Building Competitive Green Industries



Building CompetitiveGreen Industries:The Climate and Clean TechnologyOpportunity for Developing Countries

AboutinfoDevinfoDev, a global trust fund program in the World Bank Group, supports growth-orientedentrepreneurs through creative and path-breaking venture enablers. It assists entrepreneursto secure appropriate early-stage financing; convening entrepreneurs, investors, policymakers, mentors and other stakeholders for dialogue and action. We also produce cuttingedgeknowledge products, closely linked to our work on the ground.About infoDev’s Climate Technology ProgramThe Climate Technology Program (CTP), housed at infoDev, empowers developing countriesto proactively and profitably adapt, develop, and deploy climate-smart technologies andbusiness models. The CTP is creating a global network of Climate Innovation Centers (CICs)that provide a country-driven approach to addressing climate change and fostering greengrowth. The CICs are designed as locally owned and run institutions that provide a suite ofservices and venture financing that address the specific needs of local climate technologySMEs and entrepreneurs. At the global level, the CTP is providing linkages between CICs byfacilitating market entry, access to information, and financing for the private sector, whilealso offering important tools for policy makers to measure and improve domestic climateinnovation activities. Currently, the program is establishing CICs in eight countries: Kenya,the Caribbean, Ethiopia, Ghana, India, Morocco, South Africa and Vietnam.For more information visit infoDev at and Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

ContentsForeword .....................................................................ivAcknowledgments.............................................................. 1Abbreviations.................................................................. 2Executive Summary ............................................................ 41. The Climate and Clean Technology Opportunity for Developing Countries ............ 122. Sizing Climate and Clean Technology Markets................................... 183. The Role of SMEs in Climate and Clean Technology Industries...................... 324. Case Study: Solar Energy in India.............................................. 385. Case Study: Bioenergy in Kenya............................................... 486. Case Study: Climate Smart Agriculture in India and Kenya......................... 607. Actions to Support Clean Technology SMEs...................................... 70Appendix A. Market Sizing Methodology .......................................... 84Appendix B. Value Chain Breakdowns ............................................ 86Appendix C. Policy Options and Instruments....................................... 92Bibliography................................................................. 106iii

ForewordBuilding Competitive Green Industries:The Climate and Clean Technology Opportunityfor Developing CountriesBy Anabel GonzalezSenior Director, Global Practice on Trade and CompetitivenessAs we confront the challenge of climate change – a potentially lethal threat to our planet – it is vital thatpolicymakers in every country resolve to take effective action to limit greenhouse-gas emissions. Thetechnical challenge may seem daunting, yet taking far-sighted action to restrain climate-damagingemissions can have a net positive effect on the economy. As shown by a major 2014 World Bank Group report– “Climate-Smart Development: Adding Up the Benefits of Actions that Help Build Prosperity, End Povertyand Combat Climate Change” – making climate-smart investments can have, overall, a positive economicimpact, particularly among the largest greenhouse-gas-emitting economies in the developed world.Reinforcing that analysis’ hopeful message, this new report shows that developing countries – like theworld’s industrialized economies – can reap significant positive benefits by investing in technologies torestrain emissions and by developing new clean technology industries that can build resilience and limitfurther climate damage.This report analyzes the economic opportunity that developing and emerging countries can now seize, ifthey adopt policies to fight climate change and invest in low-carbon growth. This report, for the first time,quantifies the size of expected investment in clean technologies in the developing world over the nextdecade – and it finds that the opportunity is vast: the expected investment across a wide range of cleantechnology sectors, just in the world’s developing and emerging economies, will exceed $6.4 trillion overthe next decade. Better still, about $1.6 trillion of that total offers an opening for small and medium-sizedenterprises (SMEs) –key drivers of future job creation. SMEs also serve the local, rural and “base of thepyramid” markets that are often underserved by larger firms. Moreover, developing economies are alreadyon the right track, with US$112 billion in clean-tech investments in 2012 – a 19 percent year-over-yearincrease.Doing the right thing for the environment could unlock a significant potential for a pathway towards asustainable green economy. Creating competitive economic sectors is critical to stimulating the job growththat is indispensable to achieving the World Bank Group’s twin goals: eliminating extreme poverty andfostering shared prosperity. Fostering home-grown climate and clean technology industries in developingcountries can create a sustainable and wealth-producing sector of the economy, while simultaneouslyaddressing such urgent development priorities as access to clean and affordable energy, clean water andclimate-resilient agriculture.In welcoming this hopeful analysis, policymakers worldwide can benefit from its clear-sighted calculationthat the clean technology transition can deliver strong new economic benefits even as it protects the longtermwell-being of our fragile environment.ivBuilding Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

AcknowledgmentsThis report was commissioned by infoDev’s Climate Technology Program at the World Bank Group, incollaboration with the World Bank’s Innovation, Technology and Entrepreneurship Practice. The projectteam was led by Michael Ehst and included Jin Lee and Selen Kesrelioglu of infoDev. The research andwriting was carried out by The Carbon Trust UK team under the guidance of James Rawlins and includingCheryl Baum, Jeff Beyer and David Aitken. Additional contributions were made by James Haselip. JoshWimpey of The World Bank’s Enterprise Analysis Unit and the staff of the Kenya Climate Innovation Centerprovided support to the design and planning of the India and Kenya surveys which were carried out by TNSBMRB.The study design benefited from discussions with and guidance from numerous World Bank colleagues, inparticular Valerie D’Costa, Jonathan Coony, Esperanza Lasagabaster and Paulo Correa. The team gratefullyacknowledges the comments and advice provided by reviewers Mark Dutz, Parth Tewari, Oliver Knight andPablo Benitez.Thanks also to Colin Blackman for copyediting and Corporate Visions, Inc. for the design.This report was sponsored by infoDev of the World Bank under the leadership of Valerie D’CostaThe report was made possible through the support of the governments of Korea through the ITC forDevelopment Trust Fund and the United Kingdom through the Climate Innovation Trust Fund.Acknowledgments1

AbbreviationsABPPBoSBRTCAPEXCDMCERCERTCGIARCHPCICCOMESACSACSPCWCDCREACE-bikeEIAEPCEWEAETSEVFAOFCIFITGDCGDPGHGICTIDBAfrica Biogas Partnership ProgramBalance of systemsBus rapid transitCapital expenditureClean development mechanismCertified emission reductionCentral Electricity Regulatory CommissionConsultative Group on International Agricultural ResearchCombined heat and powerClimate Innovation CenterCommon Market for Eastern and Southern AfricaClimate-smart agricultureConcentrated solar powerCentral Warehousing CorporationDomestic content requirementEast African CommunityElectric bikeU.S. Energy Information AdministrationEngineering, procurement, and constructionEuropean Wind Energy AssociationEmissions Trading SchemeElectric vehicleFood and Agricultural Organization of the United NationsFood Corporation of IndiaFeed-in tariffGeothermal Development CompanyGross domestic productGreenhouse gasInformation and communication technologiesInter-American Development Bank2 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

Photo: Simone D. McCourtie / World Bank.IEAIFADIPRIREDAKCJKENDBIPKJELKWHMDGMMSMEMMTCO 2 EMWNAPCCNCCAPNCCRSNEMAO&MPAC2PCTPVR&DRD&DRETSHPSMESWCSWHTCO 2eUNEPWRIInternational Energy AgencyInternational Fund for Agricultural DevelopmentIntellectual property rightsIndian Renewable Energy Development AgencyKenya Clean JikoKenya National Domestic Biogas ProgramKenya Jatropha Energy LimitedKilowatt hourMillennium development goalIndian Ministry of Micro, Small and Medium EnterprisesMillion metric tons of carbon dioxide equivalentMegawattNational Action Plan on Climate ChangeNational Climate Change Action PlanNational Climate Change Response StrategyKenya’s National Environment Management AuthorityOperations and maintenanceBrazil’s National Growth Acceleration ProgramPatent Cooperation TreatyPhotovoltaicsResearch and developmentResearch, development and demonstrationRenewable energy technologySmall hydro powerSmall and medium enterpriseState warehousing corporationsSolar water heatersTons of carbon dioxide equivalentUnited Nations Environment ProgrammeWorld Resources InstituteAll dollar amounts are U.S. dollars unless otherwise indicated.Abbreviations3

ExecutiveSummaryClimate Change ProvidesDeveloping Countries withan Opportunity to Build LocalGreen IndustriesClimate change will have its largest impactson developing countries, with poor populationsparticularly hard hit and unable to adequatelyadapt (World Bank, 2013a). There are ongoingefforts to assist developing countries with effortsto mitigate and adapt to climate change throughthe deployment of appropriate climate and cleantechnologies. However, the main thrust of manyof these efforts is to transfer technology from thedeveloped world without regard to local industryinvolvement. There is an opportunity for developingcountries to pursue a complementary approach,emphasizing building up the capabilities of localfirms to participate in the business opportunitiessurrounding climate change. Climate changetherefore represents an opportunity for developingcountries to build local green industries that candrive sustainable economic growth and provideenvironmental benefits.This report offers insight to policy makers andother stakeholders seeking to develop competitivegreen industries 1 in developing countries. Itprovides an overview and estimate of the marketopportunity for climate and clean technologybusiness in developing countries over the coming1 In this report, the term “green industry” refers to servicesand technologies aimed at contributing to reducingnegative environmental impacts or addressing theconsequences of various forms of pollution. This is notto be confused with the term “greening of industries,” aneffort under which traditional industries improve theirresource productivity and environmental performance(UNIDO, 2011).decade. It identifies which aspects of thesemarkets are most accessible to local firms andto small and medium enterprises (SMEs) inparticular. Using a newly gathered set of firm data,it identifies which parts of the value chain arealready being targeted by local industry. Finally,it provides a set of actions that can be consideredfor countries that intend to build up local greenindustries.Developing Countries AreIncreasingly Driving Growthand Innovation in the GlobalClimate and Clean TechnologyMarketUntil recently, businesses and governments inthe developed world have been driving growthand innovation in clean technology markets,but emerging economies and developing worldmarkets are increasingly powering the sector asshown in Figure E1. 2 In 2012, clean technologyinvestment rose by 19 percent in developingcountries (to $112 billion per year) compared withan overall decline of 12 percent globally (to $244billion per year), suggesting that clean technologyinvestment is shifting towards developingeconomies in the near term.This accelerating shift from the developedto the developing world is driving innovationas technologies, processes, and financing2 This report uses the term “clean technology” to cover therange of technologies that provide climate mitigation oradaptation benefits or positive environmental benefits. Atypology of these technologies and related industries isincluded in Chapter 2.4 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

Photo: World Bank.FIGURE E1. Growth in clean technology sales, byregion (2012)Percent growth in clean tech sales7%6%5%4%3%2%1%0%6.5%Africa3.9%Europe3.7% 3.6%AsiaRegionAmericasmechanisms are adapted to suit local conditionsand new innovations are emerging to address localcustomer needs. It is also opening up opportunitiesfor ambitious entrepreneurs who are wellpositioned to capitalize on the sector’s growth.Furthermore, with this accelerating shift, theability of clean technology to foster job growth andstimulate innovation makes it particularly relevantto developing countries. Clean technology is agrowing employment sector globally and greenjobs compare favorably to jobs in other sectors:they tend to be more skilled, safer, and betterpaid. Innovation is central to the development ofclean technology products and environmentaltechnologies account for a significant proportion ofglobal patent applications.However, the unique character of cleantechnology — such as high upfront capitalrequirements and longer payback periodsfor investors — means it has greater difficultyattracting venture capital and requires more2.5%OceaniaSource: U.K. Department for Business, Innovation and Skills (BIS).public investment than traditional sectors. Thisinvestment obstacle is even more pronounced indeveloping countries where payback scenarios aremore uncertain and SMEs and new ventures areriskier.A $1.6 Trillion Market IsAccessible to SMEs inDeveloping Countries Over theNext DecadeThis report illustrates the nature and likely sizeof the clean technology opportunity for SMEs in145 developing countries over the next decade. 3In that time, expected investment across 15 cleantechnology sectors in these developing countrieswill top $6.4 trillion overall. Of that total market,roughly $1.6 trillion will be accessible to SMEs, asshown in Figure E2. Even when excluding China,India, Russia and Middle Income Europe, these3 In this report, an SME is defined as an institution witha maximum of 300 employees, maximum revenues/turnover of $15 million, and maximum assets of $15million.Photo: World Bank.Executive Summary5

FIGURE E2. Market size through 2023 for 15 clean technologies in developing countries ($ trillion)$2.8$1.0Market value (US$ trillion)$0.9$0.8$0.7$0.6$0.5$0.4$0.3$0.2$0.79$0.67$0.48$0.1$0.0WastewaterWaterOnshore windSolar PVSmall hydroWasteElectric vehiclesGeothermalBioenergy (ex feedstock)$0.32 $0.31$0.26$0.19 $0.15 $0.14 $0.12$0.06 $0.04 $0.03 $0.03Solar CSPElectric bikesSolar thermalBus rapid transitNatural gas vehiclesBiofuelsSME shareNon-SME shareSource: Authors’ analysis.opportunities are still significant: $4.1 trillionoverall, of which $1.0 trillion is accessible to SMEs(see Chapter 2 for more detail).The SME opportunity is largest in the wastewatertreatment sector, which makes up about one-thirdof the total, with small hydro, water treatment,onshore wind power, solar PV, geothermal andbioenergy the next largest SME opportunities.Photo: Danilo Pinzon / World Bank.A number of the renewable and nonrenewabletechnologies are expected to present significantopportunities for SMEs as well and they are eachdiscussed in turn with the top three opportunitiesfor each region highlighted in Figure E3. Whileenergy efficiency is not covered specifically, boththe abatement potential and SME opportunity arelarge.Opportunities are available for SMEs acrossthe entire clean technology value chain, butare particularly prevalent in minor equipmentmanufacture, installation, civil works, retailing,and operations and maintenance (O&M) activities.Knowledge of local markets, the need forspecialization, and lower financial and technicalbarriers to entry make these activities especially6 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

FIGURE E3. Top three regional opportunities for SMEsWastewaterSmall HydroGeothermalWastewaterSmall HydroWasteWastewaterWaterSolar CSPOnshore WindSolar PVElectric BikesWastewaterBioenergyWaterOnshore WindSolar PVWastewaterWastewaterSmall HydroWaterSource: Authors’ analysis.accessible to SMEs. While some opportunities existin major equipment manufacturing, SMEs tend toface barriers such as high startup capital costsand the need for highly technical expertise andequipment.SMEs Are Already Operatingand Innovating Across CleanTechnology Value ChainsThe report examines three technology areas acrossIndia and Kenya. The focus is on solar technology inIndia and bioenergy in Kenya, while climate smartagriculture is explored across both countries.These case studies reveal that clean technologySMEs are already working in the value chainsegments with the most opportunities for SMEs.Most firms in India said they worked in severaldifferent parts of the value chain, as shown inFigure E4, with over 70 percent of firms sayingthey worked in design and/or operations andmaintenance, and over 60 percent saying theyFIGURE E4. Value chain activities in which Indianclean technology firms are involvedPercent of firms90%80%70%60%50%40%30%20%10%0%81%70% 67% 65% 63%56%O&MDesignManufacture/assemblyR&DInstallationConsultancyRetail & distribution48%44%Technology licensingSource: Survey of clean technology firms in India undertaken in Julyand August 2013.Executive Summary7

FIGURE E5. Innovation activities undertaken byclean technology SMEs in KenyaFIGURE E6. Most common barriers cited by cleantechnology SMEs in India80%76%50%46%70%60%72% 70%67%40%Percent of firms50%40%30%20%48%39%31%Percent of firms30%20%10%26% 24%22%18%14%12%10%10%0%R&DMarket analysisRaising fundingDemonstrating newproducts or servicesBusiness developmentand salesTraining existing staffHiring additional skilled staffSource: Survey of clean technology firms in Kenya undertaken inJuly and August 2013.0%Access to financeAccess to landCorruptionCustoms and trade regulationsPolitical instabilityBusiness licensing and permitsPractices of competitorsin the informal sectorInadequately educated workforceSource: Survey of clean technology firms in India undertaken in Julyand August 2013.worked in one or more of installation, manufacture,and assembly, and/or R&D.The potential for local innovation is demonstratedby the clean technology SMEs interviewed for thisreport. Innovation in Kenyan SMEs is undertakenthrough a breadth of activities as shown in FigureE5, including research and development (R&D),business development, new products and services,and innovative financing options.Removing Barriers for CleanTechnology SMEs CouldPromote Faster Growth ofLocal Green IndustriesAccessing these clean technology opportunitiescomes with a number of challenges for SMEs.Clean technology SMEs find it difficult to accessthe capital needed to grow and expand, with almosthalf of Indian SMEs (see Figure E6) and two-thirdsof Kenyan SMEs surveyed for this report ratingaccess to finance as a major constraint. It is alsoa risk to rely on government policy to sustainmarkets, as is the case for most renewables, majorwater and waste public works projects, and newclean transport options. The required technicalcapacity can also be a challenge, especiallyin developing countries where highly skilledworkforces are still nascent.Nevertheless, the SMEs surveyed were optimisticabout the future prospects of their own businessesand of the clean technology market more generally.They tended to have a strong history of growth, with90 percent of firms experiencing revenue growtheven through the global economic downturn. Mostfirms are planning to hire additional staff. About90 percent of surveyed firms are fairly or veryconfident in the business environment for cleantechnology.To make the most of this opportunity that cleantechnology provides, SMEs would benefit froma supportive and reliable policy and regulatoryenvironment that favors more resource efficienttechnologies and processes. Targeted businesssupport can also help SMEs in this space thrive, insuch ways as indicated in Figure E7.With a $1.6 trillion clean technology opportunityavailable to developing world SMEs over the nextdecade, policy makers have a chance to stimulatelocal innovation and capture economic value by8 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

FIGURE E7. Areas for government support identified by clean technology SMEs in Kenya50%45%43%40%Percent of firms35%30%25%20%15%10%5%31%24%20% 19%17%13% 13%9%6%0%R&D grantsLoan guarantees/discountsMarket supportTax creditsDirect subsidiesRegulatory reformImproved enforcement/compliance mechanismsFeed-in tariffsBusiness mentoring/commercial adviceProcurementSource: Survey of clean technology firms in Kenya undertaken in July and August 2013.supporting the dynamism of their clean technologySMEs.Actions to Support CleanTechnology SMEsThis report describes the importance of SMEsto the growth of competitive clean technologyindustries. It also illustrates that opportunitiesexist for developing country SMEs across cleantechnology industries and value chains. However,the growth of these firms is also dependent onconsistent support to overcome the challengescharacteristic of clean technology firms, includinghigher upfront capital requirements, longerpayback periods for investors and a heavierreliance on government policy than othertechnology sectors.Five areas of action should be considered bygovernments, development agencies and otherpublic and private actors to support cleantechnology SMEs in developing countries.These areas, illustrated in Figure E8, are:entrepreneurship and business acceleration,innovation finance, market development,technology development and the legal andregulatory framework.Photo: infoDev.Executive Summary9

FIGURE E8. Key areas of support for clean technology SMEsEntrepreneurshipand BusinessAccelerationKey Areas of Supportfor Clean TechnologySMEsLegal & RegulatoryFrameworkInnovationFinanceMarketDevelopmentTechnologyDevelopmentPolicy makers and other stakeholders can drawupon a broad tool-box of instruments in each ofthese five areas, listed in Appendix C and discussedin Chapter 7.• Entrepreneurship and business acceleration:There is a range of programs for businesses,as well as international collaborations andnetworks, which countries and businessescan draw upon to help strengthen SMEentrepreneurship and business accelerationin clean technology sectors. Here, countriescan pursue programs offering direct technicalassistance and the linking of foreign investorswith local clean technology SMEs for technologydevelopment and/or production capacities. Morehands-on and in-country business incubationis also expanding, such as infoDev‘s ClimateInnovation Centers.• Innovation finance: There are variousinstruments available to support early stagefinancing and risk capital for clean technologySMEs, to complement traditional financingsources. These include providing soft loansand loan guarantees and stimulating seed andventure capital investment. On the demandside, there is a significant opportunity toestablish technology-specific consumer creditfacilities, which have proven particularly usefulfor technologies that require higher up-frontinvestments such as renewable energy systems.• Market development: A range of instrumentsaim to increase demand for the productsand services of local SMEs, and facilitate theoverall growth of the clean technology market.For renewable energy these include portfoliostandards, renewable energy certificates andfeed-in tariffs. Clean technology marketscan also receive a rapid boost through strictsustainable procurement policies, manufacturerstandards, product labeling and producttesting and certification, as well as indirectand/or “soft” interventions such as education,campaigns and performance rankings.• Technology development: Instrumentsdesigned to stimulate technology developmentinclude R&D tax credits, research grants,publicly funded competitive researchcollaborations, competitions, public investmentin R&D, public or private agreements ontechnology cooperation, demonstration projectsand applied research networks.• Legal and regulatory framework: The overallenabling framework for clean technology SMEscan be strengthened by implementing a numberof legal and regulatory policies, includingsector-specific tax incentives, cap-and-tradeemission schemes, emission reduction credits,taxation on pollution or natural resource use,import tax reductions or waivers and incentivesto attract skilled labor. These can be designedto create business incentives and/or obligationsthat address both the supply and demand sideof clean technology markets.10 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

Policy makers, in particular, must adopt andadapt these instruments to fit their country‘scircumstances. They should also seek to mitigatekey risks, including failures to coordinate policydesign and implementation, market distortions,and the effects of policy discontinuity.It is also important to design and implement theseinstruments in parallel, as part of a broader,national strategy to support clean technologySMEs. Policy makers are advised to take intoaccount their national circumstances and focusattention on developing policy interventionson “fertile ground,” as opposed to supportingtechnologies and sectors that do not have thesupport of already existing human and naturalresource capacities.In order to achieve complementarities and policycoherence, policy makers are also advised tosurvey the portfolio of existing policies and conducta harmonization analysis, that is, to understandif and how other policies and national economiccircumstances stand to conflict with, or undermine,planned interventions to support clean technologySMEs.To illustrate policy considerations within specificnational contexts, the report offers case studiesof national programs targeting SMEs within greenindustry. These include South Korea‘s GreenGrowth Strategy, India‘s National Solar Mission,Thailand‘s Energy Conservation Program, andEthiopia’s Climate Resilient Green EconomyStrategy.Photo: Graham Crouch / World Bank.Executive Summary11

Chapter 1The Climate and Clean TechnologyOpportunity for DevelopingCountriesMain Points• Climate change represents an opportunity for developing countries to build local green industries thatcan drive sustainable economic growth as well as environmental benefits.• Climate and clean technology sectors are intrinsically innovative and compare favorably to other sectorsin terms of innovation output, job creation and job quality.• This report provides an overview and estimate of the market opportunity for climate and clean technologybusiness in developing countries over the coming decade, with particular attention to opportunitiesand barriers for SMEs. Using the results of a new survey of clean technology firms in India and Kenya,the report identifies key barriers for these firms and which parts of the value chain are already beingtargeted by local SMEs.• Finally, the report provides a set of actions that can be considered for countries that wish to supportinnovative SMEs within local green industries.The Clean TechnologyOpportunityClimate change will have its largest impactson developing countries, with poor populationsparticularly hard hit and unable to adequatelyadapt (World Bank, 2013a). There are ongoingefforts to assist developing countries with effortsto mitigate and adapt to climate change throughdeployment of appropriate climate and cleantechnologies. However, the main thrust of manyof these efforts is to transfer technology from thedeveloped world, with little emphasis on buildingup the capabilities of local industries to participatein the business opportunities surrounding climatechange. There is an opportunity for developingcountries to take a complementary approach.Climate change represents an opportunity fordeveloping countries to build local green industriesthat can drive sustainable economic growth as wellas environmental benefits.This report offers insight to policy makers andother developing country stakeholders seeking todevelop competitive green industries. It provides anoverview and estimate of the market opportunityfor climate and clean technology business indeveloping countries over the coming decade. 4 Itidentifies which aspects of these markets are mostaccessible to local firms and SMEs in particular.Using a new set of firm data, it identifies whichparts of the value chain are already being targetedby local companies. Finally, it provides a set ofpolicy options and guidance that can be consideredfor countries that intend to build up local greenindustries.4 Market projections in this report cover the ten-year period2014-2023.12 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

Photo: © Arne Hoel / World Bank.The report is organized as follows. Chapter 1defines clean technology 5 and describes whichsectors are covered in the report and why. It thencompares clean technology to other technologysectors in terms of investment, innovation and jobs.Chapter 2 examines the projected size of cleantechnology investment globally and then delvesdeeper into the opportunities in developingcountries. It highlights where investment is beingfocused on a regional basis.Chapter 3 explores the role that SMEs playwithin clean technology industries. It highlightsthe portion of the clean technology opportunityaccessible for SMEs and looks at different stages ofthe value chain that SMEs can expect to enter.Chapters 4, 5 and 6 illustrate the opportunitiesquantified in Chapters 2 and 3 by probing thecountry and sector levels. They examine solartechnologies in India, bioenergy in Kenya, andclimate-smart agriculture (CSA) in both countries,and explore how local SMEs are exploiting theseopportunities.Finally, Chapter 7 provides a set of actions that forpolicy makers and other stakeholders to considerin supporting competitive green industries andinnovative SMEs in particular.Defining the Clean TechnologySectorClean technology has evolved from a niche 1970senvironmental aspiration into a competitive forcemotivating many of the world’s most progressivebusiness planners and boardroom strategists.It has also caught the attention of governments5 This report uses the term “clean technology” to cover thefull range of technologies that provide climate mitigationor adaptation benefits or other positive environmentalbenefits. A typology of these technologies and relatedindustries is included in Chapter 2.Climate change represents anopportunity for developing countriesto build local green industries thatcan drive sustainable economic growthas well as environmental benefits.seeking to build their economies around sectors ofthe future, where resource efficient and low carbontechnologies are expected to become everydayproducts and services demanded by consumersand of significant interest to investors.The concept of a “clean technology sector” hasonly emerged over the past decade. Climatechange science and multiple environmentalpressures led governments to build a policy spacethat encouraged more efficient, lower carbontechnologies. Investors became interested in thenascent sector because of the opportunities andrisks presented by forthcoming environmentalpolicies, high energy and resource costs that maderesource efficiency more economically attractive, amaturing innovation landscape that reduced cleantechnology costs, and a growing social appetitefor cleaner production. Together, these public andprivate sector shifts allowed a clean technologymarket to emerge, which encompassed an arrayof products, services and processes that shared acommon set of characteristics: they all deliveredvalue using fewer resources and producing lesspollution (carbon, waste or otherwise) thanconventional solutions (Pernick and Wilder, 2007).The clean technology banner has since beenwidely applied, although, given its relative youth,consensus on which subsectors should be includedin the market has not been reached. Nevertheless,it is a market whose evolution is enthusiasticallytracked by both investors and government plannerswho are eager to position themselves at the head ofthis growth-oriented sector.Chapter 1: The Climate and Clean Technology Opportunity for Developing Countries13

Technologies Covered inthis ReportTo stay below the internationally agreed limitof 2°C warming, low carbon technologiesand practices need to be applied across thebreadth of emissions sources (World Bank,2013a). Action in all areas is important, butespecially in the power sector, industry,forestry, and agriculture, which represent thefour largest abatement opportunities. Thisreport focuses on some of the sectors thatprovide the greatest opportunities in reducingemissions and improving resource efficiency.The report equally focuses on technologiesthat offer a “sweet spot” to developingcountries in that they provide economic orsocial co-benefits in addition to abatementpotential. Renewable energy, for example, isfeatured heavily in this report partly becauseof its importance to the global abatementagenda, but also because developing countrieshave real, quantified policy intentions todevelop renewable power generation capacityto meet energy access needs. Lower carbontransport options are also included becauseof their large abatement potential and theiralignment with the mobility challenges faced inrapidly urbanizing developing countries. Whilewaste offers the smallest of the abatementopportunities in absolute terms, it is includedin this report because it is a large economicopportunity and is a fast-growing challengein developing countries, as are water andsanitation (WRI, 2013).Forestry is not profiled because it dependsmore on government policy than an activeprivate sector. The market size for energyefficiency in buildings and industry is also notquantified because the data available wouldnot allow for a robust estimation, althoughboth the abatement potential and SMEopportunity from energy efficiency are large, asdescribed in Box 1.1.Agriculture is critical, especially in developingcountries whose populations and economiesrely heavily on the sector, which is why CSAis profiled in this report. The market size ofCSA opportunities that are accessible to SMEs,however, is not quantified, for reasons outlinedin Chapter 5.BOX 1.1. Energy efficiency: a big abatement andSME opportunityWhile the commercial opportunities in energyefficiency are large, multifaceted, and opento SME participation, they are not profiled ingreater depth in this study because of thelack of data (particularly national investmentplans) needed to undertake the analysis to acomparable degree of country level granularity.The built environment accounts for up to 30percent of annual global emissions and up to40 percent of energy consumption, and theindustrial sector is also a major emitter (UNEP,2009a). Energy efficient technologies andpractices can significantly reduce emissionsfrom new buildings and industrial complexes,and energy efficiency retrofits can unlockemission abatement opportunities in the highlydurable existing building stock. Implementingenergy efficiency is needed as old buildingsand facilities are refurbished and as newones are built to accommodate a growing andincreasingly urban and industrialized globalpopulation, especially in developing-worldregions where population growth, urbanization,and industrialization are happening mostquickly.Skilled construction, new materials, innovativedesign, and a focus on integrated resourceuse are all important facets of building andindustrial energy efficiency. In the EuropeanUnion, where energy efficiency has been apolicy priority and energy costs are high,experience has shown that new green buildingsand energy efficiency retrofits are well suitedto SME participation since they require moretailored and bespoke interventions (CarbonTrust, 2014). Similar types of SME opportunitiesexist in the developing world, especially aseconomic growth fuels energy demand in theface of power production capacity constraints.Energy efficiency improvements can addressthis dilemma cost effectively (UNEP, 2014).The overall size of these markets is undoubtedlylarge, including for SMEs. Some estimates putthe annual energy efficiency investment need atclose to $100 billion per year over a twelve-yeartimespan in developing regions alone if costeffectiveenergy efficiency opportunities are tobe realized (McKinsey, 2008).14 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

