A Solar Social Enterprise Collects Best Practices in India

How can social enterprises finance solar power and other investments sustainably while also bringing funding up to scale? SELCO Foundation hosted two roundtable discussions in India in 2014 and 2015 to ask stakeholders how to respond to these challenges. The roundtables and a set of interviews yielded a report, “Bridging Gaps: Investors and Social Energy Enterprise.”

The report says SELCO has faced complex and difficult challenges in ramping up its work. Investors must adjust their expectations about rapid results, risk management, short-term exit strategies, internal rates of return, and scale-up expectations to successfully fund clean-energy social enterprises in India, the data revealed.

Lack of customized, community-appropriate technology has posed a problem for SELCO, the report said. International solar market volatility has also been an issue in the past. Rates of return have been lower than anticipated. International legal and market issues have also created roadblocks. [[{"type":"media","view_mode":"media_large","fid":"2106","field_deltas":{},"attributes":{"alt":"Wall in India","height":"300","width":"450","style":"float:right","class":"media-image alignright size-medium wp-image-17856 media-element file-media-large","data-delta":"1"},"fields":{}}]]

With such a forbidding set of obstacles to face, is SELCO Foundation hopeful? Surprisingly, yes. Clean Energy Finance Forum interviewed Sarah Alexander, consultant at SELCO, about what has taken place since the roundtables and how other companies can use the data in the report.

Alexander said these recommendations apply to a broad range of sustainable enterprises in the clean energy space. The report shows how this complex web of obstacles can be broken down into relatively manageable pieces.

CEFF: Is SELCO Foundation an energy company, a nonprofit organization, or a philanthropic organization? How is it separate from SELCO India? How are they related to one another?

Alexander: SELCO Foundation operates as an independent entity from SELCO India, a social energy enterprise. SELCO Foundation builds on the learning and experience of SELCO India as a leading social enterprise in the energy-access space and develops solutions that are replicable not only [in] SELCO but [among] its peers and other key stakeholders working in this field.

SELCO Foundation is a nonprofit established in 2010 that enables deployment of sustainable-energy solutions that enhance asset creation and quality of life for underserved communities. The foundation’s solution framework involves innovations, capacity building, policy reforms, and incubation of small- to mid-scale energy enterprises.

SELCO India is a social enterprise established in 1995 that fills in the last-mile delivery of [clean energy] to underserved communities via sustainable-energy solutions and facilitation of end-user financing with regional and rural financial institutions.

CEFF: Do you think your exploration of these investment challenges has helped to put your company on a better financial footing than it was on before? Why or why not?

Alexander: For many entrepreneurs (irrespective of field), starting a social enterprise is a learning-on-your-feet… experience.

Especially in the early days, there is little mentorship or experience to draw from, so one just… uses [one’s] own judgment.

While [they were] not ideal, SELCO’s experiences, both negative and positive, ultimately shaped the way we engage in partnerships with potential investors and donors.

Today, SELCO addresses several of these challenges head on. [We do] our own “reverse” due diligence to ensure we have aligned investors who are willing to stick with us through ups and downs.

[We focus] on processes to create sustainable pathways to deliver solutions rather than [emphasizing] numbers alone. [Examples include] lean financial management, creation of local employment, and strong local suppliers.

In addition, SELCO Foundation’s Policy Team and the Incubation Centre are working towards changing attitudes and opening up conversations… regarding due diligence, investment practices, getting enterprises investment-ready, etc.

This will be further fed into the foundation of the SELCO Fund to be launched next year, which is a social venture fund targeted at small to medium-sized energy enterprises in India.

CEFF: What changes are you making now within SELCO Foundation and/or SELCO India to implement your recommendations?

Alexander: SELCO Foundation played a key role in setting up an alliance of clean energy enterprises and stakeholders, CLEAN (CLEAN Energy Access Network), endorsed by the government of India [and] other vital stakeholders.

We have also prepared a memo on the due-diligence-negotiation process with an emphasis on term-sheet language and important questions to ask for both parties during the process.

SELCO is developing another arm, a SELCO Fund, to provide funding for early-stage small-to-medium energy entrepreneurs using the best practices and lessons learned from its own investment journey.

