solar's investment, the entrepreneur could capitalize on this demand. He proceeded to develop local branches - Shell Solar Centres - to act as stock and coordinating points for door-to-door salespeople and technicians for installation and service. It was a similar approach to that in Indonesia. The number of these solar centres quickly ramped up to 16 over a two-year period, and with this, so too did the number of trained salespeople and technicians driving sales forward.

Figure 5.40 Solar light in rural kitchen
Figure 5.42 Sitting in solar light, watching television
Figure 5.43 Enjoying solar-powered television at end of day
Figure
Figure 5.46 Training technicians in battery-handling

Figure 5.48 Sales personnel and technicians massing for village demonstration

Figure 5.48 Sales personnel and technicians massing for village demonstration

Figure 5.49 Technician installing solar module on rooftop
Figure 5.50 Wiring solar module to electronics and battery
Figure 5.51 Customer education post-installation

With both credit and the market infrastructure now in place, sales surged from what the entrepreneur was used to - for example 20 per month in 1999 - to 200 per month in 2000 and 500 per month in 2001. And they would keep growing until in 2003 the company was selling some 1000 systems per month. Critical to being able to keep up with this demand was the investment by Shell Solar to finance the growing inventory that was required, as well as the growing accounts receivable - payment by the banks often took 60-90 days from installation.

At the end of 2001, the entrepreneur then created a further opportunity for growth. He got news that a particular province in the south of the country, inspired by the development of the solar market, wanted to do its own dedicated grant scheme. The province's initial plan was to orchestrate a mass tender for solar systems, and then dump them in the market at subsidized prices (which would have distorted prices and future solar sales in the area). The Sri Lankan entrepreneur was able to convince this government not to do this, but rather to build on the same policies as the World Bank project - for example make grants available based on sales by the business direct to the customer, and enable the customer to choose from a variety of firms in the marketplace.

Thus, by the end of 2001, firms participating in the Sri Lankan solar market were not only benefiting from a grant per system installed of

US$70-120 under the World Bank project, but an additional US$100 from the Uva Provincial Government, albeit that the provincial government grant had to be subtracted from the system price - it was not left up to the company to decide how much to pass on. This had a huge impact, leading to the surge in sales at the end of 2001. Moreover, the provincial government grant would serve as an example to the central government, and it would later be expanded to the other poorer eastern provinces, as well as to the north. Today this additional grant has been retained as a key policy tool by the central government, and extended on a countrywide basis.

While this was happening, the local solar industry was steadily growing. There were already two other players in the market that quickly signed with SEEDS after the entrepreneur. Once the entrepreneur and these competitors demonstrated the potential in the market, a new local entrant - Access -joined, and committed a lot of resources (at least the same amount as, if not more than, Shell Solar). On the back of their own credit scheme, this company was able to grow very quickly. Indeed, in 2001 they grew to owning about 35 per cent of the local market share (although their market share quickly dropped when their credit scheme did not work out). By the start of 2002, there were five solar providers in a growing market, most of whom were using the SEEDS facility to finance their customers. And by the end of 2007, there were a total of 14.

Moreover, once SEEDS set the example, it was possible for the entrepreneur and other solar companies to approach other potential banks and bring them in too. From 2000 to 2003, it is estimated that SEEDS's share of the solar

market was as high as 90 per cent, but with the entry of other finance houses such as Lanka Oryx Leasing Company (LOLC) and Alliance Finance, this share subsequently dropped to 50 per cent by 2005.39

With multiple firms building a market infrastructure to sell and service solar (albeit to different standards), with multiple banks actively financing solar, and with an additional grant from the Uva Provincial Government, the industry-wide sales of solar simply took off. From only 500 systems per annum in 1999, the market jumped to nearly 15,000 systems per annum in 2001. Then with a follow-on World Bank project orchestrated at the end of 2002, the scene was set for unprecedented diffusion. By the end of 2006, more than 100,000 solar systems had been sold and installed in Sri Lanka, representing more than 7 per cent of formerly unelectrified homes and more than 33 per cent of the estimated market among unelectrified households using kerosene and battery-charging services in place of grid electricity.

Shell Solar sold an estimated 50,000 of those systems before exiting the Sri Lankan solar market as part of its global exit from the solar industry. But while Shell Solar exited, the entrepreneur remained. Having already spun out of Shell Solar and set up a new solar business in 2003, his enterprise now remains one of the largest solar providers in Sri Lanka. It is a testimony to the enduring commitment and tenacity of entrepreneurs, as discussed by Schumpeter, and again stands in stark contrast to the shifting agendas of larger corporations.

When reflecting on the Sri Lankan experience with solar, and why solar sales increased there, GEF and World Bank analysts have pointed to the country's 'long history of rural microfinance' on which financing for solar could build.40 In another study it was concluded that once the microfinance institutions (MFIs) became interested, solar diffusion under the World Bank's project simply took off:

Though SHS installations were slow for several years after the project began, once MFIs became involved, installations have begun growing rapidly, from 1000 in June 2000 to over 3200 by the end of March 2001.41

But nowhere in these analyses is the question of 'why it was that MFIs decided to enter this market when they did' considered. They had not entered the market in the past two years of the project's existence, despite the presence of the two or three firms on the ground. Nor had they entered the market during the close to two decades that solar was already being sold in Sri Lanka. So why did they choose to come in now?

It is because such questions are rarely explored and answered by those adopting a more macro-view of diffusion that I specifically developed the concept of agency in Chapter 2. Very often people will explain technology diffusion with statements such as 'the price came down', or 'credit became available', without looking at exactly how this result was brought about, how those involved made it happen and why they were able to do so effectively.

As we saw in the case of Sri Lanka, it was not simply a question of there being a long history of microfinance in the country, or an arbitrary decision of microfinance institutions to become 'involved' in the market. It was a question of an entrepreneur 'convincing' the country's largest microfinance player to scale up their solar finance activities, and then having the right capacities and right resources to build a market infrastructure that could support this increase in finance with strong solar sales, installation and service. Once our profiled entrepreneur had done this, he was quickly joined by other players in the market, who in turn encouraged other finance partners to enter. With the twin pillars of a strong market infrastructure and consumer finance now emerging in Sri Lanka, solar diffusion took off.

Summary

Creating solar markets from scratch was not easy. None of the entrepreneurs got it right the first time, and none of them had sufficient resources in the early stages to realize their vision. But they persevered, and the entrepreneurs in all three cases transformed solar diffusion.

These entrepreneurs had a direct impact through what they sold to their customers. But it would prove to be their indirect impact - their demonstration effect for policymakers and other businesses - that would have an even bigger influence on solar diffusion. When competitors followed the entrepreneurs into the market, they brought extra resources to the task of building a market infrastructure. When more banks entered the solar finance business, they brought new capital to the task of making solar more affordable. And when policymakers entered, they designed programmes that gave a further boost to the diffusion process.

Even the entrepreneur in Indonesia, whose business collapsed during the Asian economic crisis, would go on to strongly influence diffusion in other countries through subsequent World Bank projects in Sri Lanka and beyond. We now turn to consider the case of this institution in more detail, and trace how the World Bank learned to accelerate solar diffusion in emerging markets.

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