Other adaptation technologies (outside of waterand wastewater treatment and purification) arenot covered as the technologies and markets arenot sufficiently defined for robust market sizing.However, adaptation technologies are of crucialimportance particularly for the most climatevulnerablecountries. They also present good SMEopportunities as countries with limited resourcesseek locally developed adaptation solutions.Establishing a clearer understanding of thesetechnologies and markets presents an opportunityfor future research with high value to developingcountries.In this report, the market size for 15 cleantechnology subsectors is estimated. Thesubsectors included are shown in Table 1.1.Comparing Clean Technologywith Other Technology SectorsDifferent than Traditional SectorsThe size of the clean technology market, discussedin Chapter 2, shows that it is important, butcomparing it to other sectors allows us to examinehow clean technology differs (or is similar) to moreestablished sectors. This comparison providesclues to how the SME experience in this emergingsector might unfold, and how governments candevelop policies and strategies based on theexperience of other sectors to support cleantechnology as it matures. Three different sectorswere compared to contextualize the cleantechnology sector:• Construction• Biotechnology• Information and communications technology(ICT)TABLE 1.1. Clean technology sectors and subsectors covered in this reportSector Subsector Inclusions and exclusionsRenewableenergytechnologiesWaste, water andsanitationTransport• Onshore wind• Small hydro• Solar photovoltaic (PV)• Concentrated solar power (CSP)• Solar thermal• Bioenergy• Biofuels• Geothermal• Water treatment and purification• Wastewater treatment• Municipal solid waste management• Electric vehicles (EVs)• Electric bikes (e-bikes)• Bus Rapid Transit (BRT)• Natural gas vehicles (NGVs)Included in market size• Technology costs, construction and installation ofequipment• Discounted operation and maintenance (O&M) for lifetimeof equipmentExcluded from market size• Transmission infrastructureIncluded in market size• Technology costs, construction and installation oftreatment facility, plus collection/transport of solid waste• Discounted O&M for lifetime of plant and equipmentExcluded from market size• Sewers, pipes and infrastructure outside fence oftreatment facilityIncluded in market size• Natural gas vehicle retrofit kit; entire EV and e-bike; busesand dedicated transit ways• Discounted O&M for lifetime of BRTExcluded from market size• O&M of NGVs, EVs and e-bikesChapter 1: The Climate and Clean Technology Opportunity for Developing Countries15

Comparing these sectors to clean technologyalong three themes that are particularly relevantto developing countries and SMEs—investment,innovation and jobs—further highlights therelevance of clean technology and the potential ithas to drive employment, innovation, and economicgrowth.InvestmentsClean technology ventures have raised significantrisk capital investment in developed countries,although the overall amounts are lower than eitherbiotech or ICT. Moreover, the fraction of risk capitaland R&D expenditure is modest as a proportion ofoverall deployment spending.Clean technology ventures in Europe and theUnited States raised more than $24 billion inventure capital (VC) between 2007 and 2012 (FS-UNEP Collaborating Centre, 2013). For comparison,biotech ventures in Europe and the United Statesraised over $31 billion, and ICT ventures raisedover $53 billion over the same period (PWC, 2013;European Private Equity and Venture CapitalAssociation, 2012).Global new investment in renewable energy in2011, which totaled $244 billion, was largely assetfinance 6 (for instance, investing in building a windfarm), while about 5 percent was risk capital(1 percent from VC and about 4 percent fromprivate or government R&D). The relatively smallVC investment highlights one of the challengesof investing in clean technology because of theparticularly high CAPEX, long timeframes, lessdifferentiated product, and regulation-dependentinnovations. As a result, clean technology VC ismore likely to be invested in energy efficiencysolutions and software and services at the expenseof newer technologies that continue to rely ongovernment finance for early stage development.The investment experience also highlights theunique characteristics of clean technology, whichhas greater difficulty attracting VC, and requiresmore public investment than traditional sectors.This investment obstacle is even more pronouncedin developing countries where payback scenariosare more uncertain and SMEs and new venturesare riskier.6 Asset finance refers to all money invested in renewableenergy generation projects (excluding large hydro),whether from internal company balance sheets, fromloans, or from equity capital.InnovationClean technology is a particularly fertile areafor innovation since it is defined as any product,service, or process that delivers value using fewerresources and producing less pollution (carbon,waste, or otherwise) than conventional solutions.Essentially, any innovative improvement thatresults in a greener outcome would fall underthe clean technology umbrella. Innovation is thelifeblood of this sector, but illustrating that intrinsicconnection with hard data can be challenging.Nevertheless, some indicators like patents arehelpful.OECD data shows environmental technologiesaccount for a significant proportion of patentapplications globally. There were 10,286environmental technology Patent CooperationTreaty (PCT) applications filed in 2010, representing6 percent of total PCT filings globally in 2010 (thelatest data available from OECD). This is similarto the biotech industry (also 6 percent), and morethan the construction industry (3 percent) andmining industry (1 percent) combined. The ICTsector dominates PCT filings though, with about 35percent of applications in 2010 (OECD, 2011).Environmental technology patents grew at acompound annual rate of 9 percent from 1999 to2010 (based on PCT filings), which is second onlyto the mining sector in terms of growth rate (10percent) but for a significantly higher number ofpatents (OECD, 2011).JobsLooked at through the lens of job creation, cleantechnology is impressive in the developed world.U.S. employment in clean technology represents2.6 percent of the total workforce, supportingover 2.5 million private sector and 886,000 publicsector jobs (U.S. Bureau of Labor Statistics,2013a). That is more than in educational services,at about 3.2 million; about one-third of America’semployment in manufacturing, at 11.5 million; or40 percent of the financial services sector, at 7.8million (U.S. Bureau of Labor Statistics, 2013b).Germany has about 2 million people employedin the clean technology sector, almost 5 percentof its total workforce (European EmploymentObservatory, 2013). For comparison, Germany’sautomotive industry, one of the country’s largestemployers and one of the engines of its industrialproduction, employs about 742,000 people (Verbandder Automobil Industrie, 2013). German biotechemploys just over 35,000 people (Biotechnologie.16 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

Photo: Dana Smillie / World, 2013). In the United Kingdom, about 940,000people are employed in clean technology,compared to about 213,000 in telecommunications(U.K. BIS, 2013; Green Alliance, 2012). Againstthese benchmarks, it is clear that clean technologyis a major employer.Clean technology jobs also compare favorablyto jobs in other sectors: green jobs tend to bemore skilled, safer, and better paid than jobsin similar sectors. Indeed, the move towards alower carbon, more resource-efficient economyis expected to yield a double-dividend in terms ofemployment and environmental improvement. TheInternational Labour Organization (ILO) estimatesthat transitioning to a greener economy could yielda net gain of 60 million jobs (ILO, 2013).ConclusionClimate change presents a formidable challengeto developing countries. However, climate changealso presents an opportunity. In the developedworld, SMEs are crucial in driving clean technologyinnovation and activity, and evidence suggestsSMEs in emerging economies can follow suit ifsupported by appropriate government policies andsupport structures to help them take advantage ofthe lucrative opportunities that exist.The clean technology sector has uniquecharacteristics that, for instance, limit private riskcapital investments and suggest a greater role forpublic finance in supporting early stage companies.However, the clean technology sector as a wholecompares favorably to other sectors on innovationoutput and job creation and quality. Countriesthat successfully build local green industries cancapture this economic value while simultaneouslybuilding climate resilience.Chapter 1: The Climate and Clean Technology Opportunity for Developing Countries17

Chapter 2Sizing Climate andClean TechnologyMarketsMain Points• Clean technology is a huge global market. In2011/2012 the sector was a $5.5 trillion globalmarket and it is currently forecast to grow ataround 4.1 percent annually until 2015/2016,significantly faster than the global economy.• Clean technology investment in developingcountries is quickly catching up with investmentin developed countries. In 2012, cleantechnology investment rose by 19 percent indeveloping countries compared with an overalldecline of 12 percent globally, suggesting thatclean technology investment is shifting towardsdeveloping economies in the near term.• Investment across 15 clean technology sectorsin 145 developing countries is expected to top$6.4 trillion over the next decade, with $1.6trillion of that market accessible to SMEs.• Investment in wastewater treatment facilitiesrepresents over a third of the total likely cleantechnology investment in developing countries(about $2.7 trillion), with water treatment,onshore wind power, solar PV, small hydroand waste management the next largestsectors (each between about $300-800 billion).Renewables should attract about $2 trillion ininvestment.• Regionally, about $1.5 trillion will be investedin China, and slightly less will be invested inLatin America and the Caribbean. Roughly $900billion will be invested in each of Sub-SaharanAfrica, Asia (excluding China and India) andNorth Africa and the Middle East; $440 billionwill be invested in India, and $235 billion inRussian and Middle Income Europe.Photo: Dave Lawrence / World Bank.18 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

Photo: © Simone D. McCourtie / World Bank.The Global Clean TechnologyMarketThe global clean technology market was valued atapproximately $5.5 trillion 7 in 2012 (U.K. BIS, 2013),comparable to the global construction industry,which had a global turnover in 2013 of $7.0 trillion. 8Clean technology is also a fast growing sectorwhose growth is not only accelerating, but whoseprojected growth is regularly revised upwards; 9a 2012 German government study (DE BMU,2012) predicted the market would double by themid-2020s. The global clean technology marketis forecast to grow at around 4.1 percent annuallyuntil 2015/2016 according to U.K. BIS (2013), whichsignificantly outstrips global average economicgrowth projections of 2.2 percent to 3.3 percentover the same period by the World Bank (2013b). 10By contrast, the global automotive industry isforecast to grow at 3.8 percent per year over thesame time period (McKinsey, 2013a).FIGURE 2.1. Growth in global clean technologysales 2007-2012 (in $ trillion)Sales (US$ trillion)$5.6$5.5$5.4$5.3$5.2$5.1$5.0$5.22007/2008Source: U.K. BIS (2013).$5.32008/20092009/2010$5.4 $5.4Year2010/2011$5.52011/20127 According to a U.K. Department for Business, Innovationand Skills (BIS) 2013 report, the total sales for the LowCarbon Environmental Goods and Services (LCEGS)sector in 2011/2012 was £3.4 trillion. This was convertedto $5.5 trillion using an average exchange rate of $1.00/£1.5847 for the year 2012 and uplifted to 2013 price fromassumed 2012 price levels using an average inflation rateof 1.5 percent. Historical exchange rate was obtainedfrom, and the U.S. annual inflation rateswere obtained from U.S. Department of Labor, Bureau ofLabor Statistics.8 According to the Confederation of InternationalContractors’ Associations website: The upward revision was documented in U.K. BIS reportsin 2011, 2012, and 2013.10 The Climate Group also conducted a market sizingexercise and estimated the global clean technologymarket to be worth more than $2.56 trillion a year, andis expected to be valued at more than $5.13 trillion bythe mid-2020s. They found the market to be growing at12 percent a year since 2007. The overall size and growthrate is different from the U.K. BIS estimate because thesubsectors included in each report differ.Breaking down the clean technology market intoits constituent subsectors shows which areas aredriving this performance. The top six subsectors interms of global market size are alternative fuels, 11building technologies, wind power, alternativefuel vehicles, 12 geothermal, and water supplyand wastewater treatment. Across the board,low carbon and renewable energy, water andsanitation, waste management solutions, andcleaner mobility make up the bulk of the market(see Figure 2.2).11 Alternative fuels include the manufacture, production,supply, and distribution of: batteries, biodiesel, butanol,ethanol, vegetable oils, biomass, methane, peanut oil,vegetable oil, wood and woodgas, and hydrogen.12 Alternative fuel vehicles includes production, supplyand distribution of natural gas, synthetic fuel and autogas, RD&D for hydrogen fuel cells and hydrogen internalcombustion, electric, hybrid electric, steam powered,organic waste fuel, wood gas, solar powered and air,spring and wind powered vehicles.Chapter 2: Sizing Climate and Clean Technology Markets19

FIGURE 2.2. Global clean technology sales breakdown, 2011/12Contaminated land reclamation and remediation 1%Air pollution 1%Environmental consultancy and related services 1%Carbon finance 1%Additional energy sources 2%Other 2%Energy management 2%Nuclear power 3%Alternative fuels 16%Waste management 5%Biomass 5%Photovoltaic 5%Building technologies 13%Wind 12%Recovery and recycling 6%Alternative fuel vehicle 10%Water supply and waste water treatment 8%Geothermal 9%Source: U.K. BIS (2013).Market Size in the DevelopingWorldThe gap in clean technology investment betweendeveloped and developing economies is shrinkingsignificantly; at the end of 2012 it stood at 18percent ($132 billion versus $112 billion peryear). This gap is down from 250 percent in 2007,according to Forbury Investment Network (2013).The same report cites that in 2012 alone, cleantechnology investment rose by 19 percent indeveloping countries compared with an overalldecline of 12 percent globally, suggesting thatclean technology investment is shifting towardsdeveloping economies in the near term.This trend is unsurprising given that developingcountries face growing pressure to increasetheir energy supply—in quantity, reliability, andaffordability—while simultaneously increasingthe clean share of their energy mix to decreasetheir emissions and mitigate climate change. Thisdouble challenge is particularly acute in lowincomecountries where people still lack accessto basic energy services, and where long-termenvironmental benefits are difficult to favor overdemands for access to affordable energy.Similar pressures exist in other clean technologysectors that seek to provide basic services topeople in a more efficient, affordable, and cleanmanner. The investment figures suggest thatdeveloping countries are rising to the challengeand investing in transforming environmentaland climate change challenges into marketopportunities.The Methodology for Sizing DevelopingCountry MarketsMuch of the existing literature has been devotedto understanding the dynamics of the cleantechnology market in the developed world.Similarly, while there is fairly comprehensive dataon the size and value of clean technology marketsat a global or regional level, its coverage is focusedon the developed world and a few large emergingeconomies such as China.Clean technology markets in the developing worldare less well understood and suffer from a lack ofcountry-level granularity; it is not uncommon forassessments of the entire African market to bebased on a handful of the larger of its 54 countryeconomies, or for Africa to be ignored altogetherin important sectors like solid waste or clean20 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

oad transport. What coverage there is focuses onlarge-scale renewables (for instance, wind, solar,geothermal) and not on the other clean technologysectors that are also highly relevant to SMEs.This report closes that gap through a regionalanalysis of 15 clean technology markets in 145countries over the next decade. In order to copewith these data limitations, the methodologywas designed to make use of existing data andprojections, coupled with clear assumptions toallow for estimates of the addressable market forlocal SMEs, at regional and sectoral levels. 13This research is unique in two ways: because ofthe regional granularity underlying the market sizeanalysis, and because the market forecasts arebased on planned investment rather than neededinvestment. This report’s regional granularityis stronger than most research because themethodology extrapolated to data-poor countriesusing subregional groups (for instance, fourAfrican subgroupings) rather than using traditionalregional groups that rely on geographic bordersrather than other indicators that are relevant tolikely future investment (for instance, GDP/percapita or ease of doing business factors).Moreover, this research does not reflect possibleor needed investment like many studies do, butrather outlines investments that are actuallyexpected to be made in these regions over thenext decade, based both on current governmentpolicies and plans, and on careful extrapolation tonearby countries with similar policies and resourceavailability.Market Size of CleanTechnology Sector inDeveloping CountriesThe fifteen clean technology subsectors arelikely to attract $6.4 trillion over the next decade($1.6 trillion accessible to SMEs) in the countriesexamined, with considerable additional investmentexpected in the sectors not covered in depth bythis report (see Figure 2.3). Even when excludingChina, India, Russia, and Middle Income Europe,these opportunities are still significant: $4.1 trillionoverall, of which $1.0 trillion is accessible to SMEs.Over the next decade, it is estimated thatrenewable energy deployment in 145 developingcountries could attract just over $2 trillion ofinvestment. This would be the result of a policy andregulatory environment that supports renewabledeployment, fast-growing energy demand alongwith falling renewable energy costs, and availablelocal natural resources.Water, wastewater, and solid waste managementwould also require major investment of up to$3.9 trillion over the next decade. As countriesenjoy growing national prosperity, investment inpublic services, especially water and sanitation,is expected to be a priority. Now, wastewaterThe SME opportunities, therefore, are not basedon broad-brush continental aspirations, but onregional evidence that deconstructs plannedinvestment into a segmented value chain analysis.By illustrating the developing-world cleantechnology opportunity in this way, this chapteraims to provide governments and agencies withevidence that can help them to promote therealization of these opportunities through policiesand programs of entrepreneurial support thattarget the areas of high value.Photo: World Bank.13 The market sizing methodology is described in AppendixA. Full details of the market sizing may be requested fromthe authors.Chapter 2: Sizing Climate and Clean Technology Markets21

FIGURE 2.3. Market size through 2023 for 15 clean technologies in developing countries ($ trillion)$2.8$1.0Market value (US$ trillion)$0.9$0.8$0.7$0.6$0.5$0.4$0.3$0.2$0.79$0.67$0.48$0.1$0.0WastewaterWaterOnshore windSolar PVSmall hydroWasteElectric vehiclesGeothermalBioenergy (ex feedstock)$0.32 $0.31$0.26$0.19 $0.15 $0.14 $0.12$0.06 $0.04 $0.03 $0.03Solar CSPElectric bikesSolar thermalBus rapid transitNatural gas vehiclesBiofuelsSME shareNon-SME shareSource: Authors’ analysis.treatment 14 is increasingly becoming a publicpriority as waterways grow polluted and waterscarcity becomes a more salient issue. Investmentin the construction and operation of these systemswould come from the government or througha public-private partnership, and would beadministered by water and wastewater treatmentcompanies, including their suppliers, among whomwould be SMEs.Solid waste management 15 is also a growingpriority. In densely populated urban areas, soaringwaste volumes require organized public attention,and while solutions like waste-to-energy aregaining popularity, in poorer countries the majorityof low-cost, sanitary disposal continues to be14 In this report, the market size for water and wastewaterincludes the CAPEX and operating costs that are insidethe fence of the treatment facility itself. So filtration andpurification systems, cesspools, dewatering equipment,holding tanks, internal piping, and treatment chemicalswould be included, whereas municipal sewage systemsand freshwater pipes and pumps would be excluded.15 The market size for solid waste has two dimensions:collection (the costs of trucks and operating labor)and treatment (CAPEX and O&M related to landfillconstruction, operation, and decommissioning).landfilling. In this report, sanitary landfills areconsidered to be clean technology compared withthe most common alternative—open dumping—which carries a much greater ecological cost.Consolidating waste in landfill also enables landfillgas recovery, a low carbon energy generationtechnology, to be deployed.Lower-carbon transportation is a smaller butstill significant market, worth up to $456 billionover the next decade. These sectors often attractinvestment because of their co-benefits ratherthan because of their environmental outcomes.Bus Rapid Transit has proven to be an effectiveway of transporting a lot of people from suburbanareas and through increasingly crowded urbancenters with relatively low upfront capital cost,and are being built to accommodate swellingurban populations. Vehicles powered by naturalgas are more cost-competitive than gasoline anddiesel vehicles in many markets and generatesignificantly less carbon emissions. Electricvehicles are strongly supported by the governmentsof India and China, and Chinese consumers areleading the way in adopting electric bikes.22 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

The Regional PictureThe regional opportunities are diverse and highlydriven by both natural resource endowments andgovernment policy priorities. While investmentis large and growing throughout the developingworld, China and Latin America stand out asleaders (see Figure 2.4).Wastewater features in the top three opportunitiesfor SMEs across the entire developing world, withthe exception of China. Countries are investingheavily in wastewater infrastructure and services toprovide basic services to their growing populationswhile ensuring a stable water supply to growindustries reliant on water use. A number of therenewable and nonrenewable technologies are alsoexpected to present significant opportunities forSMEs as well and they are each discussed in turnwith the top three opportunities for each regionhighlighted in Figure 2.5.FIGURE 2.4.Clean technology market size byregion, and the shares of SMEs and non-SME($ trillion)Market value (US$ trillion)$1.6$1.4$1.2$1.0$0.8$0.6$0.4$0.2$0.0$1.56China$1.43Latin America$0.91Sub-Saharan Africa$0.88 $0.87$0.44$0.24AsiaNorth Africa &the Middle EastIndiaRussia and MiddleIncome EuropeSMENon-SMESource: Authors’ analysis.FIGURE 2.5. Top three regional opportunities for SMEsWastewaterSmall HydroGeothermalWastewaterSmall HydroWasteWastewaterWaterSolar CSPOnshore WindSolar PVElectric BikesWastewaterBioenergyWaterOnshore WindSolar PVWastewaterWastewaterSmall HydroWaterSource: Authors’ analysis.Chapter 2: Sizing Climate and Clean Technology Markets23

Latin AmericaThe leading opportunities for Latin AmericanSMEs are in wastewater (about $160 billion),bioenergy (about $40 billion), and water (about$40 billion) (see Figure 2.6). Within the regionsome countries are seeing fast growth. The Inter-American Development Bank (2013) reports thatfive countries experienced triple digit growth inclean technology investment in 2012: Mexico (450percent), the Dominican Republic (431 percent),Uruguay (327 percent), Peru (325 percent), andChile (314 percent).The lack of current wastewater treatmentthreatening regional water sustainability isdriving investment in the region. Currently only20 percent of Latin America’s wastewater istreated, explaining recent large governmentinvestments (BN Americas, 2013). For example,the Brazilian government is investing heavilyin water, wastewater, and sewage treatmentfacilities (Carbon Trust, 2012a). New and upgradedinfrastructure is being financed through Phase 2of Brazil’s National Growth Acceleration Program(PAC2) and this will see the deployment of waterand wastewater solutions at an enormous speedand scale (Carbon Trust, 2012a). Peru is alsoprioritizing the sector and has committed to raisewastewater treatment levels from 15 percent in2010 to 100 percent by 2015 (Sanitation Updates,2010).While it is not likely that SMEs will capture a largeshare of the wastewater market value acrossthe value chain, the overall scale of investmentrequired in the sector to meet government targetscreates a large opportunity (that is, SMEs canaccess a small portion (about 20 percent) of alarge market ($160 billion)). The need for ongoingoperational inputs, such as chemicals, polymersand filters are niche SME opportunities and areasfor innovation. For example, specific flocculatingagents are added to wastewater pools to enhancethe aggregation of suspended particles, whichaccelerates wastewater separation and canenhance the efficiency of the dewatering process.These opportunities are an example of potentialongoing income streams generated by wastewateractivity that are available to SMEs in this sector.Bioenergy presents a large opportunity for SMEsacross the value chain in Latin America. The regionhas great bioenergy potential, with a land area ofaround 250 million hectares available for feedstockproduction, led by Brazil (Inter-American Networkof Academies of Science, 2012). Ethanol productionis poised to grow enormously over the next tenFIGURE 2.6. Size of the clean technology market accessible to SMEs in Latin America ($ billion)$160$140Market value (US$ billion)$120$100$80$60$40$20$0WastewaterBioenergy (ex feedstock)WaterSmall hydroOnshore windGeothermalBiofuelsWasteSolar PVBus rapid transitNatural gas vehiclesSolar CSPSolar thermalMajor equipment Planning, installation and balance of system O&MSource: Authors’ analysis.24 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

years, and heat and electricity from biomass,especially from sugarcane bagasse, is also primedfor significant growth (Carbon Trust, 2012a).All new mills in Brazil are now equipped withcogeneration equipment that produces heat andelectricity. Newer cogeneration equipment is moreefficient, which has allowed mills to sell on theexcess electricity (this can be up to 30 percentof revenue for new mills) (Carbon Trust, 2012a).Forecasts estimate that newly built mills andrefurbished older ones will see power productionincrease to between 9 and 13 GW by 2020(Carbon Trust, 2012a). Examples of potential SMEactivities in bioenergy are found throughout thevalue chain, but are most abundant in operationsand maintenance, specifically around planningand feasibility consultancy, ash disposal, andcomponent and equipment maintenance.Sub-Saharan AfricaThe leading opportunities for Sub-Saharan AfricanSMEs are in wastewater (about $90 billion), smallhydro (about $43 billion), and water (about $40billion) (see Figure 2.8). Solar PV and geothermalare also large potential markets worth between$20 billion and $30 billion to SMEs.The drive to achieve the Millennium DevelopmentGoals (MDGs) in wastewater and water in Africawould fuel investment and SME opportunities.Wastewater and water is a priority for investmentin Africa. Both markets are driven by investment bydonors and governments. The largest opportunitiesin wastewater are in West and Central Africa (about$41 billion), followed by Southern Africa (about $32billion).Growth in wastewater investment however is notsolely driven by public investment; a significantportion of the market growth will be driven byincreased wastewater treatment activities fromfast growing mining activities in the region thatare now subject to more stringent environmentalregulations (25 Degrees in Africa, 2011). Thereis also increased pressure on countries to takea more integrated approach to their water andwaste management activities, particularly in thefast growing urban areas across the continent.SMEs active in the sector that are able to deliversolutions that look at the system as a wholerather than in isolation will be particularly wellplaced. Similar to wastewater, the water sectorhas a number of promising SME activities both inurban and rural areas. SME opportunities includethe supply of pressure and leakage managementequipment, and filtration and advanced treatmentFIGURE 2.7. Size of the clean technology market accessible to SMEs in Sub-Saharan Africa ($ billion)$90$80Market value (US$ billion)$70$60$50$40$30$20$100WastewaterSmall hydroWaterSolar PVGeothermalOnshore windWasteBioenergy (ex feedstock)Solar CSPBus rapid transitSolar thermalBiofuelsMajor equipment Planning, installation and balance of system O&MSource: Authors’ analysis.Chapter 2: Sizing Climate and Clean Technology Markets25

membranes, both part of the balance of systemssegment of the value chain. Modeling ofdistribution and collection networks, and waterflow monitoring, are also opportunities.An example of an SME active in this space is SmartLeak Detection Company, based in South Africa. Itoffers water leak detection services for municipalinfrastructure, and commercial and residentialclients. Infrared radiometric pipeline testing canidentify subsurface pipeline leaks, deterioratedpipeline insulation, poor backfill or voids causedby erosion. The technology detects differencesin thermal conductance caused by a water leakplume compared to dry soil or backfill, and canhelp municipalities save money, water, and energyby identifying leaks without first having to excavateburied pipes. The company sources some of itsequipment from other South African suppliers, likeSewerin, a maker of water and gas leak detectionsystems.Demand for small hydro projects in East Africawould address rural electrification needs andthis sector is well suited to SMEs. East Africa isleading the way in small hydro opportunities withabout $38 billion of the $43 billion regional SMEopportunity, in part because of the numeroussmall rivers that run through the region. Smallhydro provides large opportunities for SMEs in thebalance of systems and operation and maintenancesegments of the value chain. The low upfrontcapital requirements for making small hydrosystems means that SMEs could also realisticallycapture about 25 percent of the major componentssegment of the value chain. Small hydro also hassignificant development benefits as it offers thepotential for electrification of isolated and ruralareas, and provides local small business the energyneeded to upscale (Consultancy Africa Intelligence,2012). East African Governments have taken noticeof the small hydro opportunity. In Uganda andRwanda, programs have been developed to targetprivate investment in small hydro projects; Ugandahas already introduced 30MW into the grid usingprivately financed projects (Consultancy AfricaIntelligence, 2012).Small-scale hydropower projects are, by theirnature, suitable for identification and developmentby SMEs. Scouting for appropriate sites, gettinglocal consent for construction, connecting ruralPhoto: infoDev26 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

populations with mini-grids, and designingbespoke systems are all activities that are moresuited to SMEs than large power companies.Micro-hydro projects can even be owned andmanaged by a local community cooperative, ratherthan a corporate power provider. For instance,Tungu-Kabiri community micro-hydro powerproject in Kenya is community-owned. The projectinvolved the construction of a small weir, canaland penstock, which diverts river water to an 18kWturbine, supplying electricity to a small communitythrough a micro-grid (Energize, 2012). This canunlock design, construction, and operationsactivities for SMEs, especially since many of thesystem components of a small hydro facility do notrequire advanced technology (,2013).Middle East & North AfricaThe leading opportunities for North African andMiddle Eastern SMEs are in wastewater (about $90billion), water (about $40 billion), and CSP about($20 billion) (see Figure 2.8).Given the region’s arid climate, it is unsurprisingthat investment in wastewater and water solutionsdominate the clean technology opportunity space.Treating wastewater properly means it can be usedand re-used both for commercial purposes andfor drinking consumption. Not treating it means iteither gets used in an unsanitary way or does notget used at all. Water treatment and purificationis also a growing sector as the region’s populationgrows and water demand increases.Solar technology represents a significantopportunity in the region. This is the only regionwhere the size of the CSP opportunity exceedsthat of solar PV. The region’s clear, sunny skiesmake it ideal for CSP technology, which needsdirect sunlight to work, unlike solar PV whichstill operates in cloudy conditions. This region isone of several global hotspots for solar resource,receiving over 3,000 kWh/m 2 /year, as much asparts of Australia, the Nevada desert, and areas onthe leeward side of Chile’s mountain ranges. Thisabundant resource could eventually be exported viahigh-voltage subsea interconnection cables thatlink North Africa to European markets, althoughsuch plans are more visionary than concrete atpresent (PWC, 2010). Both types of solar, however,offer large regional opportunities.FIGURE 2.8. Size of the clean tech market accessible to SMEs in the Middle East & North Africa ($ billion)$90$80Market value (US$ billion)$70$60$50$40$30$20$10$0WastewaterWaterSolar CSPSolar PVOnshore windGeothermalSmall hydroBioenergy (ex feedstock)WasteSolar thermalNatural gas vehiclesBus rapid transitMajor equipment Planning, installation and balance of system O&MSource: Authors’ analysis.Chapter 2: Sizing Climate and Clean Technology Markets27

