Getting personal: tailoring support to power up Tanzania’s rural businesses
Drawing on new survey findings, Sarah Best discusses how customising support for small and micro businesses in rural Tanzania could unlock productivity.
To increase income and productivity, small rural businesses need help in electrifying their operations. But the energy access sector, particularly those working on ‘productive use of energy’ (PUE) are still figuring out how to support local enterprises in the most effective and efficient way.
One question we’re chewing over is: how can support packages be tailored to the varied needs of small enterprises? They face similar local market constraints but access to resources, risk appetite and growth aspirations differ.
Our recent review of surveys – carried out by the IIED-HIVOS Energy Change Lab and NGO CEFA – examined the needs of 40 small and micro businesses in the Njombe region of Tanzania’s Southern Highlands. Together we have been exploring new ways to grow energy-using enterprises connected to a local mini-grid.
The businesses we interviewed are typical of rural areas and included hairdressers, restaurants, phone shops, millers and carpenters. Nearly all had been electrified in the last 1-5 years.
We noted big differences in earnings, ranging between US$13 and $390 a month. Most had a second income stream, again varying significantly – from one person earning $40 per harvest from farming to another making $1,000 a month from owning a milling machine, shop and truck rental business.
These differences matter because electrifying operations is expensive. Take carpentry: a manual carpenter starting out could pay $130 to buy basic tools. But a surface planer – an essential bit of kit carpenters buy when electrifying operations – costs $1,300.
Fear of borrowing
To get round capital constraints, PUE-support packages typically facilitate loans. This might be via savings groups (such as Village Community Banks (VICOBAs) or Savings and Credit Co-Operative Society (SACCOs)), church funds or microfinance providers.
But many people are reluctant to borrow money – preferring instead to use savings. Our baseline survey showed two-thirds of respondents had started their business with savings, with the rest using loans or a mix of the two.
People cited fear of losing collateral, particularly their land or houses – a concern reiterated in findings from our recent survey on SME access to finance in Tanzania. Other obstacles include finding a guarantor or simply not knowing what loan offerings are available, according to CEFA.
So what are the alternatives to loans, especially for lower-income entrepreneurs? Layaway models (PDF) (or layaway-to-credit) allow customers to reserve an item – in this case electrical equipment – and pay for it gradually, with a payment plan that suit their needs.
Another option is lowering risks by adjusting loans. CEFA, for example, is capitalising a ‘PUE fund’ in a local SACCO, offering lower interest rates than other lenders.
There may be opportunities for customising loan terms to borrowers’ circumstances, for example by setting a repayment schedule in line with seasonal income fluctuations. Lenders often offer this to farmers, but less so to other rural businesses, despite their incomes also following the agricultural cycle.
Better targeting could also help. Among our survey respondents, women were more likely than men to take loans to get their business going – probably because they had fewer savings to draw on. And across men and women, those who had borrowed in the past were more willing to take on new loans to boost their businesses.
Beyond finance, advice and training can be tailored, helping businesses earn more from using electricity. This calls for a deeper understanding of ‘high-growth enterprises’ versus ‘necessity-driven enterprises’, the gender disparity gap (PDF), and so on, each requiring unique policy approaches.
For instance, when asked about plans to upgrade their businesses, several were only interested in modest changes, like buying an affordable new power tool or more stock. Or they preferred to first spend any profits on family needs. And many took their business ideas from what they saw around them.
This can work well for entrepreneurs who have been among the first to electrify in their village. But in markets in sparsely populated rural areas such as Njombe, unfettered replication could create unsustainable competition, leading to businesses – and energy systems – failing.
Only a handful of interviewees were thinking about genuinely innovating or trying to break into new markets. An example of a ‘high-growth entrepreneur’ was a miller interested in packaging and selling flour to shops in more distant markets, rather than just processing maize locally.
Such businesses may benefit from advice on how to work through cashflow, supply chain, marketing and regulatory issues. For others, a light-touch approach – helping sensitise people to business risks and opportunities related to electrification – may be more appropriate.
An example of a light-touch intervention was our ‘PUE mobile clinic’ we ran with CEFA, reaching 500 people across 10 communities over 10 days. We loaded up a truck with electrical equipment and involved experts from local training institutes to run roadshows in communities.
These popular sessions offered equipment and safety demonstrations, basic business coaching and played video tutorials of Tanzanian PUE-entrepreneurs.
Collaboration is key
All this begs the question: can you tailor and scale simultaneously?
It comes back to cross-sector collaboration. Tanzania has institutions with nationwide presence who already know how to reach and nurture different types of enterprises.
These include government institutions, like VETA and SIDO, who are experts in vocational training and business development. And community savings groups offer points of leverage to aggregate entrepreneur demand for finance and training. But there remains a question on how to effectively reach community members who cannot access any type of financing or even save.
With more long-term support from government and funders for cross-sector collaboration at scale, we stand a better chance of energy investments improving the lives of rural people – from the ’high-growth entrepreneur’ to the average small business – providing for themselves and their families.