The primary goal of the fund is to be a social-investment vehicle with a target to enhance energy access [for] the poor and underserved. It is fundamentally different from other social venture funds in four aspects:

  • Investment instruments: Offer a holistic mix of equity, debt and grants
  • Funding stage: Offer primarily early-stage and seed-stage funding
  • Size of investments: Invest in a mix of enterprises (by size and [by] the potential scale they hope to achieve)
  • Type of entrepreneurs: Focus on entrepreneurs who are unable to tap into other sources of funding due to language, education, cultural [issues], or other barriers

The fund will not seek to maximize financial returns; the financial goal would be to return the capital while maximizing the social impact…from the investments.

CEFF: How did you collect the data for the report? Is it all from the roundtable or did you also conduct surveys and interviews?

Alexander: The data were collected from key interviews with senior management at SELCO – including the founder, president and COO – at different stages of its growth.

The report was [written] to draw openly from the experience of SELCO over the last 20 years to highlight the challenges that were present then and are still prevalent today.

In addition, the report also drew from interviews with fellow enterprises and discussions at the roundtables.

CEFF: Who is the intended audience for this report?

Alexander: Impact investors, social energy enterprises, policy makers, and NGOs or think tanks.

CEFF: Who participated in the roundtables? How did you decide who would participate?

Alexander: We chose the participants from our own investors, referrals by those investors, fellow enterprises, and stakeholders who have been vocal about this issue and have expressed an interest to proactively advocate for a change in attitudes in the sector around investments in the social enterprise space.

CEFF: Were all of the participants from India? If not, where were their organizations located?

Alexander: Mostly India - but there were investors from the United States, Italy, and the Netherlands.

CEFF: To what extent do you think your company’s difficulties finding social-enterprise capital are representative of other solar companies in India?

Alexander: Access to capital may not be as difficult as access to mission-oriented investors [who are] willing to be patient for long-term, impactful results.

We have found that, for social enterprises… issues of exit, short periods of turnaround, emphasis on results versus process, high transaction costs, etc., prevail even today.

However, perhaps there is more awareness than [there was] 20 years ago about the potential of the sector to present a real solution to India’s underserved, thus bringing in all sorts of investors and more budding entrepreneurs developing unconventional solutions.

But given that conditions to nurture these enterprises continues to remain fragmented, the inflow of investors who choose investments based on experience in other more mature fields can bring in false expectations and worse, unsustainable models.

Thus, the challenges still prevail but perhaps in varying intensity.

CEFF: Do you think that the challenges and recommendations at the end of the report are applicable to solar companies that are not social enterprises and operate in India? Why or why not?

Alexander: Yes, it is definitely applicable to social enterprises beyond solar and beyond India.

The recommendations represent “attitudinal” changes and actions that can steer the sector more realistically.

It does not focus on specificities around the… funding at different stages of enterprises, which is more subjective to different sectors and perhaps country regulations.

Despite varied sectoral differences, social enterprises… experience obstacles such as:

  • high operating costs
  • scarcity of trained human resources
  • constrained access to capital
  • dearth of processes that transition grassroots R&D to practical adoption
  • access to end user financing
  • ill-defined standards of impact assessment
  • conflicting expectations of scale
  • stifling domestic policies
  • a host of other issues related to an underdeveloped ecosystem

Social enterprises develop and implement new delivery models – many of which are untested, unfamiliar, and not highly profitable even in the long term. Therefore, getting access to investors whose goal is social impact and [are] thus willing to take lower returns remains a huge challenge in India and elsewhere.

There didn’t seem to be a lot of material from the practitioner’s perspective available.

CEFF: Do you think that the challenges and recommendations at the end of the report are likely to also be applicable to solar companies in other countries? If so, which markets worldwide are likely to be similar?

Alexander: Yes. India is often compared to a mini-Europe because every state is quite different.

Thus, based on the diverse experience in India across states and even within states, it is possible to find analogies across the world.

SELCO’s own experience in capacity building efforts with African countries revealed very similar challenges.

For instance, in Tanzania’s upcoming market for off-grid energy solutions, some common challenges emerge:

  • risk-averseness to lending for smaller projects serving low-income customers
  • tight lending criteria among domestic financiers (sometimes in contradiction to the flexible lending criteria of their fund sources)
  • weak financial management skills at the enterprise and financial-institution level to understand businesses of this nature
  • difficulty to access pockets of funding below $100,000

CEFF: Do you think that any international organizations such as the United Nations or the World Bank might be able to assist in making the investment process easier for solar social-enterprise organizations in India? If so, how could they do so?

Alexander: The United Nations and World Bank are important players to stimulate or unlock crucial financing, as they can provide the much-needed soft funding required to do so.

They can also play a role in changing attitudes and advocating for more-sustainable practices.

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