Asia (Excluding China and India)The leading opportunities for Asian SMEs are inwastewater (about $85 billion), small hydro (about$50 billion), and geothermal (about $48 billion)(see Figure 2.9). The main drivers for increasinginvestment in wastewater collection and treatment,and water treatment in Asia are the rapid growthof urban areas and also the increase in thermalpower generation, as some Asian countriesdrastically increase their coal generation capacityand will need water treatment facilities. One suchSME taking advantage of the investment in waterand wastewater treatment in Indonesia is SinarTirta Bening. The company, founded in 1998,provides a range of services to companies includingprocurement, design, and build systems for cleanwater and sewage water treatment systems.The Pacific Ring of Fire makes geothermal power aviable natural resource for several Southeast Asiancountries and island states. The region’s stronggeothermal investment potential largely reflectsthe Indonesian government’s ambitious plans.Indonesia enjoys about 40 percent of the world’stotal potential geothermal resources because ofits location on some of the most volcanically activesections of the Pacific Ring of Fire (McKinseyGlobal Institute, 2012). In 2010, the governmentincreased its 2006 goal of 9.5 GW of installedgeothermal capacity by 2025 to 12.3 GW, with neartermplans to deploy around 4 GW of new capacityby 2014 (IEA, 2011). Other nearby countries with astrong geothermal natural resource, such as thePhilippines, could develop ambitious plans as well.KCT, an Indonesian SME formed in 1992, ishighly active in the country’s growing geothermalsector. KCT supplies and leases equipment (heavyand utility) and provides other services for thegeothermal industry. KCT started its operation forUnocal Geothermal Indonesia, providing equipmentrentals, welding services, and supply of both skilledand unskilled labor for the Gunung Salak Operationin West Java (KCT, 2014).Russia and Middle Income EuropeThe report covers a number of middle-incomecountries in Eastern Europe and also Russia. Theleading opportunities for SMEs in this region are inwastewater (about $30 billion), small hydro (about$29 billion), and waste (about $34 billion) (seeFigure 2.10).Small hydro is a particularly prominent opportunityin Romania and Bulgaria, which have hundreds ofmegawatts of untapped hydrological resources.FIGURE 2.9. Size of the clean technology market accessible to SMEs in Asia, excluding China and India.($ billion)$90$80Market value (US$ billion)$70$60$50$40$30$20$10$0WastewaterSmall hydroGeothermalWaterBioenergy (ex feedstock)Solar PVWasteOnshore windNatural gas vehiclesBus rapid transitBiofuelsSolar thermalSolar CSPMajor equipment Planning, installation and balance of system O&MSource: Authors’ analysis.28 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

FIGURE 2.10. Size of the clean technology marketaccessible to SMEs in Eastern & Northern Europe($ billion)Market value (US$ billion)$30$25$20$15$10$5$0WastewaterSmall hydroSource: Authors’ analysis.WasteMajor equipmentWaterOnshore windSolar PVNatural gas vehiclesO&MPlanning, installation and balance of systemSmall hydro also tends to be an inherently localactivity. Onsite planning, site design, hydrologicalsurveys and environmental impact assessmentscan often be carried out cost effectively by localfirms with knowledge and experience regardingdomestic regulatory requirements and approvalsprocesses. The relatively small scale of smallhydro activities also helps open them up to SMEparticipation, since the capital and workforcerequired is relatively small.In Bulgaria, HEC is an SME that invests in,develops, and implements integrated turnkeyprojects in the renewable energy sector. Their corearea of focus is small hydro power plants. Theirexpertise is particularly strong in the constructionof hydro power plants and hydrotechnicalequipment. In 2007 they also expanded theirportfolio of services to include PV power plants(HEC Partners, 2014).ChinaBecause of its size, data availability, anduniqueness, China is treated as a region on its own.The leading opportunities for Chinese SMEs are inonshore wind (about $80 billion), solar PV (about$70 billion), and electric bikes (about $63 billion)(see Figure 2.11).FIGURE 2.11. Size of the clean technology market accessible to SMEs in China ($ billion)$90$80Market value (US$ billion)$70$60$50$40$30$20$10$0Onshore windSolar PVElectric bikesWastewaterSmall hydroSolar thermalBioenergy (ex feedstock)WasteSolar CSPWaterElectric vehiclesBus rapid transitNatural gas vehiclesBiofuelsGeothermalMajor equipment Planning, installation and balance of system O&MSource: Authors’ analysis.Chapter 2: Sizing Climate and Clean Technology Markets29

The strength of the electric bike market inChina makes it an outlier compared with otherregions. China has a strong tradition of cycling asa common mode of transport. The introductionof electric bikes that are accessibly priced foran increasingly wealthy population, and whichenable longer distance travel on roads that areincreasingly navigable, are accelerating thedeployment of this technology. Over the decadebetween 2012 and 2022, over 450,000 e-bikes couldbe sold (assuming they are replaced after a sevenyear lifespan), which makes China the undisputedglobal leader in this mode of transport. The majorequipment component of e-bikes is also consideredto be fairly accessible to SMEs.While electric vehicles do not appear to be a largeopportunity compared with other clean technologysectors, China nevertheless leads the countriesin this report with ambitious deployment plansendorsed by the state. These two sectors illustratethe degree to which China is adopting low carbonmobility.China’s deployment plans for onshore wind andsolar PV are also driving an enormous amount ofinvestment. China’s global market share of solarPV production grew from less than 2 percent in2002 to 45 percent in 2010 (Sahoo and Shrimaliy,2013). The government’s institutionally coordinatedindustrial PV strategy has helped develop a strongdomestic manufacturing base, and domesticinnovation, targeted subsidies, and lower-costgovernment loans have enabled manufacturersto thrive while cutting costs through processinnovations. According to Bloomberg News (2012),solar PV costs have fallen by 80 percent since2008, which has given the government confidenceto boost its deployment targets to 50 GW installedcapacity by 2020, and to further support itsdomestic industry. As a result, solar PV continuesto present a large opportunity in China.IndiaThe clean technology market opportunity analysisshows that as much as $103 billion will be investedacross 13 clean technology sectors in India over thenext decade. The leading opportunities for IndianSMEs are in onshore wind (about $23 billion), solarPV (about $21 billion), and wastewater (about $18billion) (see Figure 2.12).India’s response to its rapidly growing energydemand, concerns about energy security, and adesire to reduce greenhouse gas emissions havedirected investment towards domestic renewableFIGURE 2.12. Size of the clean technology market accessible to SMEs in India ($ billion)$25$20Market value (US$ billion)$15$10$5$0Onshore windSolar PVWastewaterSolar CSPWasteWaterSolar thermalSmall hydroBiofuelsBioenergy (ex feedstock)Bus rapid transitElectric vehiclesNatural gas vehiclesMajor equipment Planning, installation and balance of system O&MSource: Authors’ analysis.30 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

energy sources. India enjoys among the world’shighest insolation rates as well as clear, sunnyskies, which makes it ideal for both solar PV andCSP. The falling prices of onshore wind and PVhave also made those technologies economicallycompetitive with other fuels. Chapter 3 examinesin detail the clean technology market and policyenvironment in India, and focuses in particular onthe solar industry and opportunities for SMEs inthat sector.India’s installed wind capacity is forecast toapproach 60 GW by 2020, up from about 18 GW in2012 (GWEC, 2012, 2013). The country also plansto deploy up to 22 GW of solar power by 2022 aspart of its National Solar Mission (Ministry of Newand Renewable Energy-India, 2012a). These energyinvestments are creating significant opportunitiesfor SMEs, especially in planning, installation, andbalance of systems, and O&M segment of the valuechain.As with most other regions, water, wastewatertreatment, and solid waste management areall significant opportunities since hundreds ofmillions of Indians lack access to basic waterand sanitation services. Government programsare aiming to accelerate the deployment of theseimportant public services. Netsol Water SolutionsPVT, for example, is an Indian SME established in2006 working across the water, and wastewatersector offering reverse osmosis systems, effluenttreatment plants, and sewage treatment plants.ConclusionSignificant investment in clean technology isplanned for the developing world, which isexpected to reach $6.4 trillion over the nextdecade, with $1.6 trillion of that market accessibleto SMEs.These investments are happening across thedeveloping world. Regionally, about $1.5 trillionwill be invested in China, and slightly less willbe invested in Latin America and the Caribbean.Roughly $900 billion will be invested in each ofSub-Saharan Africa, Asia (excluding China andIndia), and North Africa and the Middle East; $440billion will be invested in India, and $235 billion inRussian and Middle Income Europe.These clean technology investments are alsodiverse and go beyond renewable energy.Investment in wastewater treatment facilitiesrepresents over a third of the total likely cleantechnology investment in developing countries(about $2.7 trillion), with water treatment, onshorewind power, solar PV, small hydro, and wastemanagement the next largest sectors (eachbetween about $300 billion and $800 billion).Renewables should attract about $2 trillion ininvestment.This investment will create substantialopportunities for entrepreneurs and SMEs seekingto develop new businesses or expand existingones. In the next chapter, the role of SMEs in cleantechnology is explored in greater detail.Chapter 2: Sizing Climate and Clean Technology Markets31

Chapter 3The Role of SMEs in Climateand Clean TechnologyIndustriesMain Points• The clean technology sector’s size and growth prospects make it attractive for SMEs, but it is not withoutchallenges: failure rates are high, capital requirements are a barrier, reliance on government policy is arisk, and the technical and commercial capacity required of clean technology SMEs can be a challenge.• SMEs are most able to access opportunities in the middle segment of the value chain (including balanceof systems components, installation, engineering, procurement and construction) and the final segment(O&M). Opportunities in the first segment (major equipment manufacturing) are less accessible but stillpossible.• This chapter explores the opportunities and challenges clean technology SMEs face and where in thevalue chain large commercial opportunities for SMEs are most likely to be found.Investment in Clean TechnologyMeans Opportunities for SMEsSMEs are well positioned to participate in futureclean technology markets in the developing world.SMEs play an instrumental (but often underrecognized)role in furthering growth, innovation,and development, which coupled with a growingclean technology sector, can help build prosperityin the poorest countries.Clean technology markets are well suited toSMEs. For example, it is estimated that SMEsmake up over 90 percent of clean technologybusinesses in the United Kingdom, whichcompares similarly to other sectors like ICT (U.K.BIS, 2010) or biotechnology (Biotechnology IndustryOrganisation, 2011) but differs from industrieslike mining where large companies dominate(ICMM, 2012). Nevertheless, failure rates are high,capital requirements are a barrier, reliance ongovernment policy is a risk, and the technical andcommercial capacity required of clean technologySMEs can be a challenge.Despite rich opportunities for SMEs in cleantechnology markets, many businesses still fail.While there are no definitive statistics on cleantechnology failure rates, clean technology SMEsprobably have failure rates comparable to SMEsin the ICT and biotech sectors, which experience80-90 percent failure rates. Failure rates are lowerin more established industries like construction,where, for example, 64 percent of constructionfirms in the United States fail within 5 years (SmallBusiness Trends, 2012).High capital requirements can also be a barrierto SMEs, especially those looking to be involved inthe design or manufacture of major equipment.Accessing opportunities in the later stages of thevalue chain (minor equipment manufacturing,installation, civil works, and operations andmaintenance) tends to require less upfront capital.Even so, raising the money needed to developa clean technology business is consistentlyhighlighted as a challenge for SMEs in the cleantechnology industry.32 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

Photo: Nonie Reyes / World Bank.Indeed, venture investment across all cleantechnology sectors in 2013 was 14 percent lowerthan in 2012, which itself was 24 percent lowerthan 2011 (Cleantech Group, 2014). While cleantechnology is growing as a sector, it is stilldeveloping, and raising VC has been a challengerecently. Many clean technology funds have notachieved the exits and returns they expectedso capital for new ventures, particularly thoseat an early stage, is limited. However, ventureinvestments account only for a small fraction ofoverall sector spending so its recent shrinkagedoes not undermine the sector’s prospects, whichare dominated by deployment numbers rather thanVC spending. Moreover, this VC challenge is notunique to clean technology SMEs; many biotechcompanies also find it challenging to raise finance.For example, in 2012 the innovation capital raisedby biotech companies with revenues below $500million remained significantly below pre-economiccrisis levels and raising capital was a top strategicpriority for biotech firms (Ernst & Young, 2013).The uncertainty of government regulation andpolicy is another key constraint on clean technologydevelopment, especially in developing countrieswhere policies and regulations can be subjectto frequent change. Many clean technologyinnovations depend at least initially on governmentregulation or policy to drive market growth, ratherthan consumer preference for a new product.Strong and consistent government regulationand clean technology policy can be key enablersfor the clean technology industry and underpinearly development and deployment. For example,the development and deployment of solar PVtechnology in Europe has been driven by subsidies,particularly feed-in tariffs in Germany and Italy.However, this reliance on government regulationand policy creates risks for investors andbusinesses that rely on long-term continuity sinceregulations and policies can change quickly. SomeSMEs in other industries also face risks in thisarea (for instance, biotech companies that rely ongovernment approvals for new drug developments),SMEs play an instrumental role infurthering growth, innovation, anddevelopment, which coupled with agrowing clean technology sector,can help build prosperity in thepoorest countries.while firms in construction or ICT are less exposedto this risk since their sectors are more drivenby consumer preferences and broader economicconditions.Finally, technical and commercial expertise andexperience is another limit for SME-driven cleantechnology development worldwide and is alreadyan issue for the clean technology industry inmany developed countries. There may be a lack ofdepth of experience technically or commerciallyin specific clean technology areas, hamperingthe development of vibrant clean technology SMEcommunities in developing countries.Despite these risks and barriers, cleantechnology markets exist and are growing, andtheir accessibility to SMEs represents a genuineopportunity.Photo: John Hogg / World Bank.Chapter 3: The Role of SMEs in Climate and Clean Technology Industries33

BOX 3.1. Why focus on SMEs?There are important niches for SMEsin established clean technology valuechains. As discussed in Chapter 2, thereare significant investment opportunities indeveloping countries, particularly prevalent inminor equipment manufacture, installation,civil works, retailing, and operations andmaintenance activities. Knowledge of localmarkets, the need for specialization, and lowerfinancial and technical barriers to entry makesthese activities especially accessible to SMEs.SMEs are well positioned to uncoverand address opportunities in local cleantechnology markets. Local SMEs are deeplyembedded in local markets, enabling them toidentify appropriate business models, products,and services for these markets. Moreover, localSMEs have an advantage in base of the pyramidmarkets, which continue to be unattractive andimpenetrable for many globally dominant firms.SMEs play an important role in adaptingexisting technology for local conditions.SMEs are better disposed than large firmsto the type of innovative entrepreneurshiprequired to develop clean technology solutionsthat meet local needs. While large firmsare constrained by their existing products,technologies, skills, and organization, firmsthat are small and young can more easily workoutside dominant paradigms. SMEs have theflexibility to experiment and take risks, andare not discouraged by small markets of earlytechnology adopters. This allows local SMEsto undertake the important work of adaptingexisting technologies for local conditions andcustomers.Innovative SMEs face different barriers togrowth. SMEs face different obstacles togrowth than large firms. Lack of access tofinance, lack of economies of scale, and lack ofoperational efficiency are just a few. InnovativeSMEs face even more constraints due to greaterasymmetries of information between sourcesof finance and SMEs, as well as higher rates offailure and longer-term returns on investments.Developing policy options that can specificallytarget clean technology SMEs is thereforecritical to the successful development of cleantechnology industries in developing countries.Value Chain OpportunitiesMost Easily Accessible toSMEsThe types of opportunity that exist for SMEs indeveloping countries differ by region but tendtowards larger opportunities downstream in thevalue chain, in equipment component supply,installation and retrofit, customization, andoperations and maintenance.The major equipment segment of the valuechain includes the technology element(s) thatare specific to that particular technology. Theseinclude, among others, the wind turbine andtower, solar PV module, solar thermal collector;geothermal turbine; biofuel mills and fermentationtanks; water purification equipment; wastewateraeration basins and dewatering equipment; landfillconstruction; transit ways and buses; natural gasvehicle conversion kits.The middle segment of the value chain, calledbalance of systems (BoS) or engineering,procurement, and construction (EPC), includestechnology elements that are not specific to theparticular technology and also project developmentcosts. These include, among others, civil works;mounting structures; installation costs; commonelectronics and controls; general piping, wiring andfittings; planning and design; permitting; retailing;and sales and delivery.The last segment of the value chain is operationsand maintenance. O&M costs were calculated overthe average expected lifetime of the technologyand discounted to present values so that they couldbe sensibly compared to the first two segmentsof the value chain. Costs for O&M include, amongothers, routine maintenance and inspection; partsreplacement; vegetation clearing; ongoing laborcosts; vehicle operations; reservoir management;landfill leachate collection and treatment; warrantyenforcement; and insurance.Table 3.1 summarizes the value chain segmentsand Appendix B shows more detailed value chainbreakdowns.Growth opportunities also exist for SMEs that arealready active and may have particularly relevantcapabilities to leverage in adjacent markets. Formany of these existing SMEs, the clean technologyindustry provides new opportunities for growth. Forexample, an electrician can begin installing solar34 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

TABLE 3.1. Activities in the value chain for the 15 technology areasTechnology Major equipment EPC/BoS O&MOnshore wind 57% (of the value) 22% 21%TurbineCivil worksBalance of systemOther costs44%31%25%InsuranceRoutine component andequipment maintenanceReplacement parts & materialsSolar thermal 45% 37% 19%Solar collectorCivil worksBalance of systemOther costsRoutine inspectionMaintenance of absorption andadsorption chillersSolar PV54% (>1 MW)45% (1 MW)46% (1 MW)9% (

PV panels and a heating engineer who previouslyfit boilers can expand his business to install heatpumps.A closer look at how the investment breaks downacross the value chain sheds light on where themost promising opportunities might be (see Figure3.1). For most of the renewables a significantportion of the investment is in major equipment,which is likely to offer less opportunity for SMEs.Downstream in the value chain, SMEs are likelyable to capture over 50 percent of the market in anumber of sectors. While opportunities also existin highly specialized and technically sophisticatedmajor equipment, customers tend to favor largercompanies with significant access to capital inhighly industrialized and vertically integratedmarkets. In general, the major equipmentcomponent segment of the value chain favors themore developed countries, with the exception ofeconomies like China that have established andsophisticated manufacturing sectors.ConclusionThe size and growth prospects of the cleantechnology sector present a large businessopportunity for SMEs. However, not all technologysectors or value chain segments are equallyaccessible to SMEs. Policy makers should considerthese variances when designing programs tosupport local SME participation in green industries.The next three chapters examine how policy hasbeen designed in particular country contexts tocapture such value and explores the results ofthose policy efforts.FIGURE 3.1. SME opportunities in the value chainOnshore windSolar thermalSolar PV (>1MW)Solar PV (

Photo: John Hoggs / World BankChapter 3: The Role of SMEs in Climate and Clean Technology Industries37

Chapter 4Case Study:Solar Energyin IndiaMain Points• This case study takes a deep dive into the solar industry in India to illustrate the SME opportunity moreclearly across the value chain segments and presents findings from a survey with 50 clean technologySMEs in India.• Solar is particularly interesting in India because of the Indian Government’s ambitious plans and targetsfor solar energy at small and large scales (as embodied in the Jawaharlal Nehru National Solar Mission).India is by far the world’s most advanced market for small-scale concentrated solar power (CSP) forindustrial heat, with supply dominated by local Innovative Indian technology suppliers.• The SME opportunity in on-grid solar PV and CSP technologies over the next decade in India is roughly$41 billion, including lifetime O&M.• The bulk of that opportunity is in the latter segments of the value chain: planning, installation, Balance ofSystems, and O&M. Innovation opportunities also exist around customization of small systems for PV andaccelerating the time between commissioning and operational readiness for CSP.• According to the survey, Indian clean technology SMEs are working across value chain segments andinnovation activities. However, they point out several barriers and suggest targeted policy support areas.Addressing these could provide opportunities for additional industry growth and SME participation.BOX 4.1. Setting the scene: SMEs in IndiaAfter earning an engineering and managementdegree from the University of Pennsylvania,Siddharth Malik began working in the energyfinance sector in the United States. But he wassoon drawn back to India, where he could puthis entrepreneurial character to work in thecountry’s burgeoning clean technology sector.An ambitious innovator in his late twenties,Siddharth founded Megawatt Solutions, arenewable energy company specializing inconcentrated solar thermal power. Three yearslater, he led the company through innovativepilots and demonstrations, and is now at thehelm of India’s largest solar industrial heatingproject, displacing diesel fuel and making upfor a shortfall in biomass currently used by thepharmaceutical packaging industry in the stateof Gujarat.Siddharth personifies the buoyant and dynamicatmosphere that is permeating India’s diverseclean technology market. With its largeeconomy, surging demand for energy, activepolicy environment, and a commitment toslow the growth of greenhouse gas (GHG)emissions, Indian SMEs are capitalizing onthe opportunities in the sector. While thesurvey shows that significant barriers persist,entrepreneurs like Siddarth are finding ways ofovercoming them.38 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

Photo: Ray Witlin / World Bank.Solar Energy Market andPoliciesIndia’s energy demand is forecast to increase byabout 40 percent over the next decade, from 630Mtoe to over 880 Mtoe (U.S. EIA, 2013a). Meetingthat demand will require enormous investmentin new energy sources and electricity generatingcapacity. As a part of its effort to diversify its energymix, India plans to install 22 GW of solar capacityby 2022, and over 40 GW of new wind power(Ministry of New and Renewable Energy-India,2012a; GWEC, 2013; GWEC, 2012).Of all renewable energy technologies, solaris one of the best suited for use in rural areasto help meet basic energy needs (MalaysianCommonwealth Studies Centre, 2012). Bothdecentralized, off-grid systems and larger scale,grid connected solar power are highly relevant toIndia. India has one of the world’s highest solarintensities, with an annual solar energy yield of1,700 to 1,900 kilowatt hours per kilowatt peak(kWh/kWp) of installed capacity (Germany has anaverage of 900 kWh/kWp) (McKinsey, 2008, 2013b).India also has about 300 clear, sunny days per year(Muneer, Muhammad, and Munawwar, 2005).Since India’s resource base is suitable forthe whole breadth of solar technologies, gridconnected and off-grid solar photovoltaic as wellas CSP 16 and solar thermal technologies are alldiscussed in this case study. They are all relevant tothe Indian context and represent different marketniches and commercial opportunities for SMEs.16 It is also important to clarify India’s solar nomenclature.National documents refer to CSP as “solar thermal,” andrefer to what is traditionally called solar thermal as “solarcollectors.” In this case study, the term “CSP” refersto technology that uses reflectors to concentrate solarenergy for use as electricity or heat, and “solar thermal”refers to flat plate or evacuated tube solar collectorsthat are used to generate heat, usually hot water, but notelectricity.Of all renewable energytechnologies, solar is one of the bestsuited for use in rural areas to helpmeet basic energy needs.The Jawaharlal Nehru National Solar Mission, partof India’s National Action Plan on Climate Change(NAPCC), was launched in January 2010 to promotethe development and use of solar power. It is thefoundation for policies and programs that areaccelerating deployment of both grid-connectedand off-grid solar power, encouraging deploymentof solar thermal collectors, and improvingconditions for solar manufacturing capability inIndia, particularly in the local supply chain (Ministryof New and Renewable Resource-India, n.d. (a)).The government has also established institutionsand centers to facilitate solar development. TheSolar Energy Centre, accredited testing facilities,workforce training programs, and research andtechnology validation projects. The Solar EnergyCorporation of India, a not-for-profit organization,promotes R&D, selects sites for solar powerstations, sets up transmission facilities, and owns,operates, and manages projects (Solar EnergyCorporation of India, 2014). The Ministry of Newand Renewable Energy (MNRE) organized theSolar Mission into three phases and set targetsfor each phase (Ministry of New and RenewableEnergy-India, 2012). As of June 2013, greater than85 percent of the 652 MW Phase I grid connectedSolar PV targets have been deployed. Some delayshave been experienced for CSP (projects havebeen selected, but no new CSP has actually beenbrought online). State policy is also driving thesolar market, especially where the natural solarresource is particularly strong (that is, Gujarat,Rajasthan, and Karnataka).Chapter 4: Case Study: Solar Energy in India39

BOX 4.2. India’s Feed-in TariffExperienceFeed-in tariff (FIT) schemes havebeen successful at acceleratingrenewable energy deployment inGermany and Spain, but have alsosometimes burdened consumers withfixed long-term contracts that deliverwindfall profits to developers whotake advantage of falling technologycosts and slow-to-adjust governmentsupport. In India, the CentralElectricity Regulatory Commission(CERT) analyzed the market and seta benchmark FIT, a maximum ratethat can be offered to developers. TheIndian government also requestedproject proposals from developers ina ‘reverse auction’, where developerssubmit their plans and any discountthey can offer from the FIT. In practice,44 percent of the developers offeredhundreds of megawatts at significantlylower cost. As a result, the governmentawarded 140MW of solar PV capacityat an average of 32 percent below theCERT benchmark tariff, and 350MW ofPV capacity at an average of 43 percentbelow the benchmark (Phase I). ForCSP, the average tariff was 25 percentlower than the benchmark. While thisis advantageous for consumers andefficiently allocates scarce governmentresources, it may favor large powerproducers who can leverage economiesof scale and established supplychains to reduce costs, and use theirfinancial strength to cushion againstcost overruns or overestimated powerproduction.India also has many different incentives designed toencourage the deployment of different sizes and typesof solar technology, including feed-in tariffs, capitalcost subsidies, exemptions from electricity tax, taxconcessions, and exemption from electricity demandcuts to those who produce rooftop solar power. Thefeed-in tariff (see and some capital subsidies areadministered nationally, while state governmentsmanage other policies.The SME Opportunity in theIndian Solar MarketOn-grid solar PV and CSP technologies are among thelargest clean technology SME opportunities identifiedin India. Taken together, the SME opportunity for solardevelopment over the next decade is estimated at about$41 billion, including lifetime O&M (see Table 4.1). Thebulk of that opportunity is in the latter segments ofthe value chain: planning, installation, and Balance ofSystems, and O&M. Planning, installation and Balanceof Systems activities have smaller upfront capital costsand require less technical sophistication. O&M activitieswill grow cumulatively as technologies are deployed,creating business opportunities that are suitable for newentrants or existing SMEs looking to grow their serviceofferings.The solar thermal sector is expected to be a smallermarket compared to solar PV and CSP, and theopportunities for SMEs are spread more evenly acrossthe value chain. Considering the size of the marketopportunities, this chapter explores the solar PV andCSP market in depth.TABLE 4.1. SME Solar opportunity by value chainsegment in India over the next 10 years ($ billion)SolarsubsectorMajorequipmentPlanning,installation& BoSO&MTotalSolar PV 0.8 15.0 5.5 21.3CSP 0.5 13.9 2.2 16.6Solarthermal1.3 1.7 0.9 3.9Total 2.6 30.6 8.6 41.8Source: Authors’ analysis.40 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

