Posted by: Diana Bialus, Consultant, Inclusive Finance
Many SMEs in Cambodia work with outdated and inefficient technology. With energy prices high, technological inefficiency means high production costs and high environmental costs. Locally available technologies are often not adopted because existing suppliers lack capacity to promote their products and distribute more widely, potential clients have limited access to finance and small businesses do not yet recognize the business case for adopting more efficient technologies.
MEET-BIS Cambodia (Mainstreaming Energy Efficiency Through Business Innovation Support) confronts these problems head on. Under the European Union’s SWITCH Asia initiative to promote sustainable consumption and production, this project aims to stimulate SME investment in energy efficiency and renewable energy solutions (EE/RE). The project is built on the experience of MEET-BIS Vietnam implemented by a consortium of companies, including Enclude which successfully facilitated investment in energy saving solutions for 423 SMEs.
Enclude, as the leader of the Access to Finance component of MEET-BIS Cambodia, facilitates the flow of financing to technology suppliers and to SMEs that want to invest in EE/RE projects. Our goal is to establish partnerships with at least two financial institutions (FIs) to develop “green” lending products that will support EE/RE initiatives at 50+ SMEs over four years. Innovation is an important part of our activities and we aim to develop financing solutions via several channels: from banks and MFIs to leasing, ESCO models, donor and climate funds, and crowdfunding.
An initial assessment of potential finance windows and SMEs in selected sectors suggests a general lack of awareness of the benefits of EE/RE investments by Cambodian FIs, together with lending conditions that hinder SMEs’ access to finance, such as high interest rates and high collateral requirements. While making financing inaccessible for small businesses, these conditions are what most of the larger businesses in the market are willing to accept. Therefore the FIs’ motivation to adjust their conditions, in the absence of a strong incentive, is low.
To address these challenges and convince financial institutions that there is an opportunity in this market, MEET-BIS is conducting several financing pilots. These include a partnership with Mega Leasing, a leading Cambodian leasing company, to finance investments in energy efficient air conditioning equipment. This pilot was launched in April this year and will run for six months. SMEs will benefit from financing without any collateral requirements other than the financed equipment.
In addition, MEET-BIS is in the process of developing a standardized loan product for the financing of low-cost, high-efficiency equipment (such as solar water heaters or heat pumps), in partnership with Acleda Bank. This model would reduce the administrative cost of loan assessment for the financial institution and eventually the financing cost for the SME.
Finally, we are working with partner suppliers to increase their awareness of the ESCO model of financing. In the context of MEET-BIS project, we view the ESCO model as a financing solution under which the supplier is responsible for the investment, installation and maintenance of the equipment for a certain period of time at the end of which the ownership of the equipment is transferred to the beneficiary client. This model enables the suppliers to promote their products and also facilitate financing of the investment for their SME clients. Nevertheless, the experience so far has been that a lot of education is necessary before the adoption of this model in Cambodia is feasible. Also, based on an initial analysis conducted by the Enclude team, the feasibility of an ESCO model for small individual investments is relatively low. Scale will be an important requirement for a successful ESCO model.
Therefore, one of our key lessons learned in the implementation of this programme so far has been that while financing is one of the main prerequisites for investments in clean technologies by SMEs, the market must be ready for that financing. That is why, as MEET-BIS enters its second year, the program continues to work with financial institutions, but also to support suppliers and SMEs in developing awareness of the importance and benefits of environmentally friendly and sustainable growth.