Non-financial constraints to scaling-up small and medium-sized energy enterprises: Findings from field research in Ghana, Senegal, Tanzania and Zambia

Abstract

In the context of the ‘decade for sustainable energy’ (2014–2024) under the UN's Sustainable Energy for All initiative, this article presents findings from primary research conducted into the ‘African Rural Energy Enterprise Development’ (AREED) programme. AREED was a donor-backed effort to support small and medium-sized energy enterprises, implemented in five countries by United Nations Environmental Programme between 2002 and 2012, as a means to expand access to sustainable energy products and services in sub-Saharan Africa. While access to affordable finance was found to be the primary constraint to establishing and expanding local small and medium-sized energy businesses, a range of significant non-financial constraints were also identified. This article provides a critical evaluation of these non-financial constraints as they were encountered in Ghana, Senegal, Tanzania and Zambia, based on the findings of a wider study into the key outcomes of the AREED project. These barriers include the institutional frameworks, human capacities and social and cultural factors.

Introduction

Access to clean and modern energy technologies is widely regarded as a key issue worthy of targeted policy and financial support, especially in sub-Saharan Africa, the focus of this Special Issue, where there is still a strong reliance on traditional biomass (wood, charcoal, and animal dung) and kerosene fuel [2], [11], [13]. In addition to the central importance of energy to economic growth and development, there are numerous co-benefits associated with the transition from traditional fuels, such as access to higher-quality light and heat and reduced greenhouse gases, in-door air pollution and local environmental damage, including deforestation [1], [12], [20]. Given the high proportion of rural households, poor infrastructure and the distances between smaller urban areas, energy markets in sub-Saharan Africa would appear to lend themselves to small and medium-sized business (SMEs) that can trade on local knowledge and networks, and are able and willing to pursue potentially lucrative but higher-risk business opportunities [23]. While this is a contentious claim, worthy of rigorous investigation in itself, we do not question this assumption and rather work, prima facie, with the idea that energy SMEs have a valid role to play in delivering modern energy solutions to low-income populations in developing countries.

The lack of access to affordable finance is often cited as the most significant barrier to the establishment and expansion of SMEs in sub-Saharan Africa, especially for businesses operating in new or relatively unknown sectors, including energy products and services [5], [14], [15], [24]. One of the main reasons for this is that formal financial institutions in sub-Saharan Africa are generally less willing to lend to SMEs due to the high risk of default, insufficient competition, poor guarantees and a lack of information about SME's ability to repay loans [14], [15], [19]. Therefore the majority of donor-backed programmes and policies to support the development of SMEs in Africa have a focus on the financial aspects of their viability. In fact, while most of the academic papers and grey literature addressing barriers to SMEs development in Africa focus on these financial barriers, non-financial barriers are considered as important although less discussed in the literature. In general, non-financial barriers are those linked to the wider social, economic and policy environment that affects business operations. Therefore various studies consider the need to address non-financial barriers prior to, or in addition to, exploring financial constraints to SME development [16]. Indeed that is the aim and purpose of this article, which draws upon the findings of a larger study, conducted in 2012–2013, entitled “Energy SMEs in sub-Saharan Africa: Outcomes, barriers and prospects in Ghana, Senegal, Tanzania and Zambia” (UNEP Risø, 2013).

In Section 2, we provide an overview of energy SMEs and the AREED project. Section 3 includes our research questions and the methodology used for this study. In Section 4, we provide some general and energy background on the four countries evaluated: Ghana, Senegal, Tanzania, and Zambia. We then look at the business models and institutional frameworks for each country (Section 5), followed by human capacity (Section 6) and social and cultural factors (Section 7). We conclude with recommendations and suggestions for future research.