FIGURE 4.1. Solar PV value chainMajor equipmentPlanning, installation &balance of systemOperations & maintenance54% (>1 MW)9% (1 MW) /46% (1 MW)9% (

manufacturers, as the capacity map clearlyshows (see Figure 4.4).• Planning, installation, and balance of system:The balance of system components like thesolar rack, inverters, transformers, wiring,and battery storage systems are widelyproduced by domestic SMEs, like Kripa PowerSystems, which sells inverters, or Tara Solar,which sells mounting racks (The Solar India,2013; Kripa Power Systems, 2013; Tara Solar,2013). Many other elements are inherentlylocal, such as structural installation and sitepreparation. System design, permitting, andproject management also require the kindof bespoke engineering consultancy andplanning services that are better suited tolocal firms.Customization of systems to suit smaller,off-grid loads are rapidly gaining popularity,especially since the cost of PV modules hasfallen so dramatically. Small PV retailersare outfitting shops and small businesseswith systems to offset the cost of purchasedelectricity and to keep merchandise cold andother systems operational in the event ofpower cuts.• O&M: These activities are crucial to maintaininghigh performance and successfully operatingsolar PV equipment. O&M activities last forthe lifetime of the projects and grow as thecumulative stock of installed PV equipmentexpands. For these reasons, O&M activities arelikely to be an increasingly lucrative and fastgrowingmarket.The CSP MarketIndia’s CSP market is projected to be worth up to$45 billion over the next decade, with about $16.5billion accessible to SMEs for grid-connectedCSP alone. CSP technology has two major typesof application: CSP for electricity, where wateris turned into steam and used to drive turbines;and CSP for heat, where heat or steam is usedfor medium-energy intense industrial processeslike cooking, laundries, bakeries or dairypasteurization.Grid-connected CSP has several advantagesover PV. Thermal energy storage systems, withwhich CSP can be equipped, help buffer againsttransient cloud cover and enable the technologyto generate electricity after sunset. They alsomay allow operators to distribute electricity atpeak times and enable hybrid operation capabilitywith other fuel types to meet base-load energydemands. Some CSP technologies have betterconversion efficiencies than PV, and, dependingon their level of sophistication, can be made at lowcost. The drawbacks of CSP technology includethe need for direct sunlight (PV works even undercloudy conditions), the relative immaturity of thetechnology, the consequent difficulty in securinglow-cost finance, and the relatively long lead-timesrequired from concept to operation.As previously mentioned, the first call for 500 MWof grid connected CSP was fully subscribed underthe National Solar Mission. The distribution of CSPtechnology types that were selected under PhaseI of the National Solar Mission is shown in Figure4.2. The first 50 MW parabolic trough installationcame online in June 2013, but most companieshave been delayed bringing their systems online(Godawari Green Energy, 2013).Like PV, the SME opportunities for this technologylie mostly in the latter two stages of the valuechain, which together comprise up to 65 percentof the total value of the CSP market and about 95percent of SME value lies.FIGURE 4.2. Technology choice for grid connectedCSPCommissioned capacity (MW)400350300250200150100500380Parabolic troughcollector100Compact linearFresnel reflectorSolar tower10 10Parabolic dishSource: Ministry of New and Renewable Energy-India, 2012b.42 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

Figure 4.3. CSP value chainMajor equipmentPlanning, installation &balance of systemOperations & maintenance36%Solar field 80%• Mirrors• Receivers• Steel constructionThermal storage system 20%• Salt• Storage tanks• Insulation materials• Foundations• Heat exchangers• Pumps55%Civil works 35%• Structural installation• Site preparationBalance of system 30%• Balance of plant• Power block• Heat transfer fluid system• Grid interconnection• Electronics and controlsOther costs 35 %• Project development, EPC,financing costs, allowances9%Routine inspectionPreventative maintenance• Mirror cleaning• Vegetation management• Upkeep of power andmonitoring systemsCorrective maintenance• Mirror & receiverreplacement• Warranty enforcement• Plant insuranceThe opportunities for Indian SMEs for each of thevalue chain segment are discussed below:• Major equipment:Seven companies were awarded CSPcontracts under the National Solar Mission,and one (Aurum Renewable Energy Pvt Ltd)was an SME. It was awarded 20 MW of CSPcapacity, or 4 percent of the total (AurumVentures, 2013). SMEs are not completelyshut out of this segment of the grid connectedCSP value chain will have some opportunities.For off-grid CSP, especially CSP for heat,the opportunities for SMEs in the majorequipment segment are significantly better.For example, the Scheffler dish is a parabolicdish design that can easily be manufacturedlocally in developing countries, and wasintentionally designed to be manufacturedanywhere. The design specifications arefreely available online and systems can beassembled using basic engineering skillsand easily available materials. India is alsoby far the global market leader in smallscaleoff-grid CSP, which may create exportopportunities as other markets catch up.Another solar concentrator used for thermalapplications is called ARUN and was designedby an SME called Clique Solar. There are 15ARUN dishes in operation, all in India, whichare used for process heat in the dairy andhotel industries (Clique Solar, 2013).• Planning, installation, and balance of system:About 50 percent of the latter segments of thevalue chain are thought to be accessibleby SMEs. Many of these components are lesstechnically sophisticated and would requireless upfront capital investment to develop andproduce. Many of the services are inherentlylocal, such as engineering consultancy,permitting, site preparation, and structuralinstallation.• These activities are considered to be quiteaccessible to SMEs, especially new startups,since several of the O&M activities requireminimal initial inputs.Innovation Opportunities in the IndianSolar MarketAnalysis of India’s innovation system questionswhether it has the competitive enablers thatChina’s system does. China’s global market sharefor PV production grew from less than 2 percentin 2002 to 45 percent in 2010, while India’s fellfrom 4 percent to 2 percent over that period. Itis argued that China’s institutional coordination,wide-ranging capital and resource subsidies, deepand responsive R&D support, and upstream anddownstream corporate integration made ChinesePV extremely competitive. China also offered cheapfinancing, which reduced equity requirementsand gave firms the freedom to operate withChapter 4: Case Study: Solar Energy in India43

FIGURE 4.4. Capacity map for crystalline PV(global, China, India)Capacity volume (GW)45403530252015105041 40Ingots27 27.01 .01WafersCellsModuleslower returns, and had a DCR that covered all PVtechnologies rather than just crystalline.India lacks the same degree of institutionalintegration, has an unreliable electricity supply,has an R&D agenda that is more driven by thepublic sector than the private sector, and has aDCR that covers only crystalline technology (Sahooand Shrimaliy, 2013). For these reasons, the majorequipment stage of the PV value chain is notlikely to gain a significant competitive edge, and isconsidered to be an especially limited opportunityfor SMEs. However, there are particularly strongtechnology-specific innovation opportunities forsolar PV around customization of small systems,including roof-mounted ones and off-grid bespokeapplications for small power requirements. Froman R&D perspective, there is innovation potentialfor solar PV cells and modules to be calibrated toIndia’s latitude rather than the irradiance spectrathat are more common in European markets. ForCSP, innovation is needed to accelerate the timebetween commissioning and operational readiness,since that has been a major stumbling point for theCSP commissioned under Phase I of the NationalSolar Mission. For solar thermal, innovation isneeded to improve integration with other energysources.402238231.7 1.7Global China IndiaSource: Sahoo and Shrimaliy, 2013.Innovative financing arrangements are needed toopen up the market to potential customers withlimited upfront capital. The Asian DevelopmentBank is experimenting with pay-as-you-goschemes in partnership with Simpa Networks,an SME that is helping energy-poor householdsaccess solar energy using a solar home systemand a low-cost prepaid meter connected to cloudbasedsoftware (ADB Knowledge Showcases,2013). Accessing low-cost finance is also importantfor larger-scale projects, especially in the highlycompetitive cost environment that is encouragedby the reverse-auction approach to feed-in tariffs.Innovation is also needed to improve the degreeof technical quality assurance, which would helpbuild trust in a technology’s claimed specificationsso that developers and financiers can reducetechnology risk and financing costs.Indian Clean Technology FirmSurvey ResultsA survey of 50 clean technology firms in Indiasuggests that a large majority of the firms areactive in renewable energy, including solar; 68percent of firms said they worked in renewableenergy, 40 percent are in energy efficiency, and18 percent worked in waste management andpurification (note that firms could select more thanone sector) (see Figure 4.5). These commercialactivities largely reflect the areas of greatestopportunity that were identified through the marketsizing study, and may reflect the fact that firmsare choosing to get involved in sectors that aregrowing.The survey also revealed that clean technologySMEs are already working in the value chainsegments with the most opportunities for SMEs(see Figure 4.6). Most firms said they worked inseveral different parts of the value chain, withover 70 percent of firms working in design and/orO&M, and over 60 percent working in one or moreof installation, manufacture and assembly, and/orR&D.The surveyed firms were also international, andsignificantly more international than non-cleantechnology firms in India (World Bank, 2006).Nevertheless, 70 percent of firms said that morethan three-quarters of their sales came fromdomestic customers. Forty-six percent of firms hadcustomers overseas, 43 percent of those firms hadcustomers in Africa and non-China Asia-Pacific,44 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

Figure 4.5. Sectors in which Indian cleantechnology SMEs are involved70%68%60%50%Percent of firms40%30%20%10%0%Renewable energy40%Energy efficiency18%14%Waste management& purificationSustainable agriculture8%2% 2% 2%Domestic wastemanagementOtherClean transportationImprovedbuilding designSource: Survey of clean technology firms in India undertaken in Julyand August 2013.Photo: Ray Witlin / World Bank.and more than 30 percent had customers in eachof Europe, North America, and the Middle East.Sixty-six percent had suppliers based in a foreigncountry, hailing mostly from China and Europe(61 percent each) but also from North America(39 percent) and other parts of East Asia (30percent). A further 30 percent of firms identifiedinternational expansion as a priority.Overall, the firms expressed a high level ofoptimism about the current and future Indianclean technology market: 88 percent of the firmsindicated that they were either very (62 percent) orfairly (26 percent) confident about their businessenvironment in India. The surveyed firms’ historicaland projected growth also showed promising signs:94 percent experienced sales growth in 2013 andnearly 70 percent of the firms purchased fixedassets in 2013, reflecting their willingness to investand suggesting their confidence and optimismabout the market. Further evidence of optimismand growth expectations can be seen in the factthat 96 percent of the firms expected the numberof employees focused on clean technology toincrease over the next three years (with 53 percentexpecting a large increase).Figure 4.6. Activities in which Indian cleantechnology firms are involvedPercent of firms90%80%70%60%50%40%30%20%10%0%81%70% 67% 65% 63%56%O&MDesignManufacture/assemblyR&DInstallationConsultancyRetail & distribution48%44%Technology licensingSource: Survey of clean technology firms in India undertaken in Julyand August 2013.Chapter 4: Case Study: Solar Energy in India45

Indian clean technology firms are avid innovators.Over the past two years, about 70 percent ofsurveyed firms introduced new or significantlyimproved clean technology products or services,methods of manufacturing their clean technologyproducts, and process-based activities to enhanceclean technology product delivery (see Figure 4.7).Such innovation across such a broad spectrum ofindicators suggests that firms are responding tothe dynamic market conditions that are present inIndia.As with any market, there are barriers to the rapidscale-up and deployment of solar technologies inIndia. The top two barriers identified by the cleantechnology firms surveyed in India for this reportare shown in Figure 4.8.The most commonly cited barrier by far wasaccess to finance, which is particularly problematicconsidering that 84 percent of surveyed firms planto raise funding in the next two years. This barrierwas particularly acute for the surveyed cleantechnology firms compared to average Indian firms,who considered access to finance to be the fifthbiggest obstacle to their business. To overcomethis barrier, efforts could be made to educatefinance providers about the real risks posed byinvestments in solar, including the strength ofcontractual guarantees on product performanceand the longevity and robustness of the feed-intariff. Likewise, developers could benefit fromsupport in writing detailed and realistic businesscases that meet the standards of lenders.Access to land, corruption, and customs and traderegulations were also significant barriers forclean technology firms. A lot of clean technologiesrequire access to land, especially large-scale solar,which may underlie this concern, but a focus onrooftop solar PV (which does not require additionalland) or smaller, more customized PV applicationscould mitigate this issue. When asked what thegovernment could do to help overcome thesebarriers and foster growth in clean technology,surveyed firms indicated a range of potential areaswhere help would be welcomed, as shown in Figure4.9. These results show that there is a wide rangeof different government interventions that would bewelcomed by clean technology firms.Figure 4.7. Innovation activities undertaken byclean technology SMEs in IndiaFigure 4.8. Most common barriers faced by cleantechnology SMEs in India80%70%60%80%74%70%68% 68%54% 52%50%40%46%Percent of firms50%40%30%Percent of firms30%20%26% 24%22%18%14%20%10%12%10%10%0%R&DBusiness developmentand salesTraining existing staffMarket analysisRaising fundingDemonstrating newproducts or servicesHiring additionalskilled staffSource: Survey of clean technology firms in India undertaken in Julyand August 2013.0%Access to financeAccess to landCorruptionCustoms and trade regulationsPolitical instabilityBusiness licensing and permitsPractices of competitorsin the informal sectorInadequately educated workforceSource: Survey of clean technology firms in India undertaken in Julyand August 2013.46 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

Figure 4.9. Areas for government support identified by clean technology SMEs in India35%32%30%25%28%26%24% 24%Percent of firms20%15%10%5%20%18%8%6%4%0%Direct subsidiesRegulatory reformR&D grantsLoan guarantees /discountsImproved enforcement /compliance mechanismsTax creditsFeed-in tariffsMarket supportProcurementBusiness mentoring /commercial adviceSource: Survey of clean technology firms in India undertaken in July and August 2013.ConclusionThe clean technology market is set to grow in India.Over the next decade, economic growth will bebolstered by India’s large population, peaking laborforce participation rate, increasingly educatedand skilled workforce, and the emergence of awealthier and more urban middle class.Significant investment in solar power, whichis especially well suited to India’s climate andgeography, is being driven by the National SolarMission, the feed-in tariff and falling technologycosts. The SME opportunity in on-grid solar PV andCSP technologies over the next decade is about$41 billion, including lifetime O&M. The bulk ofthat opportunity is in the latter segments of thevalue chain: planning, installation, and balance ofsystems, and O&M. Innovation opportunities existaround customization of small systems for PV andaccelerating the time between commissioning andoperational readiness for CSP.According to surveys of clean technology SMEs inIndia, firms are optimistic about the market andare active in innovative activities. However, theyhighlight several barriers to entrepreneurshipsuch as access to finance and land. Removalof these barriers and providing targeted policysupport (for instance, loan guarantees or subsidies,marketing and sales support, and improvedaccess to technical R&D facilities) could provideopportunities for additional industry growth andSME participation.Chapter 4: Case Study: Solar Energy in India47

Chapter 5Case Study:Bioenergyin KenyaMain Points• This case study takes a close look at the bioenergy industry in Kenya to illustrate the barriers andopportunities in the various subsectors, including examples of Kenyan SMEs. It also presents findingsfrom a survey with 50 clean technology SMEs in Kenya.• Bioenergy already plays a significant role in Kenya’s energy mix. It is entrenched in Kenyan domestic andworking life and as such presents an excellent opportunity for local SMEs to grow the sector and make itmore sustainable.• The SME opportunity in bioenergy—efficient biomass, biogas, crop-based biofuels, and cogeneration orcombined heat and power—is abundant but specific to certain technologies or geographical locations.Investment of $2.4 billion is expected in the East African bioenergy sector, with almost $1.4 billionaccessible to SMEs, and Kenyan SMEs may benefit from these opportunities.• Kenyan SMEs face a number of barriers including incoherent bioenergy policies, high cost of investment/access to finance, lack of business skills, and so on. Despite the challenging environment, the survey ofclean technology SMEs in Kenya suggests that firms are optimistic about the clean technology marketand have strong growth ambitions. Some Kenyan clean technology SMEs are highly innovative and aredeveloping pioneering financing models and new products and services.• Removing key barriers and providing targeted policy and business support could provide opportunities foradditional industry growth and SME participation.Kenya’s Bioenergy Market andPoliciesBioenergy is a renewable energy made frombiomass, which is organic material derived fromplant or animal matter. Three main sources ofbiomass are used to produce modern bioenergy inKenya: naturally occurring biomass (for instance,from trees or manure); industrial biomasswaste from agro-industries; and crops growncommercially with the sole purpose of biofuelproduction. This case study considers all threesources but excludes charcoal. Biomass can beused to supply heat, power, gas, and transport fuel.Biomass currently accounts for 70 percentof total energy demand (90 percent of ruralhousehold energy needs—33 percent in the formof charcoal and the rest, firewood). There is alsoover 1.8 million metric tons of estimated bagasseproduction with a potential to generate 120 MWof electricity. Bioenergy has great potential tocontinue to play a significant role in Kenya’s energymix. It is already entrenched in Kenyan domesticand working life so it would be easier to buildupon existing industries than develop new ones.Furthermore, bioenergy is particularly suited toKenya’s level of development: it can provide offgridpower solutions to remote areas; much of theinfrastructure involved is low-tech and/or available48 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

Photo: Curt Carnemark / World Bank.bioenergy … can provide off-gridpower solutions to remote areas;much of the infrastructureinvolved is low-tech and/oravailable on small scales…on small scales; and it is fed by a resource thatKenyans are able to produce on a range of scales.If poorly managed, however, a focus on scalingup bioenergy could lead to other environmentalproblems. In the past, exploitation of forests forbiomass has led to large-scale deforestation(National Climate Change Action Plan 2013-2017-Kenya, 2013). Additionally, charcoal, which provides82 percent of urban fuel consumption and which isthe largest rural employment sector in Kenya afteragriculture (Hunt, 2013), is a source of dangerousindoor air pollution (Kenya’s Energy RegulatoryCommission, 2004). It is also inefficient, typically60-80 percent of the energy in the wood is lost andcharcoal stoves are particularly wasteful, operatingat efficiency rates as low as 3 percent. Theenvironmental issues associated with some formsof bioenergy make it important that any futuredevelopment is managed sustainably.The overall government approach to bioenergyis inconsistent and could be clarified further toprovide market certainty. The National ClimateChange Action Plan (NCCAP) of 2012, an actionplan based on the 2010 National Climate ChangeResponse Strategy (NCCRS), 18 includes developingindustrial-scale cogeneration using biogas fromagricultural residues and introducing a 10 percentbiodiesel fuel blend into liquid transport fuels.18 See “National Climate Change Action Plan 2013 -2017:Executive Summary.” Republic of Kenya. 2012. 5.1. Setting the scene: SMEs in KenyaA socioeconomist by training, Samson Gichiastarted his career as a research assistant at theInternational Centre of Insect Physiology andEcology. Testing his entrepreneurial instincts,in 2007 he started a family-run maize millingbusiness, raising the startup capital from hispersonal savings. In 2010, Samson’s ambitionsgrew as he sought to provide a solution to one ofKenya’s most pressing problems—rural energyprovision. In response, he founded CobitechLimited, a bioenergy company specializing in theconstruction of fixed dome biogas systems. Thesesystems are aimed at both domestic householdclients with access to livestock waste to useas feedstock and organizations like NaivashaWater and Sewerage Company, where humanbiowaste can be utilized as feedstock for biogasgeneration. Cobitech currently has ambitiousplans to build a 2 MW biogas plant in KiambuCounty with the aim of generating renewableenergy in rural areas across the country foronward sale to government.Samson is in many ways typical of Kenyanclean technology entrepreneurs—driven to findsolutions to local problems, willing to put his ownresources behind his ambitions, and eager totake advantage of startup support mechanismsavailable in the region. Cobitech has alreadysought out support from several organizations,winning prizes and getting assistance rangingfrom mentorship support to capital finance.With Kenya’s position as a regional hub, theprocess of East African Community (EAC)integration well underway, and a significantnumber of innovation support facilities dottingthe country, Kenyan entrepreneurs are wellplaced to lead on clean technology innovationfor the region. Although as shown later in thischapter, significant barriers remain.Chapter 5: Case Study: Bioenergy in Kenya49

It also has plans for maintaining and increasingforest cover (that is, a minimum of 10 percentof land) and promoting improved cooking stovesand LPG cooking stoves. A Biofuel Policy, draftedin 2010 has yet to pass through Parliament.The absence of a formally acknowledged policyframework presents uncertainty as to what supportor restrictions may be offered or imposed in thefuture. A further indication that the governmentmay be reluctant to support bioenergy is that itspotential negative impacts are presented withoutany suggestions as to how they could be resolved.These impacts include competition for agriculturalland, resulting in increased food prices, andextensive rural biomass consumption, causingdeforestation and widespread biomass scarcity.The Kenyan government introduced a feed-in tariff(FIT) to allow renewable electricity producers,including from biogas, to sell electricity toKenya Power and Lighting Company Limited ata fixed price for a given length of time (Energy,Environment, and Development Network forAfrica, 2009). First introduced in 2008, it has beenreviewed twice, in 2010 and 2012, because theFIT price was insufficient to attract significantinvestment. The government also developed astrategic plan for biodiesel (2008-2012) to be usedboth in transport (10 percent blend by 2020) andelectricity generation. The government hopes thatgrowing biofuel feedstocks on marginal land willnot impact food security and expects the biodieselindustry to sustain itself without state subsidy aftera short term of government monetary support andplans to tax biodiesel production in the long run.The SME Opportunity in theKenyan Bioenergy MarketThe increased (and more sustainable) use ofbiomass, biogas, crop-based biofuels, andcogeneration presents a range of opportunitiesfor SMEs. While bioenergy (including biofuels) isforecast to reach a relatively small market sizecompared to small hydro, geothermal, and PV inEast Africa, this is partly because of the relativelylow capital investment required to enter themarket, which makes it a particularly appealingmarket to SMEs and entrepreneurs. The KenyaClimate Innovation Center 19 for example, has 33 ofits 79 clients active in the bioenergy and biofuelssector. Opportunities related to bioenergy arediscussed below.More efficient use of biomassProducts like improved cooking stoves and biomassboilers have significant benefits for end users:they reduce fuel costs for the purchase of woodor charcoal; improve indoor air quality therebyreducing associated health problems; and reducethe time spent by individuals in finding fuel. Keybarriers include a lack of financial investment andlack of awareness among end users.BiogasBiogas digesters convert water and organicmaterial into a gas, which can be used as a fuel,often replacing LPG. This technology is availableon different scales—domestic, community/institutional, and commercial.Domestic biogas digesters are low-technologyconstructions involving concrete or plastic tanks.There has been some take-up of biogas digesterssince the 1950s, but certain barriers restrictwide-scale installation. The quantity of organicmaterial required to power the digester (at leasttwo cows which must be standing) is unsuitablefor pastoralists and some farmers (Hunt, 2013;Resources, Conservation and Recycling, 2010).It also uses about four buckets of water per day,making it inappropriate in some water-scarceareas of the country. Many biogas digesters havefallen into disrepair because of poor maintenance—the Africa Biogas Partnership Program (ABPP)reports that only around half of all biodigestersinstalled were still operational in 2008. Demandis further limited by the large upfront installationcost of KES 100,000-150,000 (about $1,100-1,700).However, large donor funded programs likethe Kenya National Domestic Biogas Program(KENDBIP) are working to reduce the investmentcost barrier of domestic biogas installations byproviding a subsidy. This market will most likelybe driven by donors, government, and NGOs in theshort and medium term.19 The Kenya Climate Innovation Center is one of thebusiness incubators supported by the World Bank/infoDev’s Climate Technology Program. For moreinformation, see Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

SMEs focused on adapting or making biogasdigesters more suitable for domestic users, byproviding a more tailored service (for instance,pay-as-you-go business models, including lifetimeservicing which reduces the barrier of high upfrontinvestment costs), could generate moredemand for these products. An example of an SMEapplying business model innovation is presented inBox 5.2.There is high potential for industrial-scale biogasin Kenya because many substrates from typicalKenyan agricultural production and industry canbe used to produce biogas. Industrial-scale biogastechnology is exploited in dairy, slaughterhouses,and farms. A number of donors have alsoundertaken feasibility studies for differentindustries to assess their potential and encourageinvestment. A study by GIZ found that municipalsolid waste from Nairobi had the highest potentialfor a single input, followed by sisal waste, coffeeproduction, and certain food processing (GermanBiomass Research Centre, 2010). Two SMEsoperating in the industrial bioenergy sector aredescribed briefly in Box 5.3.BOX 5.2. Takamoto BiogasTakamoto Biogas is one of the 52 SMEscurrently registered with the Kenya ClimateInnovation Center, which was establishedby infoDev’s Climate Technology Program(Anjarwalla, 2013). Established in 2011 bya Brown University graduate, it employs amix of eight Americans and Kenyans. Itstarget market is the domestic household,selling biogas appliances such as stoves,water heaters, and lamps and also providinginstallation of the digesters (TakamotoBiogas, 2013). It is currently rolling out itsnew innovative financing mechanism, thepay-as-you-go system, to address the highinstallation cost that acts as a barrier to manyhouseholds. Under this system, customers paya small upfront cost (about one-tenth of thenormal price) and then pay per usage, utilizingsmart meter and mobile phone technology(Anjarwalla, 2013). Fifty systems have sofar been installed through a pilot project(Anjarwalla, 2013). Takamoto Biogas hopes thisscheme will expand its market and improveaccess to biogas technology in rural areas.BOX 5.3. Nairo-Bio Limited and Four for OneTrading ServicesIn 2012 Evans Kamau Munira, a Swedish-Kenyan entrepreneur, won the European-African Entrepreneurship Award for hisproposed biodiesel business venture. Aftersubstantial market research he had createda business model that involves turning usedcooking oil into biodiesel. The companyplans to source the equipment from Swedenand the oil from local waste producers andthen to sell to transport firms and privatefuel stations. It addresses the need inthe market for a cheaper fuel source fortransport as imported fossil fuels becomeunaffordable, accounting for a significantportion of total costs borne by companies.The plan also capitalizes on the zeroratedduty for imported clean technologyprocessing equipment and the availabilityof waste cooking oil at low cost (it currentlypresents a disposal problem for manyrestaurants).Four for One Trading Services is anotherSME supported by the Kenya ClimateInnovation Center. In contrast to TakamotoBiogas, it operates in the industrial biogasmarket, targeting companies that producelarge quantities of organic waste, suchas the dairy and sugar sectors. It offersservices in the design, construction, andoperation of biogas plants and employs88 skilled workers, besides expecting toemploy at least six technicians at eachindustrial installation (Four for One TradingServices, 2013). In its targeted approach ithas managed to exploit huge demand, withover 500 clients in four years. Four for OneTrading Services integrates technologicalinnovation into its business model. First,it claims to have a unique biogas digestersystem, the Ambita model, which producesalmost twice as much biogas as conventionalsystems, and furthermore it is looking atnovel feedstocks, such as investigatingthe potential for creating biogas from thehyacinth weed that is a pest for fishermenon Lake Victoria (Kenya Climate InnovationCenter, 2013).Chapter 5: Case Study: Bioenergy in Kenya51

Crop-based biofuelsCrop-based biofuels have not had particularly goodsuccess in Kenya. Jatropha—a crop whose seedsproduce oil that is used to create biodiesel—wasintroduced to Kenya several years ago on the basisthat it could grow on arid lands and hence provideeconomic activity in otherwise unproductive areas.However, time has shown that while jatropha canindeed grow on poor land, the results are similarlypoor, and it has consequently become less popular(Khatun, 2013).As shown in Figure 5.1, the potential for feedstockproduction varies dramatically across Kenya(African Centre for Technology Studies, 2010).The coastal, central, and western regions aresuitable for a large number of crops, while thenorth, east, and southwest could only support afew. Besides geographic limitation, there are alsosignificant regulatory barriers for SMEs thinkingof entering this market. Much of Kenya’s land hasno formal owner. This lack of land tenure restrictsdevelopment: proposed developments faceFigure 5.1. Number of biofuel crops suitable persceneopposition owing to disputes over access rightsand furthermore people are unwilling to makelong-term investment in land without guarantee ofownership.Cogeneration or combined heat andpower (CHP)Sugar companies have the opportunity to producetwo types of bioenergy from waste sugar material:bioethanol from molasses; and cogenerationusing bagasse. Inefficiencies in the Kenyan sugarindustry mean that prices are about twice theinternational level (FAO, 2012). Market protectioncurrently provided by the Common Market forEastern and Southern Africa (COMESA), whichlimits sugar imports through tariffs and quotas,will expire in 2014 and the resulting marketliberalization could result in a flood of importsdriving domestic prices down by as much as 25percent (FAO, 2012). Therefore companies willneed to find methods of cost reduction and incomediversification, to which bioethanol and electricityproduction could both contribute (Mumias SugarCompany, 2013).There is also potential for adoption of a schemecommon to Brazil where sugar and bioethanolproduction can be altered according to relativeprices, in order to maximize income (Hunt,2013). Bioenergy from sugar residues—throughbioethanol or cogeneration—could thereforebecome more attractive, expanding these markets.Cogeneration plans have been incorporated intofour of the seven large Kenyan sugar companies,but bioethanol production has not received thesame level of take-up. Development in this areahas so far been limited because of high investmentcosts, uncompetitive price mechanisms, limitedtechnology, and a weak legal and regulatoryframework. However, Kenya Sugar Board newlyrequires all sugar mills to include ethanol andelectricity production in their operations within24 months (Business Daily Africa, 2013). Thiscondition is currently met only by Mumias SugarCo., the largest sugar producer by volume. Thesefactors could provide the necessary incentives tokickstart the bioethanol market, creating potentialfor SMEs in ethanol retail and ethanol-relatedproducts and appliances.Source: ACTS, PISCES and UNEP, 2010.The diversification of sugar companies into ethanoland electricity production has impacted the supplychain of companies that solely produce ethanol.52 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

