S3IDF: Catalysing Pro-poor Infrastructure SMEs

S3IDF addresses market failures by bringing the financial, institutional and technical engineering and innovations from the large-scale infrastructure sector and applying them to the small-scale pro-poor infrastructure sector. It provides innovative and gap-filling finance, project structuring services, business development assistance (BDA) and other services needed to catalyze environmentally sustainable, pro-poor infrastructure services and participation by local FIs and technology suppliers. Through successful examples, it demonstrates to development finance institutions and local players that the S3IDF approach and its projects are replicable and that it is possible to provide pro-poor infrastructure services profitably using small-scale providers.
Under its “social merchant bank" approach, it provides finance, business-plan training, project facilitation, implementation/operations assistance and other value-added services to small/fledgling entrepreneurs and community NGOs seeking to sell infrastructure services (water, energy, sanitation, transport, information) to India’s urban and rural poor in accordance to their preferences and willingness to pay. As project developer and investor, S3IDF requires that the enterprises it fosters should be financially sustainable at least from implementation onwards and bear pre-investment costs as feasible. S3IDF uses a “Revolving Fund" to deploy its financial support (debt, equity, credit conditioning), which is projected to generate a 12+% return based on a 90+% repayment rate. For every 1€ of S3IDF’s investment at least 2€ and often 4€ of capital is injected by the entrepreneur, local bank, government program and/or equipment supplier. Given the pro-poor market segment and its operational complexities, pre-investment costs cannot be entirely capitalized into the project costs and needs to be underwritten by grant funds. S3IDF’s business model works to minimize such subsidy needs, constantly exploring new avenues of cost recovery (e.g. securing developer fees) or cost transfer/reduction whereby other players in the value chain cover a share of the pre-investment and other assistance costs.
The next years of its “proof of concept" phase can effectively absorb amounts within the BID range €500,000. In its pilot phase operations, significant portion of the costs were covered by the founders’ financial and pro-bono contributions. Apart from the pro-bono efforts, its operations currently employ 8 full-time and 3 part-time staff.

S3IDF works through two integrated entities — S3IDF-US, a US non-profit corporation with 501(c)(3) charity status, and S3IDF-India, a non-profit Section 25 company based in Bangalore, India. Operations are implemented from Bangalore and currently focus on South India. Roughly 400 million Indians at the “bottom of the pyramid" constitute an enormous “un-served" demand for pro-poor infrastructure services. S3IDF has already deployed around €38,000, which has leveraged about €107,500 from other players, in 37 transactions with individual investments ranging from less than €30 to about €8300. The clients’ repayment record has been excellent (90+%) and there have been no project failures. There are 100+ projects under preparation in its pipeline.
Its business model has won some competitive grants and has mobilized financial support and partnership from others, including the Shell Foundation, which is now a key partner assisting further capitalization. It has developed strong co-financing partnerships with local banks and collaborations with various local NGOs and know-how suppliers, such as SELCO Solar Light, Administrative Staff College of India, and Sahyadri Energy Systems. The local banks provide project co-financing, various NGO partners help in project and player identification and share pre-investment efforts, and the technology suppliers provide technology and technical support and participate in project identification and pre-investment activities.
Though there are financial institutions in these market areas, finance is typically not easily accessible to S3IDF’s clients (small enterprises with capital needs ranging from €100s to €10,000s) because the financing programs target smaller customers (e.g. household microfinance) or larger/more established customers (e.g. “priority-sector" lending) and because of restrictive collateral or other “business as usual" requirements. These sources do not offer BDA, project integration, financial engineering and flexible, innovative financing critical to creating bankable small-scale infrastructure projects by small enterprises who have the skills needed to run a successful business. Providing these services, which are not available elsewhere, in an integrated manner gives S3IDF its long-term comparative advantage. The S3IDF approach is attractive to its local FI, technology and other partnerships, which will increasingly contribute to S3IDF’s project pipeline development and, in turn, to S3IDF’s own financial stability.

There are strong arguments for focusing on small-scale infrastructure projects — firstly it is accepted that infrastructure services are necessary if not sufficient for development, and secondly small-scale projects with small players achieve up- and down-stream development linkages for poverty alleviation. The infrastructure services provided by S3IDF’s clients to their poor customers are key to the developmental equation that will allow them to escape poverty. There are development linkages when these services are put to both consumptive end uses that improve living conditions and productive end uses that increase income. The enterprises have local primary and secondary employment generation impacts and in many cases asset ownership is transferred to the poor. There are also upstream development linkages with local capital/finance and technology supply/service sectors.
Though still young, S3IDF is successfully catalyzing the emergence and growth of viable, small-scale infrastructure service enterprises. The initial transactions have had about 2,000 direct and 10,000 indirect beneficiaries in terms of owner/operators, employees and customers. The approach S3IDF adopts ensures that only environmentally sustainable solutions are employed and there is emphasis on local resource development. Inherent in its approach and the services it provides is local human resource and skill development.
S3IDF’s business model contributes most significantly to MDG#1 and MDG#7. Its pro-poor, pro-environment criteria and inclusion of linked energy-dependent, productivity-enhancing investments such as irrigation pumping and workplace lighting, explicitly address MDG#1, MDG#7, MDG#5 and MDG#8. Its projects thus far include enterprises that deliver energy efficiency in biomass stoves for productive and household cooking purposes, enterprises geared towards provision of access to clean cooking fuels for women, adequate clean lighting for small and petty businessmen and poor households and information/communications technology investments for schools. Its pipeline includes the fostering of small enterprises that can provide electricity, water or other infrastructure services at village or slum levels and local franchising of last mile utility infrastructure operations. It thus contributes to MDG#2 and MDG#3 as such services are necessary enablers for education and eases the burden on women of rural households who bear most of the energy and water management responsibility.