Spectre International, also known as KisumuMolasses, used to source 60 percent of its materialfrom Mumias Sugar Co., for whom it was a wasteproduct. However, since Mumias opened its owndistillery, this supply has been greatly reduced. Asa result, Spectre was forced to close for severalweeks in early 2013 until new suppliers could befound. Spectre now imports molasses from Kakirand Kagera in Uganda and Tanzania respectively(The Star-Kenya, 2013).Innovation opportunities in the Kenyanbioenergy marketThere are strong innovation opportunities inbioenergy through the entire value chain (seeFigure 5.2), such as maximizing the yields ofdedicated energy crops (particularly those onmarginal land), which would reduce costs andrelieve pressure on land use. There are alsosignificant innovation opportunities in improvingthe technologies used to convert feedstocksand waste so that it can be done more reliably,efficiently and at greater scale (Carbon Trust,2012b). Much of this innovation might be doneabroad, however there may be opportunities forlocal firms to customize these technologies to localconditions and needs.Innovative financing arrangements are neededin bioenergy to open up the market to potentialcustomers with limited upfront capital particularlyon the domestic and small business side.Takamoto Biogas is one such company trying toturn the lack-of-capital barrier into an opportunity.Accessing low-cost finance is also importantfor larger-scale projects, especially in a highlycompetitive cost environment. Innovation is alsoneeded to improve the degree of technical qualityassurance around the performance of particulartechnologies, once confidence in the technology isestablished developers and financiers will be morewilling to invest as the technology risk is lower.The bioethanol industry also has opportunities forSMEs in appliance production and small-scale fuelretail, as large companies such as Spectre preferto sell in bulk to vendors. This market shouldexpand because of the push factors examinedabove, including the removal of trade barriers andnew policies requiring ethanol production. Overall,innovation in all segments of the value chain,as well as in sales, service, and financing, has akey role to play in supporting the deployment ofbioenergy in Kenya.In addition to innovation opportunities, thereare support structures in place to drive cleantechnologygrowth particularly among SMEs.Nontraditional financing and NGO support isavailable to assist preliminary entry into themarket. For example, the Visionary EmpowermentProgram offers microfinance to small-scalefarming and industrial businesses. It works withthe Kenya National Biogas Program to fundconstruction of biogas technology (The Guardian,2011). Further, the market for the Kenya Clean Jiko(KCJ) stove (an efficient cooking stove) was initiallysupported by NGOs, but now runs commerciallyFigure 5.2. Bioenergy value chain (excluding feedstock)Major equipmentPlanning, installation &balance of systemOperations & maintenance29%Feedstock conversionsystem 80%• E.g. boiler/gasifier/gascollection systemPrime mover 20%• Power generationtechnology37%Civil works 30%• Construction costs• Site preparation• Building constructionBalance of system 50%• Fuel handling / preparation• Control systems• Grid interconnectionOther costs 20 %• Project consultancy• Planning / feasibility /permitting costs34%Fixed costs• Routine component andequipment maintenance• Operations labor• InsuranceVariable costs• Ash disposal• Unplanned maintenance• Incremental servicing costsChapter 5: Case Study: Bioenergy in Kenya53

in its own right (Hunt, 2013). The Kenya CIC alsoprovides financing and incubation support to cleantechnology SMEs.To encourage domestic deployment of renewables,the government recently applied a zero-ratedimport duty on renewable energy technologiesand removed VAT from related equipment andcomponents. This could reduce costs for SMEsbut the availability of cheap imported systemscould make it hard for domestic producers of cleantechnology equipment to compete.SMEs often try to source from local suppliersto keep costs down (Anjarwalla, 2013), which inBOX 5.4. infoDev’s Kenya Climate InnovationCenterThe Kenya Climate Innovation Center (KenyaCIC) was the first CIC to be established byinfoDev’s Climate Technology Program at theWorld Bank. Since its launch in September2012, the Kenya CIC continues to supporta growing network and cluster of climateinnovators and entrepreneurs.It aims to provide holistic, country-drivensupport to accelerate the development,deployment, and transfer of locally relevantclimate and clean energy technologies. TheKenya CIC provides incubation, capacitybuildingservices and financing to Kenyanentrepreneurs and new ventures that aredeveloping innovative solutions in energy,water, and agribusiness to address climatechange challenges. Its priority sectorsare off-grid renewable energy, watermanagement and purification, biofuels, andclimate-smart agriculture. It is also a keypart of the government of Kenya’s NationalClimate Change Action Plan.The Kenya CIC has supported more than 70clients and has provided more than $250,000in proof-of-concept grants as of November2013, while offering direct services andbroader training sessions on accessingcarbon finance and intellectual propertyrights, each done in partnership with theWorld Intellectual Property Organization(WIPO). The KCIC aims to further grow itsclient base and will expand its services witha seed capital investment facility.turn presents opportunities for other local SMEs.For example, Kenyan company CYPRO Biogas isworking with Polytanks (a Kenyan business inmolded plastic products) to produce an innovativeplastic tank for them to distribute as part of theirbusiness (Anjarwalla, 2013).Kenyan Clean TechnologyFirm Survey ResultsThe clean technology market opportunity analysisshows that as much as $290 billion will be investedacross 11 clean technology sectors over the nextdecade in East Africa. 20 The analysis was conductedat the regional rather than country level so doesnot estimate Kenya-specific investment, however itis expected that a significant portion of the regionalinvestment would be focused on Kenya.In East Africa, wastewater, small hydro, solar PV,geothermal, and water were among the top fiveclean technology sectors (see Figure 5.3), andSMEs would find the best opportunities in smallhydro and geothermal sectors (see Figure 5.4).Similar to other regions, SMEs are expected tobe most active in planning, installation, balanceof system and O&M segments of the value chain.In this section, these estimates are compared tothe results from the survey of 50 clean technologyfirms in Kenya.The survey suggests that a large majority of thefirms are active in renewable energy, includingsolar: 87 percent of firms said they worked inrenewable energy, 46 percent are in energyefficiency, 28 percent in sustainable agriculture,and 26 percent in waste management andpurification (note that firms could select more thanone sector). These commercial activities largelyreflect the areas of greatest opportunity that wereidentified through the market sizing study, andmay reflect the fact that firms are choosing to getinvolved in sectors that are growing.The survey also revealed that the Kenyan cleantechnology SMEs are working throughout thevalue chain: over 80 percent of firms work indesign, and/or consulting and over 70 percentwork in installation, operations and maintenance,20 Based on authors’ analysis, which assumes that theplanned investment by the Kenyan government is realizedin full. Actual investment might be lower than suggestedif there are significant delays or changes to the proposedinvestment plans.54 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

FIGURE 5.3. Investment in clean technology in East Africa: SME and non-SME share ($ billion)$80$70Investment ($US billion)$60$50$40$30$20$10$0WastewaterSmall hydroSolar PVGeothermalWaterOnshore windWasteBioenergy (ex feedstock)Bus rapid transitBiofuelsSolar thermalNatural gas vehiclesSME shareNon-SME shareSource: Authors’ analysis.FIGURE 5.4. SME share of East African clean technology market by value chain segment ($ billion)4035Market value (US$ billion)302520151050Small HydroGeothermalSolar PVWastewaterWaterOnshore windBioenergy(ex feedstock)WasteBiofuelsBus Rapid TransitSolar ThermalNatural GasVehiclesMajor equipment Planning, installation and balance of system O&MSource: Authors’ analysis.Chapter 5: Case Study: Bioenergy in Kenya55

manufacture and assembly. Compared to Indian,firms in Kenya are younger and spread throughoutthe value chain, at least for now as they find theirfooting.The surveyed firms were also international, andsignificantly more international than non-cleantechnology firms in Kenya; 25 percent of non-cleantechnology firms in Kenya export and 78 percent oftheir sales are domestic (World Bank, 2013). Of theclean technology firms surveyed, 52 percent hadcustomers overseas (mostly in Africa, and some inEurope and North America). Nearly 80 percent hadsuppliers based in a foreign country, unsurprisinglymany from China (83 percent), followed by Europe(53 percent) but also from India and other parts ofAfrica (about 30 percent each).Overall, the firms expressed a high level ofoptimism about the current and future Kenyanclean technology market: 96 percent of the firmsindicated that they were either very or fairlyconfident about their business environment inKenya. The surveyed firms’ historical and projectedgrowth also showed promising signs: 91 percentexperienced sales growth in 2013 and nearly 70percent of the firms purchased fixed assets in 2013,FIGURE 5.5. Innovation activities undertaken byclean technology SMEs in KenyaPercent of firms80%70%60%50%40%30%20%10%0%76%R&DMarket analysis72% 70%67%Raising fundingDemonstrating newproducts or servicesBusiness developmentand sales48%39%Training existing staffHiring additional skilled staffSource: Survey of clean technology firms in Kenya undertaken inJuly and August 2013.31%reflecting their willingness to invest and suggestingtheir confidence and optimism about the market.The survey shows that Kenyan clean technologyfirms regard themselves as innovators. Over thepast two years, about 85 percent of surveyed firmsintroduced new or significantly improved cleantechnologyproducts or services. There is also anoteworthy range of activities undertaken by cleantechnology SMEs to grow or enhance their cleantechnology business, as shown in Figure 5.5.While a promising market opportunity, there arealso barriers to the rapid scale-up and deploymentof bioenergy in Kenya. The top barriers faced bysurveyed clean technology firms in Kenya areshown in Figure 5.6.In common with surveyed firms in India, the barriermost commonly cited by respondents was accessto finance. A further 85 percent of those surveyedindicated they plan to raise funding in the next twoyears, making the issue of access to affordablefinance a priority. Limited capital creates the needfor credit, but this is often unaffordable or simplyunobtainable. Kenyan banks are reluctant to loan topeople without financial records, and their interestrates are high, for example, interest rates are in theregion of 18 percent (Anjarwalla, 2013). Interviewswith firms suggested that there is substantialinterest from potential foreign investors, especiallyfollowing the opening of the Kenya CIC, but this isnot being realized as the pipeline of opportunitiescurrently do not meet their standards. There arefurther opportunities for funding through grants,but these are very competitive (Anjarwalla, 2013).As a result, ventures are commonly fundedinformally using money from friends and family(Khatun, 2013). There is also a high level of relianceon international donors as many businessescannot afford to operate unsupported. This lackof finance restricts entrepreneurial development.For example, one Nairobi entrepreneur receivingincubation support from the Kenya CIC,manufactures charcoal briquettes in a processthat involves drying out charcoal dust in the sun,which is vulnerable to Nairobi’s unpredictablerain. A solar dryer is needed but the entrepreneurcannot receive credit as he has no financial record(Anjarwalla, 2013).Kenyan private companies from a range of sectorssurveyed in 2013 indicated that practices in theinformal sector was the biggest barrier they faced,with corruption ranking as the second biggestbarrier. While not at the top of their list of barriers,56 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

FIGURE 5.6. Most common barriers faced by clean technology SMEs in Kenya80%70%72%60%Percent of firms50%40%30%20%10%20%19%15% 15%13%11%7% 7%0%Access to financePractices of competitorsin the informal sectorCorruptionAccess to landCustoms andtrade regulationsInadequatelyeducated workforceTax ratesPolitical instabilityBusiness licensingand permitsSource: Survey of clean technology firms in Kenya undertaken in July and August 2013.the surveyed clean technology firms (20 percent)were similar to their private sector counterparts(24 percent) in identifying the practices of theinformal sector as significant. Corruption andaccess to land were also significant barriers forclean technology firms. A lot of clean technologiesrequire access to land, which may underlie thisconcern. Corruption is prevalent in Kenya, andKenya regularly scores badly on transparencyinternational’s corruption perception index, ranking139 out of 176 countries. Indian firms also indicatedcorruption as a significant barrier, although Indiais ranked 45 countries ahead of Kenya on theindex. One example of corruption impacting onthe bioenergy sector is the extraction of “tariffs”by police. Historically it was illegal to produce andtransport charcoal, so biomass is still the targetof police checks, often solely to extract illegaltariffs on transporters, who are not sufficientlyknowledgeable of the change in law to question it(Hunt, 2013).The bioenergy sector in and of itself suffers fromsome specific obstacles (see Table 5.1). Becausemuch of it relies on new technology, it suffersfrom a ‘chicken and egg’ problem, whereby itis hard to get a venture off the ground becauseof a codependency. For example, the ethanolappliance industry is currently limited, as thereis little ethanol available to use, but meanwhilethere cannot be a market for ethanol without theavailability of stoves with which to use it. Similarly,a biofuel processing plant requires feedstock,which will not exist without a market to sell to.This increases the capital intensity of new biofueldevelopment as the two often need to be createdsimultaneously.Because much of bioenergy requires the collectionand transport of large volumes of biomass toget workable economies of scale, Kenya’s poorinfrastructure and numerous remote communitiescan make scale-up difficult. For example, biofuelproduction can be hard to develop from a pilot toa commercially viable business because of thefragmented nature of Kenyan farming, as feedstockcollection from a large number of small farmsincurs logistical difficulties and large expense(Anjarwalla, 2013).There are also human capital constraints. There isa skills gap in Kenya, and many Kenyans lack thetraining necessary to turn an idea into a successfulbusiness. Many are unable to compose investmentproposal documents, such as technical reportsand financial projections, thus further reducingtheir chances of obtaining credit. Support is largelyunavailable from banks, which generally do notengage with their clients in business activities suchas sales and marketing (Anjarwalla, 2013).Chapter 5: Case Study: Bioenergy in Kenya57

Photo: Stephan Bachenheimer / World Bank.There is also inequity in theawareness of and access to supportfor SMEs. The fact that it is cheaperto reach those who are located inmore accessible places meansrural and remote areas are at animmediate disadvantage (Hunt,2005). For example, owing to itsphysical presence in Nairobi, theKenya CIC has a Nairobi-heavyportfolio of businesses in incubation(Anjarwalla, 2013). There is also agender imbalance: 80 percent ofthe entrepreneurs supported bythe Kenya CIC are men, perhapsresulting from the traditionalpatriarchal culture.The SMEs surveyed highlightedareas where they could usegovernment support in growingand overcoming some of the keybarriers they face with the top threeareas relating directly to accessingcapital (see Figure 5.7). Forty-threepercent thought the governmentcould provide more research anddevelopment grants, 31 percentTABLE 5.1. Barriers and opportunities faced by Kenyan SMEsIndustry-specificDomesticbiogasIndustrialbiogasMain barrierMarket is restricted by requirement fortwo standing cows, water usage, and largeinstallation costUpfront capital investment is requiredMain opportunityInnovative financing mechanisms such as thepay-as-you-go systemDemand from companies with large quantities oforganic waste, such as dairy and sugarEthanol Upfront capital investment is required Market set to expand as new legislation forcessugar companies to diversify into ethanolproduction; opportunity for SMEs in distributionand the appliance marketCrop-basedbiofuelsMarket-wideSkillsLand tenure and food security issues result indramatic opposition to proposed development;uncertainty over potential due to lack of apublished biofuel policyLack of business skills; inequity in access tosupportImprovement in crop efficiency on marginal landsIncubation and finance support from the KenyaCIC and other government and donor programsaimed at promoting the SME sectorMarkets Poor infrastructure impedes transportation Businesses looking to source locally to keepcosts down58 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

FIGURE 5.7. Areas for government support identified by clean technology SMEs in Kenya50%45%43%40%Percent of firms35%30%25%20%15%10%5%31%24%20% 19%17%13% 13%9%6%0%R&D grantsLoan guarantees/discountsMarket supportTax creditsDirect subsidiesRegulatory reformImproved enforcement/compliance mechanismsFeed-in tariffsBusiness mentoring/commercial adviceProcurementSource: Survey of clean technology firms in Kenya undertaken in July and August 2013.pointed to loan guarantees or discounted financing,and 19 percent to direct subsidies. Not far behindat 17 percent was improved regulatory reform,which could help address the obstacle related topractices of the informal sector identified in thesurvey and barriers related to land tenure.The survey also identified areas of support SMEssought from organizations outside of government,which differed from the support they requiredfrom the government. SMEs identified supportin networking and the development of businessskills in marketing and sales as key areas whereorganizations like the Kenya CIC could assist.ConclusionThe clean technology market in Kenya isrelatively nascent and a wave of policies andprograms are beginning to translate into marketopportunities for SMEs and entrepreneurs.The most promising opportunity in the sectorappears to be in the production of industrial-scalebiogas, in particular for companies in industriesproducing large volumes of organic waste, suchas dairy or sugar. The bioethanol market alsohas potential for growth as sugar companieslook to income diversification for financial andregulatory reasons. Bioethanol production initself is not a large SME opportunity, but linkedmarkets including distribution and appliancescould provide an opportunity for SMEs. Barriers tothese opportunities, however, do exist, especiallyinvolving access to finance, the practices of theinformal sector, and corruption.According to the survey of clean technology SMEsin Kenya, firms are optimistic about the marketand are active in a variety of innovation-orientedactivities. However, they indicate the need forfinancial assistance for both seed and growthcapital, as well as general business supportprograms. Removing key barriers and providingtargeted policy and business support would provideopportunities for additional industry growth andSME participation.Chapter 5: Case Study: Bioenergy in Kenya59

Chapter 6Case Study: Climate SmartAgriculture in India andKenyaMain Points• This case study examines climate-smart agriculture (CSA) in India and Kenya, and highlights thedifferences between agriculture and other clean-technology sectors and the main challenges facing thetwo countries.• Agriculture is a major employer and source of economic activity in developing countries but faces manyenvironmental, institutional, financial, and behavioral challenges that are exacerbated by climate changeand rural poverty.• Climate-smart agriculture is an approach that aims to integrate social, economic and ecologicalobjectives to increase agricultural yields, boost profits, reduce local pollution, address poverty, enhanceclimate resilience and reduce greenhouse gas emissions.• CSA differs from other clean technology sectors because it tends to rely on donor and governmentinvolvement and depends heavily on behavior change, education, and institutional reform, butnevertheless represents a commercial opportunity for SMEs.• Drip irrigation, food storage, and agroforestry are three innovative agricultural activities profiled in thiscase study; there are many other SME opportunities that align with CSA goals.To address growing challenges, society willdepend on a productive agricultural system thatis economically, socially, and environmentallysustainable. Agriculture underpins the livelihoodsof billions of the world’s poorest, employing 2.6billion people, most of whom are smallholders. Agrowing global population requires agriculturalproductivity to increase substantially over thecoming decades, but current agricultural practiceis putting unsustainable demands on the naturalenvironment. Increasing the use of agriculturalinputs is delivering diminishing returns in manyparts of the world, and practices that werepromoted throughout the Green Revolution areturning out to be unsustainable in the longerterm. These challenges, together with the rapidlychanging environmental conditions caused byclimate change, are putting serious pressure onagricultural productivity and the livelihoods ofbillions of people.CSA is an approach that aims to integrate social,economic, and ecological objectives to increaseagricultural yields, boost profits, reduce localpollution, address poverty, enhance climateresilience, and reduce greenhouse gas emissions.The approach combines proven agriculturaltechniques with innovative farming practices, andaddresses multiple local and institutional barriersto change in order to improve the sustainability ofagriculture (FAO, 2013).Institutions like the World Bank and theInternational Fund for Agricultural Development(IFAD) are leading the way in approaches tosustainable development that integrate the fieldsof agriculture, water management, forests,60 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

Photo: Edwin Huffman / World security, and socioecological systems.While climate-smart agriculture is for the mostpart being led by governments, bilateral, andmultilateral institutions, it is also generatingcommercial opportunities for SMEs in Kenya, India,and other countries around the world.This case study examines the role of agriculturein Kenya and India and documents the challengesfacing the sector in those countries. It discusseswhy agriculture is different to other cleantechnology sectors, and describes how CSA isan approach that is starting to overcome theunique barriers facing it. India and Kenya’s policyframeworks are explained to show how they arepromoting and implementing CSA practices.Finally, three different potential SME activitiesare described to illustrate the ways in which CSAcan create opportunities for entrepreneurs indeveloping countries.Importance of AgricultureSector in India and Kenya’sEconomiesAgriculture underpins employment in bothIndia and Kenya, and contributes significantly toeconomic productivity. The agricultural sectoremploys 51 percent of the Indian workforce andmakes up about 15 percent of GDP. The numbersare even more striking in Kenya, where agricultureemploys 75 percent of the Kenyan workforce andmakes up 51 percent of GDP (Feed the Future,2013).India is a regional leader in farming and animalrearing. India is the world’s largest producer ofmilk, pulses, and spices, and has the largest cattleherd of buffalo.India has 195 million hectares under cultivation,of which roughly 63 percent is rain fed, with theremainder irrigated. It has the world’s largest areaClimate-smart agriculture isgenerating commercial opportunitiesfor SMEs in Kenya, India, and othercountries around the world.under cultivation for wheat, rice, and cotton, and isthe second largest producer of wheat, rice, cotton,sugarcane, farmed fish, sheep meat, goat meat,fruit, vegetables, and tea (World Bank, 2012a).Kenya has a much less bountiful naturalagricultural resource endowment than India. Itssoils are less suitable for crops and livestock, andtend to be deficient in nitrogen and phosphorus,and occasionally potassium, the three keyingredients of fertilizer. Rainfall is low, variable,and unreliable, which leads to limited organicbuildup and poor soil fertility and structure. Assuch, only about 15 percent of its land has thesoil and precipitation characteristics to make itagriculturally appropriate, and only about 7 percentof land is of high quality (FAO, 2006). Just less than10 percent of Kenya’s land as of 2011 is being usedfor agricultural purposes (World Bank, 2011b).With such characteristics and the subsistencenature of most of its farmers, Kenya isunderstandably not the regional leader in manyagricultural products. Nevertheless, it leads theAfrican continent in tea production and is a largeexporter of coffee. It is also well known for floralexports, as well as other horticultural productsincluding green beans, onions, cabbages, snowpeas, avocados, mangoes, and passion fruit(Horticultural Crops Development Authority, 2013).Both the Indian and Kenyan governmentsacknowledge the enormous importance ofagriculture as it relates to both economicperformance and the livelihoods of the country’smost disadvantaged population groups. They alsoChapter 6: Case Study: Climate Smart Agriculture in India and Kenya61

ecognize the threats to agriculture caused byclimate change. In 2013 alone, sudden and severerains caused extensive flooding in India’s north,while severe drought struck in the east of thecountry. A major drought across the entire EastAfrican region in 2011 devastated agriculturaloutput and led to regional instability as people fledfrom neighboring countries into Kenya and staplefood prices soared.Both countries suffer from soil degradation, waterstress, crop productivity problems, the need tofeed a growing population, and increasingly severethreats from climate change. Many agriculturalproducts in India and Kenya are being grown at orclose to their maximum heat tolerance. Sustainedheat waves can devastate wheat, rice, maize,and other crops, and negatively impact upon theproductivity and reproduction of higher-yieldingcattle species compared to more resilient but lessproductive local varieties.Given India’s size and the diversity of its climaticzones (ranging from arid to tropical wet to humidsubtropical), responses to climate impacts arenecessarily varied and regionally specific. Kenya’srural, poorly educated, impoverished, and fastgrowingpopulation limits its adaptive capacity,BOX 6.1. Solar pumps make irrigationaccessibleIrregular and insufficient rainfall is achallenge to farmers who must pumpwater onto their fields manually or withthe help of expensive and polluting petrolor diesel pumps. SMEs like Future PumpLtd, a Kenyan company, are helping tosolve that problem with innovative solarpowered pumps that can irrigate half anacre per day with no manual labor or fuelcosts. The initial investment of around $400can be recouped in 1-2 years comparedto the ongoing running costs of diesel orpetrol engines, and higher yields frommore productive crops further boosts thebusiness case for these pumps. FuturePump Ltd. is working with Kenya ClimateInnovation Center to get business support,introductions to distributors and salespartners, and linkages to potential investorsfor business acceleration.which exacerbates the agricultural impacts ofclimate change. Together, the countries facesome of the same agricultural challenges, butalso have different characteristics that requirebespoke agricultural interventions to be tested,disseminated and adopted at large scale.Agriculture is different than other cleantechnology sectorsUnlike renewable energy or cleaner transportationoptions, improving agricultural practice dependsheavily on behavior change, education, andinstitutional reform rather than on technologicalinterventions. It is also almost exclusively drivenby donor agencies and governments, and tends notto be as suitable for public-private partnership asother clean technology sectors.While agriculture has been practiced for thousandsof years, sustainable agriculture that enhancesclimate change resilience and increases theintensification that is required to feed the world’sgrowing population is a more nascent area of study.Newer sustainable farming practices reimaginethe agricultural paradigm that propelled countrieslike India through the scarcity challenges ofthe 1970s. At that time, the Green Revolutionaddressed the challenge of population growthoutstripping agricultural productivity gains throughagricultural intensification practices such asmass mechanization, the introduction of pest anddisease resistant crop varieties, and subsidies foragricultural inputs like seed, fertilizer, pesticide,and irrigation infrastructure.While the Green Revolution has been an effectiveintervention that significantly improved yields,its limitations are becoming clear. Mechanizedploughing has accelerated soil erosion and landdegradation. Excessive use of fertilizers andpesticides has degraded soil quality, increasedpest resistance, and polluted waterways andgroundwater sources. Monocropping has reducedsoil fertility and biodiversity, and has exposedfarmers to ecological and economic threats.Excessive and continual irrigation has led to soilsalinization and unsustainable withdrawals fromaquifers (IFAD, 2012). The negative environmentalexternalities from these kinds of agriculturalpractices coupled with the accelerating impactsof climate change are making it more difficult fortoday’s farmers.62 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

BOX 6.2. Drying food to cut post-harvestlossesIneffective and inadequate food storagesystems lead to postharvest food losses,foregone revenue, and wide fluctuationsin the market price of harvestedproduce because of seasonal gluts andundersupplies. Drying food for storage caneffectively address these problems. AzuriHealth Ltd is a Kenyan SME that uses solardriers to treat and preserve food boughtfrom farmer groups, including mangoes,pineapples, bananas, sweet potato flour, andnutri-porridge.Conventional driers tend to rely on costlyfossil fuels or electricity, and generategreenhouse gas emissions, but Azuri’stechnology has lower operating costs andis emissions-free. Azuri has sought advicefrom Kenya Climate Innovation Center toaddress several business and technicalchallenges including product developmentand information on international markets.Likewise, the speed and severity of climate-relatedchanges is a challenge for governments, many ofwhich lack the funding and institutional capacityto disseminate better agricultural practice.Their responses to these multiple agriculturalchallenges are often under-researched and poorlycommunicated.Setting this against a backdrop of extremevulnerability exacerbates the challenge. Poorsubsistence farmers tend to either cling totraditional agricultural practices, which arebecoming increasingly inappropriate given thechanging climate, or must unlearn some of thefarming practices that government agriculturalextension services have been disseminating, whichare delivering diminishing returns today and areproving to be unsustainable in the long term.Subsistence farmers with no savings and no publicsafety net are understandably risk-averse. Theyare reluctant to experiment with new practices thatmay require more than one harvest season beforeshowing dividends, have strained human, financial,and environmental capital, and are suspicious ofagricultural extension services whose messageis changing. This issue of trust is another barrierfaced in changing agricultural practices that otherclean technology sectors, like public transit orwater, wastewater, and solid waste managementsolutions do not face.Climate-smart agricultural solutions tend tohave more difficulty attracting finance than othersectors too, especially in the context of carbonsequestration. Sequestration benefits fromagriculture are more difficult to measure and verifythan traditional abatement opportunities in energy,industry, or transport, and may be easily lost ifbehavior change is not sustained in the longerterm. And climate resilient agricultural activitiesoften include both mitigation and adaptationoutcomes, whereas many climate funds tend tofocus on one or the other.Understanding what constitutes better agriculturalpractice is not always straightforward, either.Whereas, for example, well-designed feed-intariffs are almost guaranteed to accelerate thedeployment of renewable energy and can be easilyscaled, agriculture’s site specificity means thatit is often ineffective to standardize and scale upuniform solutions. Moreover, existing agriculturalpolicies and programs often promote the verypractices that are degrading ecological services.Moving towards more resilient agricultural policiesand programs means that policy makers andtheir rural and often poor and undereducatedconstituencies need to reverse the spread ofrecently promulgated policies and practices.Scaling is also a challenge because of the numberof farmers that must be reached. There are about2.6 billion farmers in the world—about 40 percentof the global population—most of whom aresmallholders. The sheer number of people involvedin agriculture makes large-scale disseminationof best practice a daunting challenge, and alsomakes transaction costs too high for farmers to beinvolved in climate finance schemes.For all these reasons, sustainable agriculture facesa multitude of barriers that other clean technologysectors do not. Overcoming these barriers, though,is fundamental to enhancing the food securityand livelihood opportunities of billions of people,and is needed to ensure that the planet’s growingpopulation can be fed.Chapter 6: Case Study: Climate Smart Agriculture in India and Kenya63

CSA Is Beginning to DeliverDividendsDespite these challenges, CSA is starting to deliverresults. Donor agencies like IFAD and branchesof the World Bank Group have been working withgovernment partners to develop approaches to CSAthat are paying real dividends, not only in terms ofhigher yields and profit, reduced local pollution,poverty reduction, and enhanced climate resilience,but also in terms of greenhouse gas abatement.Indeed, mitigation and adaptation are linked inthe World Bank’s definition of CSA, which sees itas an activity that “seeks to increase sustainableproductivity, strengthen farmers’ resilience,reduce agriculture’s greenhouse gas emissionsand increase carbon sequestration. It strengthensfood security and delivers environmentalbenefits. Climate-smart agriculture includesproven practical techniques—such as mulching,intercropping, conservation agriculture, croprotation, integrated crop-livestock management,agroforestry, improved grazing and improved watermanagement—and innovative practices such asbetter weather forecasting, more resilient foodcrops and risk insurance” (World Bank, 2013e).CSA works when approached from a multiplebenefitsperspective. Such an approach aims toaddress the complex links to other socioecologicalphenomena, like deforestation, land degradation,water stress, food insecurity, poverty, andgender discrimination. Understanding theseinterconnections through deep vulnerabilityassessments, the use of climate modeling, andan understanding of integrated landscape andwatershed dynamics is the first step to developinga CSA plan.CSA plans integrate a host of approaches, includingmaximizing the use of natural processes andecosystems; reducing external inorganic inputs andwaste; diversifying production and ensuring cropsand livestock are cultivated in locally appropriateproportions; and mixing new technologies withtraditional knowledge (IFAD, 2012).Integrated vulnerability assessments indicatehow, when, where, and in what quantity certaininterventions can generate multiple benefits. Theycan be done on different scales and in differentlandscapes that have various assets but facemultiple threats. Once these socioecologicaldiagnostics are complete, appropriate interventionscan begin.The fundamental underpinnings of CSA alreadyexist and are being successfully applied in manycountries. They include interventions such asterracing and leaving crop residue cover toprevent water and wind erosion and enhance soilretention; zero or minimum tillage combined withthe application of mulch, manure, or other organicfertilizers to improve soil quality and structure;and fallowing and crop rotation, including theuse of leguminous nitrogen-fixing varieties, toenhance soil fertility. Interventions can also bemore technical, such as precision agricultureto optimize inputs using sensors and software;water conservation and reuse activities like dripirrigation; and biotech improvements to introducedrought- and pest-resistant varieties and increaseyields.Animal systems also factor in. Fodder crops can begrown and stall-fed to livestock in order to intensifylivestock production while freeing up rangeland forother productive purposes. Better yielding livestockvarieties can also be introduced.Agroforestry is another intervention, where plantedtrees improve microclimates; provide shade tocrops and livestock; enhance water retentionin soils; and bring underground nutrients tothe surface through the growth, shedding, anddecomposition of leaf litter. Trees can also providean opportunity for income diversification and assetaccumulation as they grow and produce fuel wood,construction materials, or food like nuts and fruit.These interventions help to improve crop yields,lead to enhanced biodiversity, improved climateresilience and asset diversification, pollutionreduction, and reduced reliance on expensiveagricultural inputs. They also fix carbon throughsequestration in soils and standing biomass, andcan help minimize the release of greenhousegases from inorganic fertilizers, slash and burntechniques, and enteric methane emissions fromcattle. However, many interventions focused onbehavior change do not obviously lead to significantopportunities for SMEs, and highly technicalinterventions may be inappropriate for a typicalrural farmer. CSA activities do, however, make thelivelihoods of farmers (many of whom are SMEs intheir own right) more secure.64 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

Government Policy IsSupporting the Promulgationof CSALike the Solar Mission, India’s National Mission forSustainable Agriculture was released in 2010, twoyears after the NAPCC (Department of Agricultureand Cooperation-India, 2010). Implementation ofthis mission falls to the Department of Agricultureand Cooperation, which is part of India’s Ministry ofAgriculture. Recognizing the threats to agricultureposed by climate change, the mission seeksto “transform Indian agriculture into a climateresilient production system through suitableadaptation and mitigation measures in the domainof crops and animal husbandry“(Department ofAgriculture and Cooperation-India, 2010).The breadth of activities that fall under CSA makesthis mission more of a list of recommendationsthan a targeted set of interventions. To providesome structure, however, sustainable agricultureis framed using ten main objectives (PressInformation Bureau- Government of India, 2013):1. Improved crop seeds, livestock and fish culture2. Water efficiency3. Pest management4. Improved farm practices5. Nutrient management6. Agriculture insurance7. Credit support8. Markets9. Access to information10. Livelihood diversificationUnder each objective, activities are qualitativelylisted and grouped into four “functional areas.” Theareas and their respective budgets are shown inFigure 6.1.It is worth noting that half of the budget under“Technology, products and practices” is earmarkedfor water use efficiency, including micro-irrigationand efficient water management. Water useand water conservation also feature in the otherfunctional areas, and naturally overlap with theNational Water Mission.What is surprising about this mission’s multipleobjectives is the limited degree to which thebiggest sources of agricultural GHG emissionsFIGURE 6.1. Functional areas and their budgets($ billion)Infrastructure,incl. insurance $5.960%29%Research anddevelopment $1.26%5%Capacity building$0.94Technology, products and practices $12.2Source: Department of Agriculture and Cooperation-India, 2010.Note: Exchange rate, World Bank 2008-2012 average addressed. Deep in chapter six of the missiondocument, 21 three key mitigation measures arementioned (changing livestock feeding practices;further adopting the System of Rice Intensification;and soil-related measures including reducedtillage and using improved crop varieties thatexhibit better carbon sequestration), but they areonly mentioned in passing and without any specificplan for action.Overall, the National Mission for SustainableAgriculture is a broad set of aspirational objectivesthat as of yet are not specific, measurable, or timebound.They aim to ameliorate a wide variety ofphysical, behavioral, and institutional obstacles to amore productive and more sustainable agriculturalsector, but do not specifically target the areas ofgreatest agricultural emissions.Kenya’s ten-year Agricultural Sector DevelopmentStrategy was also released in 2010 and includesrecommendations that could enhance theresilience of the agriculture sector in the face ofclimate change. It recognizes that changes are21 See “National Mission For Sustainable Agriculture:Strategies for Meeting the Challenges of Climate Change.”Department of Agriculture and Cooperation Ministry ofAgriculture New Delhi, 2010. Documents/National MissionFor Sustainable Agriculture-DRAFT-Sept-2010.pdfChapter 6: Case Study: Climate Smart Agriculture in India and Kenya65

needed in the policy, legislative, and institutionalspace, as well as in the field through education andawareness-raising activities and local vulnerabilityassessments (Agricultural Sector DevelopmentStrategy-Kenya, 2010). Specific interventionswere outlined in more depth in Kenya’s updatedNational Climate Change Action Plan, which wasreleased in 2013 (National Climate Change ActionPlan 2013-2017-Kenya, 2013). The plan includesinterventions for agriculture, and livestock andpastoralism.In agriculture, the plan aims to promote irrigationand conservation tillage; develop weather-indexedcrop insurance schemes; and provide support forcommunity-based adaptation schemes includingthe provision of drought-resistant seed andagricultural extension services that aim to educatefarmers about climate risks. In terms of livestockand pastoralism, the plan recommends breedingheat-tolerant animals; promoting vaccinationcampaigns; ensuring a safe and adequate watersupply for both animals and people; and providinginsurance schemes.Kenya recognizes the triple wins that climatesmartagriculture can deliver from enhancedcarbon mitigation, improved adaptation benefits,and higher productivity and profits. It is currentlydeveloping policies and approaches to implementCSA on a large scale, and does not have toovercome deeply institutionalized policies andpractices that are not necessarily congruent withCSA, as India does.The government is active in moving its CSAprogram forward with the help of developmentgroups such as CCARS (the Research Program onClimate Change, Agriculture and Food Security),which is supported by CGIAR (the ConsultativeGroup on International Agricultural Research). Thegroup is working to build consensus on the priorityactions related to agriculture that are proposedin the NAPCC so that they can be piloted andultimately scaled up when appropriate (ResearchProgram on Climate Change, Agriculture and FoodSecurity, 2013). One of the biggest opportunitiesfor the government is to improve agriculturalextension services to help accelerate the traditionalrate of learning and knowledge dissemination,and improve the distribution of improved seed andother technological innovations.The government’s plans for agriculture alsooverlap with other national priorities, like waterconservation and improved catchment, andincreased forest cover. Approaching CSA witha multiple-benefits perspective is helping thegovernment align its departments and theiractivities, and is effectively aiming to mainstreamthe kind of landscape-level planning that CSAdemands.The SME Story for CSAThe differences between CSA and other cleantechnology sectors, and the types of activitiesthat are involved in CSA, illustrate why the SMEopportunities in this sector are significantlydifferent from those in other clean technologysectors. The value chain approach—majorequipment, installation and balance of systems,and O&M—is less clearly applicable than in theIndian solar or Kenyan bioenergy case studies.Many CSA activities are rooted in behaviorchange, sustainable use of natural capital, and theintelligent application of knowledge and practiceto natural systems. The activities that drivethese CSA changes include clinical diagnosticsof local threats and opportunities, education andawareness raising, farmer field demonstrations,and ultimately adoption of integrated, sustainabletechniques.Unlike the renewable energy, transport, and waterand sanitation sectors, whose market sizes andcommercial SME opportunities could be moreeasily articulated, CSA is often not a technocentricactivity particularly on smallholder farms indeveloping countries. Many interventions requirelittle or no new equipment. CSA plans also tendto be driven by government or donors, since thecommercial returns of improved practice accrueto the farmer and community at large, rather thanthe trainer or extension agent, so the commercialopportunity space is more limited. Furthermore,individual farmers may be too small to serveprofitably and most smallholder farmers are notready to pay for education about new techniques.However, in developed countries CSA technologiesare emerging that are relevant. These technologiesprovide an indication of some of the opportunitiesthat may emerge over time in developing countries.They include:• Sensor-driven technologies, software, androbotics to drive precision agriculture, forinstance, soil and plant sensors that monitorgrowing conditions and enable inputs to be66 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

tailored at small scales to increase productivityand reduce costs—SolChip is one exampleof an Israeli company developing wirelessagricultural sensors. 22• Lighting technologies that can be tailored tothe growing requirements of plants indoors, forinstance, Valoya Oy is a Finland based companythat is developing energy efficient light emittingdiodes for more efficient indoor growing thatimproves product quality. 23• Greenhouse technologies, for instance,Israel based Drygair’s combined heating anddehumidification systems for greenhouses. 24• Crop breeding technologies, for instance,hybrid potato breeding being developed byNetherlands-based Solynta. 25In addition, there are some interventions thatalready lend themselves to commercializationfor SMEs in developing countries. Three suchopportunities include:The technology varies in its sophistication, rangingfrom a bucket and hose with holes in it to a moreprecise system with anticlogging apparatus,backwash controller, and other innovations.Drip irrigation systems can also be used to targetfertilizer delivery. The combination of irrigation andfertilization is called fertigation. Such combinedsystems enable farmers to deliver fertilizer loadswith precision and accuracy, which can reduceoverall fertilizer use, minimize polluting runoffand harmful eutrophication (nutrient enrichmentleading to excessive plant growth, decomposition,oxygen depletion, and fish death in surroundingwater bodies), and reduce greenhouse gasemissions from inorganic fertilizer production anddecomposition.The technology helps reduce soil erosion, evenlydistributes water resources, reduces weed growth,is less labor intensive, can reduce total water use ormake water delivery more efficient, and is usually• Drip irrigation systems;• Improved storage facilities to reduce foodwaste; and• Seedling plantations for agroforestry.These areas and the opportunities they present forSMEs are described below.Drip irrigationWater stress is an issue in both India and Kenya.Drip irrigation is a technology that delivers anappropriate amount of water targeted at the rootsof crops through a network of pipes and tubing,controlled by valves and delivered either underpressure or by gravity.The micro-irrigation market is forecast to be worth$4.8 billion by 2018 and is growing at almost 20percent per year (Transparency Market Research,2013). Compared to other irrigation methods, dripirrigation can reduce total water consumptionby reducing evaporation and minimizing deepdrainage. In water stressed areas, drip irrigationmay not reduce total water consumption, but canboost yields by delivering water more efficiently.22 “News & Events.” 2013. Sol Chip. See “Professional LED Grow Lights.” 2013. Valoya. See DryGair, “The Company.” See “Solynta B.v.” 2013. 6.3. Improving yields with dripirrigationGodavari Polymers provides drip irrigationproducts for farmers to improve agriculturalyields and reduce water consumption.It makes and sells drippers suitable fororchards, plantations, fruit crops, and broadspacing crops.Godavari Polymers is a medium-sizedenterprise in India specializing in polymertubing, pipes, and sprinklers, and wasrecognized as the Best Performer of theYear—Manufacturing Sector at India’s2013 SME Excellence Awards for its rapidgrowth and high turnover. The company wasestablished in 1991, and between 2009/10and 2012, saw its turnover rise from about$14 million to over $25 million.Its inline drip lines are made frompolyethylene, which is resistant to ultravioletrays, chemicals and fertilizer used in dripsystems. Godavari uses sand as a primaryfilter, which is effective against organicimpurities, algae and very fine suspendedparticles. It also offers fertilizer tanks todeliver water-soluble fertilizers like ureaand potash to send equal portions to everyplant root zone directly.Chapter 6: Case Study: Climate Smart Agriculture in India and Kenya67

Photo: World Bankoperated at low pressure, which can reduce energycosts and associated emissions from pumping.Drip irrigation, however, can suffer from higherupfront capital costs, system clogging, and damagefrom rodents, and can interfere with harvesting.SMEs in India and elsewhere are exploiting thisagricultural opportunity and are expanding plasticand polymer manufacturing activities to capitalizeon this growing market.Food storagePost-harvest food loss is an enormous globalissue, with about one-third of all food producedlost because of storage issues, waste, or ineffectiveprocessing and logistics (FAO, 2011). Insufficientstorage is a particular issue. It reduces incomessince predatory buyers can often buy crops atthe farm gate for extremely low prices at harvesttime because of an oversupply and an inability offarmers to store food and sell it when prices arehigher. Inadequate storage also contributes to foodinsecurity, which exists when people do not haveaccess to enough food in the right place at the righttime that is accessibly priced and meets dietaryneeds and preferences.India has a few large “safe and scientific” publicfood storage warehousing organizations, includingthe Food Corporation of India (FCI) and the CentralWarehousing Corporation (CWC), as well as StateWarehousing Corporations (SWC). The FCI is thelargest food storage facility in India, with storagecapacity of over 37 million tons (India Agronet,2013; Food Corporation of India, 2014). Giventhe public role in large-scale food storage, theopportunity for SMEs lies more in the small andmedium-scale storage market.Traditional food storage devices include structuresmade of paddy straw, wheat straw, wood, bamboo,reeds, mud, bricks, and cow dung, which tend notto provide the securityfrom pest infestation,rodents, and molds thatmore modern storageprovides (India Instituteof Technology, 2011).There is opportunity forSMEs to participate inthis space.The variety of moremodern storage facilitiesBOX 6.4. Improving grain storage in IndiaG.T. Engineering Pvt. Ltd. produces, sells,and installs grain storage silo systems,chain, screw, and belt grain conveyorsand belt and chain bucket elevators forfood grain. A company with less than 100employees, and based in Pune, Maharashtra,the company provides turnkey solutions forstable, waterproof and rated capacity silosystemsis considerable. SMEs can build mud or brick silosequipped with polythene films to prevent waterintrusion, keeping grains fresher. Cylindricalrubberized structures supported by poles keepgrains elevated to protect them from floodingand to reduce rodent problems. Grain is removedfrom such structures through capped holes in thebottom. Cover and plinth structures are silo-likestructures that allow crates of protected grainsto be stacked in conditions suitable for storageof between 6 and 12 months. They can be builtin a matter of weeks and are an inexpensive andeffective storage method. Modern silos, which canbe made from either concrete or metal, are alsoeffective storage options.All of the above storage facilities are potential SMEconstruction opportunities, and this activity is setto grow as India aims to reduce food waste throughimproved storage facilities.Seed plantations for agroforestryAgroforestry is an important tool that can beincluded in the basket of CSA interventions. Itcreates integrated and sustainable land-usesystems by combining agriculture and forestry, andcapitalizes on the beneficial ecological dynamics ofcombining trees and shrubs with crop or livestocksystems (USDA National Agroforestry Centre,2013a). It draws on both traditional and modernland-use systems to increase the resilience offarmers to the impacts of climate change (ClimateSmart Agriculture, 2014).Trees can be used in different ways to producebenefits that are appropriate to local circumstances.They can protect and enhance natural capital,diversify income streams by producing wood forfuel or other productive uses, and can produceuseful crops themselves such as fruit and nuts. Theagricultural component of agroforestry can also help68 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

BOX 6.5. SME opportunities in agroforestryMaurice Kwadha is a Kenyan entrepreneurwho recognizes the value of includingtrees in the agricultural landscape. Heunderstands that the right kinds of treesin the right places can help to stabilize andreplenish soil, retain moisture and provideshade, protect topsoil from water and winderosion, and provide fresh food and alsobuilding material and fuel wood. Maurice hasimproved agricultural yields on his own farmwhile enhancing the resilience of his plot anddiversifying his income streams.Maurice has capitalized on his agroforestrysuccess by starting a tree nursery. He hasabout 20,000 seedlings that he sells direct tofarmers but also to the Kenyan government.His successful business demonstratesone of the SME opportunities afforded byagroforestry.bridge the time it takes for trees to become matureenough to produce an income stream.Alley cropping refers to the practice of growingtrees simultaneously with agricultural crops.This allows high-value trees, like hardwoods ornut trees, to mature while the agricultural cropsprovide a steady annual income, allowing thelandholder to diversify their income streams (USDANational Agroforestry Centre, 2013b).Riparian forest buffers are stands of trees, bushes,and grasses planted and grown on riverbanks orthe sides of streams. They stabilize the banks andprevent erosion, enhance biodiversity, and protectaquatic life, and act as a natural barrier to fertilizerrunoff, reducing the pollution of waterways (USDANational Agroforestry Centre, 2013c).Silvopasture combines trees and livestock in anintegrated system that produces shade to helpincrease the productivity of livestock and foragewhile allowing trees to grow for other productiveuses, such as fruits, nuts, timber, or fuelwood(USDA National Agroforestry Centre, 2013d).Finally, windbreaks are made by planting treesin lines to protect crops, livestock, and soils fromwind stresses. They buffer against storms, enhancesoil water retention, reduce wind erosion, canreduce the visual and odor impacts of animals, andincrease bee and insect pollination (USDA NationalAgroforestry Centre, 2013e).Overall, agroforestry is an important opportunitythat can help to increase yields, protect farmland,improve resilience to climate threats, enhancebiodiversity, and diversify income streams. OneSME opportunity lies in cultivating seedlings thatcan be sold for agroforestry purposes.The World Agroforestry Centre has developed atoolkit and reference source, published in Kenya,to help SMEs get started in tree nurseries as anenterprise (World Agroforestry Centre, 2013).The toolkit outlines the elements of a businessapproach and how and why each elementcontributes to running a successful business. Italso explains how to assess the market, priceproducts, and determine which species willmaximize profitability, as well as how to effectivelymarket products and interact with competitors.Finally, it describes how tree nurseries can be asuccessful enterprise, and how it is only throughcommercialization of the activity that agroforestrypractices can be sustained in the long term.ConclusionAgricultural systems are changing fast. Theadoption of CSA in India and Kenya will improve thelong-term sustainability of their farming systemsand, if applied well, can improve yields andincomes, enhance food security and biodiversity,and reduce greenhouse gas emissions whileincreasing climate resilience.Policy frameworks exist to promote CSA in bothIndia and Kenya, although they have different focusareas. While many of the improvements requiredby CSA involve behavior change, modification ofagricultural practice, and institutional reform, CSAalso provides some opportunities for SMEs.Three specific opportunities—drip irrigation, foodstorage and agroforestry—illustrate the potentialfor entrepreneurs to find and develop successfulbusinesses that fit into the CSA framework. Whilethis sector is different to other clean technologysectors, this case study shows that there arepotential commercial opportunities for SMEs in allareas of clean technology.Chapter 6: Case Study: Climate Smart Agriculture in India and Kenya69

Chapter 7Actions to SupportClean TechnologySMEsMain Points• This report has described the importance of SMEs to the growth of competitive clean technologyindustries. It has also illustrated that opportunities exist for developing country SMEs across cleantechnology industries and value chains. However, as illustrated (particularly in the case studies inChapters 4, 5 and 6), the growth of these firms is also dependent on consistent support to overcome thechallenges characteristic of clean technology firms.• This chapter identifies five areas of action that should be considered by governments, developmentagencies, and other public and private actors to support clean technology SMEs in developing countriesThese areas are:Entrepreneurship and business accelerationInnovation financeMarket developmentTechnology developmentLegal and regulatory frameworkPolicy makers and other stakeholders can draw upon a broad tool-box of instruments in each of thesefive areas, to promote clean technology SMEs, listed in Appendix C and discussed in this chapter.• Policy makers, in particular, must adopt and adapt these instruments to fit their country‘scircumstances. They should also seek to mitigate key risks, including failures to coordinate policy designand implementation, market distortions, and the effects of policy discontinuity.• To illustrate considerations within specific national contexts, case studies of national programs targetingSMEs within green industry development are incorporated in the chapter. These include South Korea‘sGreen Growth Strategy, India‘s National Solar Mission, Thailand‘s Energy Conservation Program, andEthiopia’s Climate Resilient Green Economy Strategy.70 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

Photo: Curt Carnemark / World Bank.Growing a Dynamic CleanTechnology SME SectorRequires SustainedCommitment from Governmentand Other StakeholdersThis report has described the importance of SMEs tothe growth of competitive clean technology industries.It has also illustrated that opportunities exist fordeveloping country SMEs across clean technologyindustries and value chains. However, as illustrated inthe case studies in Chapters 4, 5 and 6, investmentsin clean technology businesses often have higherupfront capital requirements, longer payback periodsfor investors and a heavier reliance on governmentpolicy than other technology sectors such as ICT.These issues can make clean technology marketsmore risky and difficult for SMEs to engage with. Assuch, and as part of a wider agenda to pursue “greengrowth,” there is an important role for governments,development agencies, and other public and privateactors to play in creating and supporting new marketsfor clean technology in developing countries.BOX 7.1. National commitment: SMEs in South Korea’s Green Growth StrategySouth Korea launched its Green Growth Strategy in2009, with a primary focus on (i) the development ofgreen technologies to provide new “growth engines;”(ii) the ”greening” of traditional industries throughgreater energy and natural resource efficiency and wastemanagement; and (iii) targeted support to emergingclean technology SMEs (Kamal-Chaoui et al., 2011). Thekey policy instruments being used, or planned to beused, in the Green Growth Strategy include:• Credit guarantees for clean technology SMEs• Public sector financing for clean technology R&D• National public-private partnerships for educationand training in key clean technology sectors• Business skill training and competitions for cleantechnology SMEs• Development of a cap-and-trade Emissions TradingScheme (ETS)• Carbon taxes for sectors not included in the ETSThe government implemented its first 5-year plan(2009-13) with public spending equal to 2 percent of GDPper year on about 600 projects with a total 5-year cost of₩108.7 trillion (about $106 billion). During the first halfof the 5-year Plan ₩14 trillion (about $13.7 billion) (1.3percent of 2009 GDP) in credit guarantees were providedto clean technology SMEs by the state-backed KoreaCredit Guarantee Fund (KODIT) and the Korea TechnologyFinance Corporation (KOTEC), providing for preferentialfees.Furthermore, the ceiling on guaranteed credit is set at₩7 billion (about $6.8 million) for “green” businesses,compared to ₩3 billion (about $2.9 million) for nongreenloans. Government investment in green technologiesrose from 16 percent to 20 percent of total governmentspending on R&D between 2010 and 2013, totaled ₩3.5trillion (about $3.4 billion), making it the highest amongall OECD countries as a proportion of GDP (Jonesand Yoo, 2012). Under the strategy, the government’sSmall and Medium Business Administration (SMBA)facilitates collaborations between industry, universities,and research institutions and provides up to 75 percentfinancing to promising clean technology SMEs fortechnology development. In 2010, the SMBA awarded ₩56billion (about $54 million) for 1,228 SME projects (Kamal-Chaoui et al., 2011).Finally, the government is promoting the study of climatechange at university level and has funded courses onrenewable energy and clean technologies in the 36regional polytechnic colleges, with the express aim oftraining a “green workforce” with links to local SMEs.Chapter 7: Policy to Support Clean Technology SMEs71

In nurturing innovative SMEs in particular,governments and other stakeholders can helpbusinesses to capture value across the value chainand provide a basis for growth and innovation innational clean technology industries. Governmentsthat have successfully promoted a dynamic cleantechnology SME sector have maintained a longterm political and policy commitment to theparticipation of SMEs in these industries (WorldBank, 2013i).Five Areas of Support forClean Technology SMEsThis section discusses five areas of support thatshould be considered by governments and otherstakeholders to provide effective support toinnovative clean technology SMEs in developingcountries. These areas are:• Entrepreneurship and business acceleration• Innovation finance• Market development• Technology development• Legal and regulatory frameworkPolicy makers and other stakeholders can drawupon a tool-box of instruments in each of thesefive areas to promote clean technology SMEs.These are listed in the tables in Appendix C, whichprovide a brief description, evaluation and appliedcountry example. Here, “instruments” are referredto as the means by which the intent of a policy orprogram is accomplished. Indeed, policies andprograms can include various instruments, allworking towards the same goal. However in somecases, such as feed-in tariffs for renewable energy,the instrument is comprehensive enough to beconsidered a policy per se. While various studiesrefer to “enabling frameworks” as a specific subsetof policy instruments (UNIDO, 2011) here thisterm is used in reference to all of the instruments,regulations and activities aimed at supportingclean technology SMEs.Entrepreneurship and businessaccelerationEntrepreneurship and business acceleration refersto actions designed to assist entrepreneurs inturning ideas into viable businesses, or to scaleup an existing business or business line. Thishas traditionally taken the form of programsthat provide direct training and capacity buildingto managers and owners of entrepreneurialbusinesses, ranging from general financial andmanagerial skills to targeted support for technicalaspects of the business. These programs arefrequently delivered by advisory services firms,business incubators or technical experts.More recent programs seek to developcollaborations and networks that aim to assistclean technology SMEs to share knowledge andexperience. These entrepreneurial networks, forthe sake of collective and mutual innovation, cangreatly reduce transaction costs for individualSMEs. By pooling resources and potentially sharingR&D and intellectual property rights (IPR), thecosts of technology deployment and access tomarkets can be reduced. However, the success ofsuch collaborations depends upon a high degreeFIGURE 7.1. Key Areas of Support for Clean Technology SMEsAreas of Support for CleanTechnology SMEsEntrepreneurshipand BusinessAccelerationLegal & RegulatoryFrameworkInnovationFinanceTechnologyDevelopmentMarketDevelopment72 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

of trust and openness, especially when faced withthe risk of losing IPR to larger or better fundedpartners (Hultman et al., 2012). In some instances,these kinds of interventions have been designedto incubate and grow clean technology SMEs. Forexample, Climate Innovation Centers, supportedby the World Bank’s infoDev Climate TechnologyProgram have been set up to provide in-countryinvestment and advisory services to cleantechnology SMEs (see Box 7.2).Collaborations between national governments, theprivate sector and the international communitycan also support the creation and sharing oftechnical knowledge, while building upon existingentrepreneurial cultures. They can innovate anddeliver new models for financing and intellectualproperty sharing, and finance the demonstrationof complex technologies that have strategic,transformative, value. Such international, publicprivate,collaborations are able to achieve thesefunctions partly through education and capacitybuilding for SMEs, but also through protections forintellectual property and the provision of economicresources and legal conditions required to enablecommercial risk-taking.Business clustering, that is, the sector-specificand/or spatial concentration of SMEs, has beenstudied in various geographical and sector-specificcontexts, indicating their potential benefits. Theseinclude the facilitation of inter-firm cooperation,labor market pooling and technological learningand well as providing a focal point for targetedpolicy support (McCormick, 1999). Further,deliberate SME clustering can be of particularvalue to developing countries as they enable risksharing between businesses and the pooling oflimited capital and entrepreneurial skills withina defined space and infrastructure. Howeverexperiences from around the world show thatclusters tend to benefit export-oriented markets,sectors with already-existing trade networks,and SMEs operating in relatively low-technologysectors such as textiles and non-electronicsmanufacturing. This suggests that efforts tostimulate clustering in the clean technology sectormay be of limited benefit to SMEs supplying localand relatively high-technology markets.Clean technology SMEs and the “greening ofSMEs” can be also be supported by workingin collaboration with large companies withlong supply chains. An example is Mexico‘sGreen Supply Chains program, a public-privatepartnership, which succeeded in achievingBOX 7.2. infoDev’s Climate Innovation CentersinfoDev is a global multi-donor program ofthe World Bank that supports growth orientedentrepreneurs in developing countries. infoDev’sClimate Technology Program supports SMEsand emerging entrepreneurs that are developinginnovative products and new business models inthe climate technology sector. The CTP’s flagshipinitiative is the development and implementationof country-level Climate Innovation Centers(CICs). The CICs are designed as locally ownedand run institutions that provide a suite ofservices and venture financing that address thespecific needs of local climate innovators andcompanies.Currently, the program is establishing CICs ineight countries: Kenya, the Caribbean, Ethiopia,Ghana, India, Morocco, South Africa and Vietnam.The innovation centers in Kenya, the Caribbean,and Ethiopia are already fully operational whilethe others are in an advanced development stage.At the global level, the CTP is providing linkagesbetween CICs by facilitating market entry, accessto information and financing for the privatesector, while also offering important tools forPolicymakers to measure and improve domesticclimate innovation activities.Host country governments see the CICs as akey tool to support domestic private sectorparticipation in growing climate technologyopportunities to achieve economic growth andjob creation. Climate technology SMEs andentrepreneurs look for the investment andadvisory services that the CICs will providefor them to succeed. When asked about theirinterest in accessing CIC”s business advisoryand financing services, the surveyed Indianand Kenyan clean technology SMEs wereoverwhelmingly enthusiastic (that is, 70 percentof Indian firms and 100 percent Kenyan firms).This growing experience with CICs is nowbeginning to provide lessons about theeffectiveness of targeted support to cleantechnology SMEs within a wide range ofdeveloping country contexts. Results aremeasured in terms of both economic impacts(for instance, growth and job creation of thesupported SMEs), as well as environmentaland social impacts (for instance, CO 2mitigated,increased access to energy, or cleaner water).Chapter 7: Policy to Support Clean Technology SMEs73

improved productivity, competitiveness and naturalresource efficiency for 146 SMEs working inpartnership with 14 multinational companies (VanHoof and Lyon, 2012).Finally, public and private agencies can alsoconduct a facilitating and mediating role betweenentrepreneurs and their market clients. This caninclude awareness raising activities, informationsharing and simple communication of ideasand opportunities of mutual interest to cleantechnology SMEs and their customers. Suchactivities constitute the intangible assets of humancapacity necessary to make markets work, beyondthe more easily measured financial barriers. Here,governments, other stakeholders, and SMEs candraw upon technical support and advice from arange of international collaborations and networksto promote clean technology and small businessdevelopment (see Appendix C, Table C1).Innovation financeInnovation finance refers to instruments that aimto provide clean technology SMEs with severalforms of early stage financing and risk capital,not available from traditional financing sources.This includes seed capital, venture capital, softloans and loan guarantees (see Appendix C, TableC2). Here, governments and investors motivatedby impact can also provide funding to bolsterprivate sector lending to clean technology SMEson preferential terms, that is, at lower interestrates and more flexible collateral and repaymentconditions, or by providing loan guarantees. Suchsupport addresses what is (beyond the absence of ahigh price for carbon emissions), in most countries,the most significant barrier to clean technologySMEs. This was confirmed in the surveys in Indiaand Kenya (see Chapters 4 and 5) where accessto finance was identified as the most significantbarrier to SMEs operating in clean technologysectors, especially in Kenya where 70 percent ofbioenergy firms identified it as the primary barrier,compared to 46 percent of solar energy firms inIndia.To some extent, the high cost of capital andbusiness financing for clean technology SMEs oftenreflects a lack of awareness on behalf of localbanks about clean technology opportunities, whichtranslates into higher financial risk assessments.However the decision to invest in clean technologySMEs, even for those seeking finance for proventechnologies in existing markets, also presentsopportunity costs for local banks where highand reliable rates of return can be secured fromlending to high-turnover businesses, for examplethose trading in high-volume, perishable goods(Haselip et al., 2014). There can also be a strongcognitive bias on behalf of potential lendersin favor of traditional business activities, asthey are unused to viewing the world througha clean technology “lens” and hence perceivemore problems than solutions. While “impactinvestment,” or investments made against“triple-bottom-line” calculations are more likelyto tolerate a higher rate of strictly financial riskin the face of clearer environmental and socialbenefits, the aim of instruments to push demandfor clean technology products and services shouldbe to attract investors that are not necessarilyseeking these non-financial rewards. In this sense,instruments should aim to normalize the marketwhereby investment in clean technology becomesprofitable and hence “rational.”Other factors, including the relatively hightransaction costs of investing in SMEs and thelonger supply chains inherent to the marketstructure of many clean technology businesses,also serve to increase the financial risk of investingin clean technology SMEs. Given this reality inmany developing countries, government-backedsupport for concessional and/or flexible loanscreates the risk that these businesses becomedependent upon non-market financing. In orderto mitigate this risk, and enable a longer-termtransition to market-based financing, soft loansand credit guarantees must be issued throughcommercial banks that set their own financialand technical criteria. This “double assessment”approach is particularly relevant for SME startupsor development projects that involve a significanttechnological element, thus increasing bothborrower and lender confidence. Equity financingis another supply-side option for clean technologySMEs in the early stages of the innovation cycle,however even in OECD economies equity financingis used by less than 2 percent of SMEs, with thevast majority dependent upon internal or debtfinance (MENA-OECD, 2011).Innovation finance can also operate on the demandside. Here, the most important instrument topromote growth in clean technology marketsis technology-specific consumer credit. Suchfacilities can greatly overcome the financialbarriers surrounding high capital cost goods,such as off-grid renewable energy technologies74 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

(RETs). For example, high demand for solar waterheaters (SWHs) in South Africa, Tunisia andMauritius has largely been due to the availabilityof low-cost commercial loans, offered specificallyfor SWHs (Ölz, 2011). These technology-specificcredit markets have enabled, and were enabledby, greater awareness and acceptance for SWHs,lowering risk premiums. In the case of small-scaleand off-grid clean technologies, SMEs tend tobenefit most as the market for retail, installationand maintenance favors smaller, local, businesses.Market developmentA range of instruments aim to increase demand forthe products of local SMEs and facilitate the overallgrowth of the clean technology market. The mainpurpose of demand-side instruments is to reducecommercial uncertainties for businesses supplyingclean technologies, thus reducing investment risk(OECD, 2012). Support for consumer financing,as discussed earlier, is an important means tostimulate the growth of clean technology marketsat the household level. However there is also plentythat governments can do to stimulate industrialdemand for clean technology.In the area of renewable energy, the most wellknowninstrument to strengthen market demandfor grid-connected technologies in developedcountries has been feed-in tariffs, which supportapproximately 75 percent of global installedsolar PV capacity and 45 percent of wind power(Deutsche Bank Group, 2010). While FITs havebeen instrumental in driving demand and costreductions in RETs in developed countries, theirpresence in developing countries is relativelyrecent and so their impact is yet to become clear.However, given that FITs operate as a crosssubsidy, where the cost of tariff-supported RETs isdivided among all grid-connected consumers, thisparticular instrument becomes less economicallyviable and relevant in lower-income countrieswhere levels of energy access remain low.framework that creates them. Therefore thepenalties for non-compliance must be significant,and floor prices should be set high enough toensure energy companies are incentivized to investin clean technologies.Large organizations, whether they are privatecorporations or government departments, can havea significant influence in driving demand for cleantechnology by mandating sustainable procurementpolicies. However the exact criteria used willvary significantly between organizations, thusconsumption that is radically more sustainablethan “business as usual” does not always occurand hence close attention must be paid to the detailof procurement policies.Similarly, manufacturer standards, productlabeling and product testing and certification arepotentially powerful means to drive demand forclean technologies and raise consumer awareness.However such instruments are mostly limited toconsumer goods such as household applianceswhich are of marginal significance to SMEs indeveloping countries since such goods are morelikely to be imported than manufactured locally.Nonetheless, government-imposed standards,for example for energy efficiency in buildings, arean important means to drive demand for cleantechnologies that are likely to be supplied orinstalled by SMEs. India‘s National Solar Mission(detailed in Box 7.3) is a good example of a nationalstrategy to help develop a specific clean technologymarket, drawing upon a range of complementaryinstruments.Renewable Energy Portfolio Standards orObligations and Renewable energy certificates(RECs) are also widely used to develop renewableenergy markets. These are government-imposedmandatory targets for utilities to generate Xpercent of their power from RETs, that normallyresult in the creation of certificates which can be“surrendered” or traded, providing a market-basedsubsidy. While RECs are a market mechanism,their prices are largely influenced by the regulatoryPhoto: Danilo Pinzon / World BankChapter 7: Policy to Support Clean Technology SMEs75

BOX 7.3. SMEs in India’s National Solar MissionIndia’s National Solar Mission was launched in2010 and aims to accelerate the use of solar PV andsolar thermal technologies, with a target of 20,000MW of grid-connected and 2,000 MW off-grid solarenergy capacity by 2022 (PWC, 2014). The nationalsolar energy strategy is one of eight missionslaunched under the country’s national action planon climate change, and is divided into three phases(Government of India, 2010). Various instrumentsare being used at the state level to incentivizeinvestment in grid-connected solar energy andlocal manufacturing capacity. These include:• Renewable Purchase Obligations• Renewable Energy Certificates (RECs)• Feed-in tariffs• 50 percent of all capacity is subject to a“domestic content requirement” of solar cellsand modules• Incubation of startup solar SMEs• Concession loans to solar SMEsIndia’s 2003 Electricity Act is credited withenabling an increase in private sector investmentin renewable energy capacity, which is drivingthe solar market. However, policy and regulatoryincentives are at an early stage of development andhave suffered some setbacks, including the weakeconomic impact of the RECs market, launched in2011 (Climate Policy Initiative, 2012).Under the Solar Mission, SMEs are benefittingin a similar way to how they did under the ICTrevolution, that is, by operating in the slipstreamof large corporations who are driving the market,and by innovating technological solutions and localmanufacturing skills and capacity. Indeed, SMEsmostly occupy the manufacturing level of the solarmarket supply chain in India, supplying mostlyelectronics equipment such as inverters, batteries,micro-controllers, chargers, cable connectors, andmeters. Here, the solar strategy benefits from thestrong power electronics base, already present inIndia. The Indian Renewable Energy DevelopmentAgency (IREDA) provides concessional loans forSMEs partaking in RET projects and incubationof solar SMEs is conducted by centers suchas the Centre for Innovation, Incubation andEntrepreneurship (CIIE) in Gujarat (Ministry of Newand Renewable Energy 2014).Finally, there are numerous “soft” interventionsthat public agencies, NGOs and charities canpursue to promote clean technologies. Theseinclude education, which can operate at variouslevels from primary to advanced, to either raiseawareness about clean technology or build specificcapacities and campaigns which can take manyforms and be official (that is, government-led),commercial, individual or community-based andbroad or specific in focus. Authorities or wellknownorganizations can also promote a spiritof competition between countries, businesses,organizations or municipalities based on theproduction or consumption of clean technology,in the form of public rankings. The strengths andweaknesses of these instruments are presented inAppendix C, Table C3.Technology developmentTechnology development instruments aimto assist SMEs with the technical aspects ofdeveloping an innovative product. These caninclude R&D tax credits, research grants, publiclyfunded competitive research collaborations,competitions, public investment in R&D, public orprivate agreements on technology cooperation,demonstration projects and applied researchnetworks. These instruments are briefly assessedin Appendix C, Table C4.Perhaps unsurprisingly, 43 percent of the Kenyanfirms surveyed in this report (see Chapter 5) statedthat governments could provide more funding forR&D, with 31 percent identifying loan guaranteesor discounted financing as most useful, followed by19 percent in favor of direct subsidies. Similarly, inIndia direct subsidies were identified as being themost popular form of government support by cleantechnology firms (32 percent).While instruments to provide public support forR&D can be a powerful catalyst to the developmentof clean technologies and local SME capacities,they also carry structural risks that policymakers should consider and anticipate. Aboveall, government funding for R&D may result in aninefficient allocation of resources as a non-marketmeans to pick technology and business modelwinners, and/or result in over-subsidization thatleaves technologies far from the market. Policymakers also need to consider the risks of politicalcapture and rent seeking surrounding the use ofsubsidies, as well as opportunity costs where thepotential benefits of supporting other markets76 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

and technologies may be significant. Therefore,when taking the decision to finance R&D, policymakers must ensure that this does not occur atthe expense of private sector innovation funding,and that the commercialization phase of cleantechnology innovation is determined by marketforces (Hultman et al., 2012; UNDESA, 2011).Another significant area of technology developmentconcerns Intellectual Property Rights (IPR). This isa controversial aspect of the debate surroundingclimate technology development and transfer,given the perceived conflict between the provisionof legal patent protection (and hence profits) toincentivize private sector investment in R&D, andthe need for developing countries to purchaseclean/low-carbon technologies at affordableprices. In recognition of the strategic importanceof patenting in the “knowledge economy,” manydeveloping countries have implemented patentpolicies, often with technical support and fundingfrom international organization such as the WorldIntellectual Property Organization (WIPO). Rwanda,for example, has a comprehensive IP policy asa means to support scientific and technologicalcapacity and technology transfer (European PatentOffice/UNEP, 2013).Further issues relate to the trade-off betweeneffective enforcement mechanisms and the need toprovide geographically-appropriate technologies.Here, some attention has been given to thepotential role of Open and Compulsory LicenseAgreements for climate technologies, that is,legal permission to use software or manufacturetechnology hardware without the consent of thepatent owner, as has been used for drugs underthe WTO‘s Trade-Related Aspects of IntellectualProperty Rights (TRIPS) agreement. Howeverit is unlikely that a global agreement will bereached on whether climate change should berightly considered a public health issue, thuscovering low-carbon technologies under the TRIPSprovision. This is partly because of the greaternumber of patents required for specific climatetechnologies, as compared, for example, to drugsfor HIV/AIDS. Growing competition from emergingeconomies also makes compulsory licensing lesslikely, and there is wide agreement among privatesector actors that it would dampen incentives toinvest in clean technology innovation (Ebinger andAvasarala, 2009).An important means of overcoming theaforementioned barrier is for governments,multilateral organizations and the privatesector—working together or separately—tolaunch competitions, backed with monetaryprizes. 26 Competitions, if well-focused, can driveinnovation especially for bottom-of-the-pyramidand/or technologies for problems that have beenneglected by the market in developing countries(Dutz and Sharma, 2012). Such competitionswould attract mostly innovative SMEs, driving localinterest, creativity and competitive advantage.Legal and regulatory frameworkThe legal and regulatory framework is the setof laws and related regulations that aims tostrengthen the overall enabling environmentfor clean technology SMEs, adding weight to theinstruments discussed in the preceding sections.Here, the main instruments are: sector-specifictax incentives, emission reduction credits, taxationon pollution or natural resource use, import taxreductions or waivers and incentives to attractskilled labor. These can be broadly dividedinto “carrot” and “stick” instruments, creatingincentives or obligations that address both thesupply and demand side of clean technologymarkets (see Appendix C, Table C5).In terms of financial incentives for clean technologySMEs, governments can introduce sector-specificbusiness income tax breaks and import taxreductions or waivers. Such tax-related incentivescan result in efficiency and productivity benefits,driving innovation and profitability (KPMG 2013). Ingeneral, the main benefit of legal and regulatoryinstruments to support the supply-side is thatthey offer non-prescriptive support, that is, theytend to be generic and not technology-specific,encouraging early-stage business innovationand competition. However strict criteria andoversight is required in order to avoid non-eligiblebusinesses claiming tax benefits, especially withregard to import tax relief. There are also riskssurrounding the use and effectiveness of taxcredits in countries with widespread tax evasion.On the demand side, governments can establishclear economic signals that “polluters pay,”in order to stimulate clean technology useand innovation (KPMG, 2013). To this end,Governments can impose taxation, charges or26 Competitions can also be viewed as a mechanism to drivedemand for clean technologies, however this discussionis about competitions used as a means to achieve a predefinedtarget or objective, hence pushing investment andinnovation in a particular direction.Chapter 7: Policy to Support Clean Technology SMEs77

BOX 7.4. SMEs in Thailand’s Energy ConservationProgramThailand first made serious efforts to promote energyefficiency with its Energy Conservation Promotion Act of1992, which has since been revised and expanded. Thecenterpiece of this policy is the Energy ConservationPromotion (ECON) Fund, which is financed by a $0.001per liter charge on petroleum, raising about $50 millionper year, which is then invested into support for energyefficiency projects (Grüning et al., 2012). By 2012 theprogram was estimated to have resulted in a reductionin peak electricity demand of 2,600 MW and a cumulativesaving of 15,700 GWh of energy (Polycarp et al., 2013).The main policy elements of Thailand’s drive to increaseenergy efficiency include:• Renewable Purchase Obligations• Taxation on fossil fuel consumption, demarcated forinvestment in energy conservation (ECON)• Active involvement of multilateral and donororganizations for financing and technical assistance• Revolving fund for concessional loansThe ECON fund is used to support various agenciesimplementing energy conservation projects, as well asrenewable energy, R&D, training, and public awarenesscampaigns, through grants, subsidies, and tax incentivesand two dedicated funds for energy efficiency: theRevolving Fund and Energy Services Company (ESCO)fund. The revolving and ESCO funds provide credit tolocal banks that issue low-interest loans to projectdevelopers. The country’s support for energy efficiencyhas driven demand for efficient transport, lighting,air conditioning, and solar energy technologies, aswell as construction and insulation materials. Large,mostly foreign, corporations have taken the largestshare of the market in energy efficient technologies,which are mostly imported to Thailand. However,SMEs have obtained some market share through theretail, installation, and maintenance of energy efficientequipment, such as air conditioners, solar thermalsystems, and low-energy lighting systems.Another way in which SMEs have accessed the energyefficiency market is through the ESCO model, supportedby the ECON fund. Indeed most ESCOs are SMEs andsuffer from the same financial barriers as SMEs inother sectors, where banks have been less familiarwith the ESCO model and hence less willing to lend tothem, which in turn has limited their participation in therevolving fund (Polycarp et al., 2013).levies on pollution, waste production and/or theunsustainable consumption of natural resources.As an alternative to taxation, governments canutilize market-based mechanisms such as thetrade in emissions permits or credits, wherebyeconomic entities are subject to an emissions cap(absolute limit) which obliges actors to reduceemissions or waste, instead of simply punishingthem. However the cap on emissions must be tightand become more stringent over time, in order toset permit prices at a meaningful level. In supportof market mechanisms, taxation can be deployedas a “baseline instrument” to send the economicsignal, especially to major industrial emitters, thatinvestment in clean technology is an act of selfinterest(OECD, 2012).Here, the effectiveness of pollution taxationdepends upon strong and sustained politicalsupport so as to give clear signals that delayedinvestment in clean technology will result in highercosts. Although emissions trading and taxation ismostly targeted at large corporate players, SMEsstand to benefit directly from these policies asthey strengthen demand for technical solutions toreduce emissions and waste, much of which willcome from innovation-led SMEs and from thosecontracted to install, operate and maintain cleantechnology solutions. The case study on Thailand’sEnergy Conservation Program (see Box 7.4) refersto a mix of legal and regulatory instruments, aswell as an innovative financing mechanism, todrive the supply and demand for energy efficienttechnologies.In addition to the presence of economic incentives,the growth of clean technology SMEs also dependsupon a country’s “absorptive capacity” which is theresult of creative talent and a skilled workforceoperating within a favorable business environmentto enable experimentation and learning. Here, oneinstrument to attract relevant skills and talentsis to offer income tax benefits and/or subsidies totargeted individuals, the so-called “sticky cities”policy. This can be a low-cost, low-risk, optionfor governments and is of particular value to lessdeveloped countries that typically suffer a “braindrain” to richer counties. However reversing thistrend is a challenge and success depends uponconcerted efforts to attract a critical mass ofindividuals, working in a specific sector.78 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

Country ContextThere is limited empirical knowledge regarding therelationship between specific developing countrycontexts and the most effective instruments topromote clean technology industries. However,there are a number of national, economy-wide,conditions necessary to support clean technologyindustries, whether investors are domestic orforeign. These include a stable macroeconomicenvironment, meaning rational interest rates, tightcontrol over inflation and competitive exchangerates. More generally, countries should haveundergone, or be in pursuit of, reforms to simplifyand minimize the cost of business registrationand formalization, including decentralizedadministration, strong rule of law, contractenforcement, pro-business bankruptcy andre-entry rules. While these may appear obviousprerequisites that stand to benefit all industries,there can be profound contradictions between agovernment‘s sector-specific policies and the widereconomic and business framework, thus hinderingclean technology industries.When designing instruments to support cleantechnology industries, governments, in particular,should take into account their country‘sadministration and innovation capacities, in orderto pursue realistic goals and strategies (UNDESA,2011). This applies to education policies throughto IPR regimes, though the need to take intoaccount national development circumstances isperhaps most important when thinking aboutclean technology transfer. For countries withweaker capacities, it makes more sense to focuson attracting foreign direct investment (FDI) and increating a role in global value chains, where jointventures with foreign firms are the best optionsfor securing technology transfer, in addition tosupporting local research capacities.An example of this is Egypt‘s Kuraymat IntegratedSolar Combined Cycle power plant, a gridconnectedproject including 20MW of concentratedsolar capacity, which became operational in June2011. Sixty percent of the value for the Kuraymatplant was captured by local SMEs through thesupply of civil works, mounting structure, tubes,electrical cables, grid connection, engineering,and procurement and construction responsibility.Many local SMEs obtained knowledge andskills regarding the design, construction andmaintenance of the solar plant, in the process ofworking with foreign firms (MEDREC, 2013).There is also a range of social and cultural barriersto the update of clean technologies that mayinhibit the growth of clean technology industries.These can include limited acceptance or trust inthe suitability or reliability of clean technologies,as well as consumer resistance on the basis ofaesthetic criteria, for example in the uptake ofroof-top rain water harvesting. Resistance at thecommunity level has also been experienced, forexample in efforts to encourage collectivized foodstorage in flood-prone areas. Tradition, socialesteem, pride and religious beliefs may also bea source of resistance to the uptake of climatetechnologies. However there are various optionsto address these barriers, including campaignsto disseminate information, educate and raiseawareness as well as public-private partnershipsand targeted assistance to promote early adoptersand technology front runners (Boldt et al., 2012).Policy Interaction and RiskIn addition to providing active, positive, supportfor clean technology markets via the menu ofinstruments detailed in tables in Appendix C,governments and regulators also need to ensurethat they remove or minimize any “negativeincentives,” that is, fiscal instruments, subsidiesor regulations that favor conventional energy andother “dirty tech” markets. Action to remove orreform such policies, thus reducing policy conflicts,is another key aspect of an enabling framework forclean technology SMEs.Negative incentives for clean technology SMEs indeveloping countries are likely to result from redtape and import taxation, as well as more sectorspecificregulations that restrict market access,such as monopoly status awarded to State utilitiesto generate electricity or operate water treatmentplants. For example, despite low levels of ruralelectrification, the Tanzanian utility TANESCOmaintained control over all grid and mini-gridpower generation up until the creation of the RuralEnergy Agency (REA) in 2008. Since then the REAhas supported small-scale independent powerproducers, thus opening up investment in smallscale hydro power and mini-grid technologies tosupply villages and rural areas (Uisso, 2011).Another source of policy conflict that underminesclean technology SMEs are subsidies issued tofossil fuels, which remain widespread in bothdeveloped and developing countries (Whitley, 2013).Chapter 7: Policy to Support Clean Technology SMEs79

BOX 7.5. Ethiopia’s Climate Resilient Green EconomyStrategy (CRGE)The Ethiopian government launched its Climate ResilientGreen Economy Strategy (CRGE) in 2011 to support the5-year Growth and Transformation Plan (GTP), which aimsfor the country to obtain middle-income status by 2025,via carbon-neutral growth. This is an ambitious target,especially given the country’s high GDP growth rates, whichaveraged 10 percent between 2004 and 2013. The CRGEstands out as being a model strategy in bringing greeneconomy and climate resilient objectives to the forefrontof national economic planning. Indeed, on paper, it isdifficult to fault the CRGE, which, unlike green strategiesin many other countries, benefits from high-level supportand oversight. The CRGE Ministerial Steering Committeeoperates within the Prime Minister’s Office, and works inpartnership with the Ministry of Finance and EconomicDevelopment and the Environmental Protection Agency.In a similar way to the Korean Green Growth Strategy, theCRGE is made up of a portfolio of specific projects, acrossnumerous sectors. These include the fast-tracking ofsupport to develop the country’s hydro power resources, thescaling up of fuel-efficient cooking stoves in rural areas,efficiency improvements to the livestock value chain, andfinancing for Reducing Emissions from Deforestation andForest Degradation (REDD) projects (Federal DemocraticRepublic of Ethiopia, 2012). Although some policyinstruments have been legislated, including a FIT to supportinvestment in grid-connected renewable energy, most ofthe strategy will be delivered through direct investmentand spending from a central fund, managed by the Ministryof Finance and Economic Development. This fund, knownas the CRGE Facility, aims to mobilize $200 billion fromnational and international public and private sources over a20-year period and has already received international donorsupport, including $24 million from the U.K. government(GGGI, 2013). In terms of how these funds are spent,the government has established the Sectoral ReductionMechanism Framework, which purports to outline theprecise mechanisms of implementation, though it makesscant reference to clean technology innovation or the roleof SMEs. Indeed this highly centralized approach risksresulting in an inefficient distribution of resources if privatesector actors and investors are not systematically drawninto decision-making processes.Another risk is weak implementation or enforcement of thegovernment’s stated policies. It remains to be seen if theCRGE’s clear national vision and planning will be translatedinto lasting support for the private sector that is necessaryto develop green industries in Ethiopia.Governments often justify these subsidies onthe basis of welfare, for example for kerosenewhich remains an important fuel for domesticlighting in rural, off-grid, Africa. However,technical progress and cost reductions withsolar lighting technology mean that subsidiesfor kerosene are no longer justified, andin fact governments would be advised totax unsustainable fuels, further driving themarket for clean technology alternatives.Clean technology SMEs and investors thatdepend upon government policies andregulations for the size and strength of theirmarkets need to be aware of the risk of policydiscontinuity. There are two types of suchpolicy risks: prospective and retroactive risk.Prospective policy risk refers to the overalllevel of instability or uncertainly regarding acountry‘s enabling framework, upon whichclean technology SMEs may depend. In otherwords this is the risk that governments willmake frequent or irregular and unpredictablechanges in policies that may have a negativeimpact on project planning, thus pushing upthe cost of borrowing or the rate of returndemanded by investors. Retroactive policyrisk refers to changes in policy or regulationsthat affect existing projects, especially whenthey have an impact on business income.Indeed, retroactive changes to policiesthat financially support clean technologyinvestments has become a main barrierto scaling up private investment in therenewable energy sector (Micale et al., 2013).In the area of renewable energies, the mostwell-known risk relates to changes in thevalue of feed-in tariffs where, for example,the Spanish government issued a decreelimiting the rate of return on RET investmentsto 7.5 percent, effectively cutting the valueof tariff support by up to 25 percent forboth existing and future projects (PV Tech,2014). Such retroactive changes in keyfinancial instruments are what businessesand investors fear most as it can resultin a drop in forecast revenues, increaseborrowing costs and diminish the confidenceof investors, undermining market growthprospects. There are various circumstancesunder which such changes tend to occur,though the most are related to changes in thepolitical ideology of presiding governmentsand economic crises.80 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

While policy change is not always and necessarilybad for business (indeed sometimes it iswelcomed), changes especially to instrumentsthat provide financial support to investmentsmust be developed in consultation with theaffected businesses and investors. Ideally changeshould be implemented gradually, after plenty ofwarning. Indeed, sudden and unexpected changesin policy are likely to cause most damage,especially when foreign companies and investorsare involved.Finally, it is important to bear in mind thechallenges surrounding the implementation,enforcement and regulation of any giveninstrument. In many developing countriesthis issue presents the greatest risk, whereeven well designed legal frameworks andfinancial mechanisms can fall victim to poorimplementation or compliance. Regulatorypolicies, such as import tariff waivers designedto support clean technology sectors, cancreate incentives for corruption as does thedemarcation of government funds to supportnascent industries. Indeed, 26 percent of thesolar energy firms surveyed in India (see Chapter4) identified corruption as a major barrier facingthe development of their business, with 22percent pointing to unfavorable customs andtrade regulations. In order to reduce the riskof rendering supportive instruments obsoletebecause of poor enforcement, governments andother stakeholders must sustain capacity buildingprograms, combined with reforms that allowfor greater transparency, reporting and auditingprocesses throughout public administration. Box7.5 discusses some of these issues, with regardto Ethiopia’s Climate Resilient Green EconomyStrategy.In the least developed countries and those withmajor resource constraints, governments andother stakeholders are advised to identify cleantechnology “sweet spots” in order to maximizethe co-benefits of economic growth and climateresilient development or greater energy access.This is of particular importance in countrieswhose greenhouse gas emissions are of globalinsignificance, such as in most Sub-SaharanAfrican countries, where there is a far greaterneed for economic development than climatechange mitigation. In such countries, instrumentsthat support clean technology sectors should beintegrated into national development strategies,BOX 7.6 Climate Smart Agriculture—a potential “sweetspot” industry offering environmental and social cobenefits?As discussed in the previous chapter, CSA is more aproduct of behavior change than hard technologicalchange; hence, policy support should be geared moretowards shifting farming away from unsustainablepractices. However the widespread uptake of CSApolicies by governments provides some opportunitiesfor SMEs (including small holder farmers) throughdemand for drip irrigation, food storage and similartechnologies. In order to design a policy frameworkto stimulate CSA, there is wide agreement on thefundamental need for effective coordination betweennational agricultural development plans, food securityand climate change (FAO, 2010). Since these are oftenthe domain of different Ministries, such coordination isa challenge.In terms of specific instruments to support CSA, theFAO identifies three key mechanisms: reformed credit,insurance and payments for environmental services,all of which should be designed to incentivize farmersto adopt CSA practices. First of all, commercial creditand insurance sold to farmers needs to be reformedin order to incentivize the use of crop residues andrestoration projects, which usually involve withdrawingland from short-term production, in order to obtaingreater longer-term productivities from increasednatural fertility. Traditional credit and insuranceproducts do not encourage such practices and viewthese ecological investments as negative financialtrade-offs. Governments are also able to legislatepayments for environmental services, in support of thetransition to CSA. Payment for environmental services,such as the mitigation of climate change, has beensuccessful in the forestry sector and is a service thatsmallholder farmers can easily provide, as a means tocompensate for the short-term productivity losses thatoften result from CSA practices.Many countries have already proposed the use of theseinstruments through national strategy or planningprocesses, such as Poverty Reduction Strategy Papers(PRSPs), National Action Plans for Adaptation (NAPAs),Nationally Appropriate Mitigation Actions (NAMAs) orTechnology Needs Assessments (TNAs) for climatechange. In addition to highlighting the ecologicalbenefits of CSA, governments and other stakeholderscould explore the potential benefit of CSA as a drivingforce for local SMEs supplying clean technologies,adding, where necessary, political support to the CSAagenda.Chapter 7: Policy to Support Clean Technology SMEs81

targeting the most attractive value chains, asdiscussed in Chapter 3.ConclusionsThis chapter has discussed the broad tool-box ofinstruments to promote clean technology SMEsthat public policy makers, development agencies,and other public and private actors can adopt andadapt to fit their country‘s circumstances. Theseinstruments have been categorized into five areas:entrepreneurship and business acceleration,innovation finance, market development,technology development and the legal andregulatory framework.• Entrepreneurship and business acceleration:There is a range of programs for businesses,as well as international collaborations andnetworks, which countries and businessescan draw upon to help strengthen SMEentrepreneurship and business accelerationin clean technology sectors. Here, countriescan pursue programs offering direct technicalassistance and the linking of foreign investorswith local clean technology SMEs for technologydevelopment and/or production capacities. Morehands-on and in-country business incubationis also expanding, such as infoDev‘s ClimateInnovation Centers.• Innovation finance: There are variousinstruments available to support early stagefinancing and risk capital for clean technologySMEs, to complement traditional financingsources. These include providing soft loansand loan guarantees and stimulating seed andventure capital investment. On the demandside, there is a significant opportunity toestablish technology-specific consumer creditfacilities, which have proven particularly usefulfor technologies that require higher up-frontinvestments such as renewable energy systems.• Market development: A range of instrumentsaim to increase demand for the productsand services of local SMEs and facilitate theoverall growth of the clean technology market.For renewable energy these include portfoliostandards, renewable energy certificates andfeed-in tariffs. Clean technology marketscan also receive a rapid boost through strictsustainable procurement policies, manufacturerstandards, product labeling and producttesting and certification, as well as indirectand/or “soft” interventions such as education,campaigns and performance rankings.• Technology development: Instrumentsdesigned to stimulate technology developmentinclude R&D tax credits, research grants,publicly funded competitive researchcollaborations, competitions, public investmentin R&D, public or private agreements ontechnology cooperation, demonstration projectsand applied research networks.• Legal and regulatory framework: The overallenabling framework for clean technology SMEscan be strengthened by implementing a numberof legal and regulatory policies, includingsector-specific tax incentives, cap-and-tradeemission schemes, emission reduction credits,taxation on pollution or natural resource use,import tax reductions or waivers and incentivesto attract skilled labor. These can be designedto create business incentives and/or obligationsthat address both the supply and demand sideof clean technology markets.This chapter has also discussed the importanceof designing and implementing these instrumentsin parallel, as part of a broader, national strategyto support clean technology industries. Policymakers and other stakeholders are advised totake into account their national circumstances andfocus attention on developing policy interventionson “fertile ground,” as opposed to supportingtechnologies and sectors that do not have thesupport of already-existing human and naturalresource capacities.In order to achieve complementarities and policycoherence, policy makers and other stakeholdersare also advised to survey the portfolio of existinginstruments and conduct a harmonization analysis,that is, to understand if and how other instrumentsand national economic circumstances stand toconflict with, or undermine, planned interventionsto support clean technology SMEs. The casestudies highlighted in this chapter illustrate howeffective policies have been used to promotea dynamic SME sector within specific greenindustries.82 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

Photo: Boris Balabanov / World Bank.Chapter 7: Policy to Support Clean Technology SMEs83

Appendix A.Market Sizing MethodologyThe market sizing methodology has five main steps (further detail available upon request):1. Regional clusters were defined based on a variety of indicators that allowed for modeling of regionalopportunities amongst similar countries. This allowed country-level data gaps to be filled byextrapolation. The clusters group similar countries within regions, with India and China treated as standalone,both because of their relative uniqueness, size, and better data availability.2. A short list of clean technology sectors was created and the overall market value for each sector for eachregion was estimated using a variety of data sources, including: investment projections, installed capacityprojections, and national plans. Country data gaps within regions were filled by extrapolation using GDPas the main scaling factor.3. The value chains for each sector were mapped and the proportion of value in each segment estimated(for instance, 40 percent of the value is in major equipment; 10 percent in engineering, procurementand construction; and 50 percent in operations and maintenance). This was combined with the regionalestimates of sector market value to estimate the addressable market in each segment.4. The share of each value chain segment that could be captured by local SMEs was estimated. A ratingof Low, Small, Medium, or High was assigned to each value chain segment for each sector with acorresponding fixed percentage for each rating in order to estimate the value that could be captured bylocal SMEs. The ratings were based on the technical complexity and market structure of the segment andexperience in the United Kingdom of working with SMEs in clean technology across the value chain.5. All of the estimates were sense checked against existing global estimates and the findings from the casestudies. In the analysis of opportunities the subregions were reaggregated to more conventional regionsfor the purposes of presenting the findings.84 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

TABLE A1. Market sizing methodologyClassify countries into regional clusters (11 regions, 2 country stand-alones)Geography Population and GDP Innovation capacity Ease of doing business¸Develop regional market projections (15 technology areas)Investment projection per regionInstalled capacity projections perregion¸Map the value chain (lifetime)Regional projections extrapolatedfrom national plansMajor equipmentEngineering, procurement, and Operation and maintenanceconstruction¸Estimate the opportunity for SMEs (average)Technical complexity of value chainsegmentLocalization of activity¸Triangulate findingsAuthors’ analysisAppendix A. Market Sizing Methodology85

Appendix B.Value Chain BreakdownsTABLE B1. Renewables value chainsTechnology Major Equipment EPC O&MOnshore wind 57% 22% 21%Turbine• Tower 28%Civil works• Foundation• Blades 22%• Site access & preparation• Gearbox 11%• Building construction• Power converter 5%Balance of system31%• Transformer 4%• Control systems• Generator 3%• Substations• Other equipment 27%• Grid interconnectionOther costs• Project consultancy• Planning / feasibility /permitting costs44% • Insurance• Administration• Fixed grid access fees• Routine component and25%equipment maintenance• Replacement parts &materials• Labor costsSolar thermal 45% 37% 19%Solar collector• Evacuated tubesCivil works• Site preparation• Flat platesBalance of system• Collector mountingcomponents• Storage vessel• PlumbingOther costs• Project development, EPC,financing costs, allowances• Routine inspection• Maintenance of absorption andadsorption chillersSolar PV 54% 36% 10%>1 MW PV module Civil works• Structural installation• Site preparation57% Routine inspectionBalance of system• Solar racks• Inverter• Transformer• Wiring• Battery or storage systemOther costs• System design, permitfees, management, upfrontfinancing costs29% Preventative maintenance• Panel cleaning• Vegetation management• Upkeep of power andmonitoring systems14% Corrective maintenance• Critical repair• Warranty enforcementcontinued on next page86 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

TABLE B1. Renewables value chains (continued)Technology Major Equipment EPC O&MSolar PV 45% 46% 9%

TABLE B1. Renewables value chains (continued)Technology Major Equipment EPC O&MGeothermal 32% 45% 23%Power plant• Turbine• Heat exchangerCivil works• Drilling• Powerhouse / surfacefacilities• Site access infrastructureBalance of system• Steam gathering• Control systems• Grid interconnectionOther costs• Exploration and resourceconfirmation• Project consultancy• Planning / feasibility /permitting costs40% Fixed costs• Routine component andequipment maintenance• Operations labor• Insurance30% Variable costs• Unplanned maintenance (e.g.well replacement drilling)• Incremental servicing costs30%Bioenergy 42% 27% 32%Feedstock conversionsystem• E.g. boiler / gasifier/ gas collectionsystem80% Civil works• Construction costs• Site preparation• Building construction30% Fixed costs• Routine component andequipment maintenance• Operations labor• InsurancePrime mover• Power generationtechnology20% Balance of system• Fuel handling / preparation• Control systems• Grid interconnection50% Variable costs• Ash disposal• Unplanned maintenance• Incremental servicing costsOther costs• Project consultancy• Planning / feasibility /permitting costs20%Biofuels 46% 27% 27%Major equipment• Milling / crushingcomponents• Cooking tanksCivil works• Construction costs• Site preparation• Building construction• Centrifuges• Drying systems• Boilers• Thermal oxidizers• Distillation &evaporation columnsBalance of system• Piping• Rolling stock• Forced air• Water treatment /digesters• Storage tanks• Chemicals, enzymes, yeast• DenaturantOther costs• Project consultancy• Planning / feasibility /permitting costsFixed costs• Routine component andequipment maintenance• Operations labor• InsuranceVariable costs• Energy costs• Effluent treatment & disposal88 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

TABLE B2. Water and sanitation value chainsTechnology Major Equipment EPC O&MWater 68% 27% 5%Purification• Filters• Testing & monitoringequipmentPurification• Sales, delivery & installationPurification• Scheduled filter replacement• On-going testing & monitoringDistribution and Storage• Pipes• Tanks• Water towers and pumpsWatershed management• Reservoir facilities• Monitoring instrumentsDistribution and Storage• Pipe laying• Sales, delivery & installation• Civil works / constructionWatershed management• Civil works /construction• Installation &calibrationDistribution and Storage• On-going delivery• Replacement partsWatershed management• Reservoir management• Data processing & logisticsWastewater 40% 50% 10%Collection• On-site collection (septictanks, on-site cesspools,septage removal trucks)Collection• Civil works (construction)• Sales, delivery & installationCollection• Infrastructure maintenance• Trucking/transport upkeepMunicipal solidwasteTreatment• Sewage treatment plants• Industrial treatment plants• Agricultural wastewatermanagementFinal disposal• Dewatering equipment• Processing equipment forreuse or landfill/incinerationCollection & recovery• Collection vehicles• Communal binsSorting• Sorting equipment (manualand mechanical)Treatment• Recycling facilities• Organic waste facilitiesFinal disposal• Sanitary landfill construction• Incineration equipmentTreatment• Civil works (construction)• Sales, delivery & installation• Management of erosion,nutrient runoff, & IPMFinal disposal• Sales, delivery & installation• Retailing of processedsludgesTreatment• Plant operations &maintenance• Chemicals and enzymes• Land managementFinal disposal• Equipment operations &maintenance18% 23% 59%Collection & recovery• Strategic planning• Sales & deliverySorting• Civil works and on-siteconstructionTreatment• Civil works and on-siteconstructionFinal disposal• Civil works and on-siteconstructionCollection & recovery• Vehicle operations & upkeepSorting• Sorting facility upkeepTreatment• Waste management andrecycling facility operationsFinal disposal• Landfill operations (leachate /methane management)• MonitoringAppendix B. Value Chain Breakdowns89

TABLE B3. Transport value chainsTechnology Major Equipment EPC O&MNatural gas vehicles 95% 5% 0%Natural gas conversionkit• Tank• Cylinder• Vapor bag• High pressure pipe• Refueling valve• Pressure regulator• Gas-air mixer• Petrol-solenoid valve• Selector switchLabor• Mechanicn/aElectric vehicles 100% 0% 0%Entire electric vehicle n/a n/aElectric bikes 81% 18% 1%E-bikes• Cost of an e-bikeE-bikes• Battery replacementE-bikes• Equipment maintenance• LaborBus rapid transit 15% 35% 50%BusesBus system• Bus station• Bus terminal• Control center• Roadway constructionBuses• Bus maintenanceBus system• Upkeep of infrastructure90 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

Appendix B. Value Chain Breakdowns91Photo: World Bank.

Appendix C.Policy Options andInstruments27 28TABLE C1. Entrepreneurship and business accelerationNameDescription ofcollaborationEvaluation (summary ofstrengths / weaknesses)CommitmentperiodExampleStartup orinnovatornetworksA network of SMEinnovators or“startups” aimingto share ideas andfacilitate accessto markets andinvestorsA more business-orientedmeans to achieve thesame intended outcomesas bilateral and multilateralagreements andpartnerships to incubateclean technology SMEs and/or connect investors withbusiness opportunities,mostly in developingcountries.Effectiveness is linkedto establishing relevantrelationships andtrust-buildingBrazil‘s Centre forInnovation, Entrepreneurshipand Technology (CIETEC) 27was set up in 1998 by theSecretariat of Developmentof the State of São Pauloand the São Paulo Micro andSmall Enterprise SupportService. It is hosted at theUniversity of São Paulo andhas the capacity to support120 technology-led firmsthrough the pre-incubation,incubation and postincubationphases.Management andentrepreneurshiptrainingTargeted capacitybuilding forentrepreneurs andmanagers operatingin, or planningto develop, cleantechnology SMEsEnterprise development, thatis, business skills capacitydevelopment, is often anintegrated part of donorbackedprojects to helppush clean technology SMEideas and opportunities indeveloping countries. Suchprograms are most valuablein developing countrieswhere general businessskills and/or awarenessregarding clean technologyopportunities may be lower.Normally a shortterm,project-based,development cycle as aprerequisite for accessto soft loansGVEP‘s €4 millionDeveloping EnergyEnterprises Project (DEEP), 28supported 900 “bottom ofthe pyramid” micro andsmall businesses acrossEast Africa with mentoring,training and support servicescovering product quality andtechnical issues, businessand sales skills, accessto finance and businessnetworks.continued on next page27 For a detailed study of startup and innovator networks in Latin America, see OECD (2013) “Startup Latin America: Promoting Innovationin the Region.” For a summary of the DEEP project (2008-2013), see: Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

TABLE C1. Entrepreneurship and business acceleration (continued)NameDescription ofcollaborationEvaluation (summary ofstrengths / weaknesses)CommitmentperiodExampleMultilateralsupport forclean technologyentrepreneursPrograms tosupport specificclean technologystartup SMEs andenhance businessenvironmentsCan be cooperation orcompetition-based methodsto identify clean technologyentrepreneurs and connectthem to potential investors,partners and markets.Various programs focuson capacity building andbusiness skills development,spanning sectors andtechnologies.Can be short or longtermKey initiatives include theGEF-UNIDO Global Cleantechnology Program forSMEs 29 and World BankinfoDev‘s Climate InnovationCenters. 30 Both have beenbuilding up work programsand capacities in developingcountries since 2011.National ormultilateralpublic-privatepartnershipsTo link investorswith cleantechnologyopportunities indeveloping countriesThere is a tendency forsuch agreements to operateat higher levels, involvinggovernments and largecorporate players. However,as with bilateral agreements,these are be designed orreformed to incorporate SMEplayers. However criteriaand terms of reference willhave to reflect sector andmarket characteristics.Effectiveness is linkedto establishing relevantrelationshipsThe Private FinancingAdvisory Network (PFAN) isa multilateral, public-privatepartnership initiated by theClimate Technology Initiative(CTI) in cooperation with theUNFCCC Expert Group onTechnology Transfer. PFANaims “to bridge the gapbetween investments andclean energy businesses.” 31Officialdevelopmentassistance (ODA)Public spending byOECD governmentson assistance todeveloping countriesto implementsustainabledevelopmentODA is increasingly directedat climate change mitigationand adaptation programs,in continued recognition ofthe relationship betweenenvironment and poverty.As such there is significantscope for programdevelopers to integrateclean technology SMEs intotheir work plans, includingcapacity building and softfinancing, as a key means toaddress develop goals.ODA funding andproject tend to followmulti-year cyclesDanida (Danish developmentassistance) runs “BusinessPartnerships,” providingfinancial support forthe “preparation andimplementation ofcommercially orientedpartnerships” betweenDanish companies andpartners in developingcountries. 32continued on next page29 See: See: See: www.cti-pfan.net32 Danida Business Partnerships: C. Policy Options and Instruments93

TABLE C1. Entrepreneurship and business acceleration (continued)NameDescription ofcollaborationEvaluation (summary ofstrengths / weaknesses)CommitmentperiodExampleUN-led initiativesto enabletechnologytransferPrimarily technicalassistance forclean technology“readiness,”donor-funded butcountry-ledFunding is in place underthe UNFCCC‘s TechnologyMechanism, providingcountry-specific technicalsupport for low-carbonand climate resilientdevelopment. Interventionsare country-led and so thereis plenty of scope to involveSMEs. However the longertermimpacts depend uponthe delivery of large-scalefunds for investments thatenable technology transferto developing countries.Ongoing and linkedto UN-chairednegotiations underthe global ClimateConventionThe Climate TechnologyCentre and Network (CTCN)is the operational arm ofthe UNFCCC TechnologyMechanism providingtechnical assistance todeveloping countries, insupport of their low-carbonand climate-resilientdevelopment plans. Thiswill be provided through 11expert organizations locatedin developing and developedcountries, as of 2014. 33KnowledgeplatformsDesigned topromote knowledgesharing on bothtechnical inputs andproject/businessimplementation(that is, “goodpractice”)Can be valuable whenfocused and well structured,however success dependsupon positive reputation andthe achievement of “go-to”status. This is challenginggiven the plethora of onlineknowledge platforms.Ongoing, built up overtimeInternational CleantechNetwork, 34 hosted by theCopenhagen CleantechCluster; Climate andDevelopment KnowledgeNetwork (CDKN) 3533 See: See: See: Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

TABLE C2. Innovation financeName ofinstrumentDescription ofinstrumentEvaluationCommitmentperiodExampleLoanguarantees 36Can be commercialbusiness loans issuedby private banks,though with thebacking of State fundsto share the financialrisk and providetypically

TABLE C2. Innovation finance (continued)Name ofinstrumentDescription ofinstrumentEvaluationCommitmentperiodExampleTargetedconsumer creditCommercial orsubsidized lendingto householdor commercialconsumers for specificclean technologyproductsCan help overcome demandsidebarriers to cleantechnology products withrelatively high up-front capitalcosts, where banks have eitherblocked loans or charged highrates for unknown productsthat were perceived as rightrisk. Tailoring technologyspecificloans, rebates ortax credits builds specificknowledge within banks,enables more accurate riskassessment and cheaperfinancing.Can be developed as ashort-to-medium termbridge to “normalize”commercial lendingTunisia‘s consumer creditfacilities for solar waterheaters 40 (SWH) havebeen a key means toboost demand and lowersystem costs, working inpartnership with multilateralagencies and localbanks.40 For a detailed study of Tunisia’s PROSOL programme to support SWHs, see the Climate Policy Initiative (2012): Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

TABLE C3. Market developmentName ofinstrumentDescription ofinstrumentEvaluationCommitmentperiodExampleSector-specificgovernmentstandardsCan be applied to arange of sectors topull demand for cleantechnology, fromenergy efficiency inbuildings to biofuelmixingGovernment-imposed performancestandards are a key means toinfluence the pace of innovationand technological change inspecific sectors, driving demandfor clean technology products andservices. The main challenge is tosteer a course beyond businessas usual, balancing ambition andrealism. Most effective standardsare developed in partnership withlocal industry, charting a clear,long-term transition that willensure future market demand.Medium tolong-term, withclear year-basedtargetsThailand‘s 1992 EnergyConservation PromotionAct (subsequently revised)initiated demand forefficient lighting, airconditioning,and hotwater generation andsolar energy systems, aswell as the construction ofenergy efficient buildings(envelope). 41Manufacturerstandards andproduct labelingA standard forthe purchase ormanufacture ofappliances that meetcertain environmentalperformanceManufacture and/or performancestandards and labeling haveproved to be a powerful meansof driving demand for cleantechnologies, in particularenergy efficient consumergoods. Success is achieved bymeans of communicating simpleinformation, offering “win-win”benefits and raising consumerconsciousness. However theirpower depends upon widerecognition of the standard,thus limiting the scope for newstandards.Onceestablished,performancecriteria musttighten overtime so as todrive furtherinnovation andinvestmentto improveperformanceThe Energy Star standardis the most successfulinternational label forenergy efficient consumergoods which offerefficiencies of at least 25percent above the UnitedStates federal standardsand has been adopted bythe EU and most otherOECD countries. 42Product testingand certificationAims to level theplaying field betweenbusinesses and ensurequality control. Thiscan be done either bynational governmentsor internationalagencies.In embracing quality controland certification schemes,governments can supportlocal clean technology SMEsthat would otherwise face stiffcompetition from low-cost andlow-quality imported goods,thus maintaining or improvingtechnology reputations. Canwork in partnership with productlabeling initiatives, but successdepends upon a significant degreeof consumer awareness to makeinformed decisions.Requires strong,sustainedsupportand marketregulationIFC/World Bank‘s LightingAfrica initiative supports“Lighting Global” qualityverification of solar lamps,where approved productscommanded about a thirdof Africa’s off-grid lightingmarket in 2012. 43continued on next page41 For a detailed study of energy efficiencies driven by Thailand’s government-set building standards see: Chirarattananona, S. et al. (2010)“Assessment of energy savings from the revised building energy code of Thailand,” Energy, Vol.35 (4) p. 1741–1753.42 For more information on Energy Star and qualified products, see: See here for more information about Lighting Global’s minimum quality standards: C. Policy Options and Instruments97

44 45 46TABLE C3. Market development (continued)Name ofinstrumentDescription ofinstrumentEvaluationCommitmentperiodExampleRenewableEnergy PortfolioStandards orObligationsand Renewableenergycertificates(RECs)Obligations orportfolio standardsare governmentimposedmandatorytargets for utilities togenerate X percentof their power fromRETs. This normallyresults in the creationof certificates whichcan “surrendered” ortraded, providing amarket-based subsidy.Portfolio standards (or obligations)tend to drive price competitionbetween different RETs, howeverthey often fail to support import butmore expensive technologies, suchas solar PV. In order to stimulateinvestment in renewable energycapacity, the demand and pricefor RECs has to be high. WhileRECs are a market mechanism,prices are largely influenced by theregulatory framework that createsthem. Therefore the penalties fornoncompliance must be significant,and floor prices should not beset so low that the value of RECsbecomes of marginal importance.As withall marketmechanisms, theeffectiveness ofRECs dependsupon sustainedgovernmentcommitment.RE portfolio standards andobligation have been usedin the United States, UnitedKingdom and Sweden asan alternative to feed-intariffs and have succeededin supporting mostlyonshore wind power. RECshave been traded in India 44since 2011 however marketparticipation has been lowand has failed to attractsignificant investment.Feed-in tariffs(FITs) 45Provide a minimumguaranteed pricepaid by utilities toall generators ofelectricity fromrenewable energy,supplying the grid.The exact value oftariff support is set bygovernment, usuallyfor a fixed time period,and tends to varyaccording to the type ofgeneration technology.Simpler than RECs, FITs havebeen successful in many OECDcountries, driving markets forwind and solar power where SMEparticipation is high for installationand operation. They are unlikeconventional subsidies in that theyare intended to spur market andtechnological development, drivingcost reductions in the process,normally by tapering tariff overtime. FITs are conceptually verysimple and easy to administer,offering clear financial riskmanagement for investors.However, once renewables take upa larger share of the generationmarket place, fixed-price (asopposed to market-based) FITs canbecome expensive and harder forgovernments to justify.The number ofyears offeredby the FIT is offundamentalimportance andcan range from5-30 years80+ countries worldwidehave legislated FITs,however the vast majorityof RET investmentssupported by FITs has beenin developed countries.This is partly because ofthe rapid uptake of FITs indeveloping countries since2009, following which thereis a delay during projectsare designed and investorsare mobilized. 46AdvancedmarketcommitmentA legal contractbetween publicor private entitiesthat guaranteesthe purchase of atechnology, subject tomeeting minimal, predefined,performancerequirementsA means to minimize investmentrisk in important but unproventechnologies, where payment is onlymade upon delivery. To date hasonly been used for the developmentof medicine and is most relevantin addressing specific technicalproblems or requirements.Of minimal relevance to cleantechnology, and its effectivenessdiminishes along with a high degreeof technological uncertainty.Technologyspecificandtime-boundPneumococcal Vaccinesupported by the GlobalAlliance for Vaccines andImmunizationontinued on next page44 For an assessment of the first year of REC trading in India, see: For a comprehensive overview of FITs for developing countries, see: Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

47 48 49 50TABLE C3. Market development (continued)Name ofinstrumentDescription ofinstrumentEvaluationCommitmentperiodExampleSustainableprocurement 47Purchasing policies bygovernments and largecorporations, wheredecision making takesinto account externalenvironmental andsocial costs, in additionto financial (internal)costsCan be a powerful means to drivedemand for clean technologyproducts and services asgovernments tend to be the singlelargest consumers in an economy.However the exact criteria can varysignificantly between organization,thus consumption that is radicallymore sustainable than “businessas usual” does not always occur.Policy continuitydrives long termdemand forclean technologyproducts andservicesIn 2007 the Federalgovernment of Brazilimposed publicprocurement criteria toensure the purchase oflegally-certified sustainablewood products, with criteriadesigned to increase theparticipation of SMEs.However more widereachingand progressivesocial and environmentcriteria has been legislatedby the State of Sao Paulo. 48Public rankingsA ranking ofcountries, businesses,organizations ormunicipalities basedon the production orconsumption of cleantechnologyAs with all rankings, resultsare the product of context-freecriteria that are unlikely to reflectfairly the performance of alltarget entities or jurisdictions,for the sake of comparison.While rankings can stimulate ahealthy degree of competition,and hence motivation to reachspecific targets, they can alsohave a counter-productive effectwhereby the “usual suspects” (forinstance, Scandinavia) dominatethe rankings, thus demotivatingothers and having a competitiveeffect only at the top.Most rankingsare publishedyearly and obtainstatus andfollowing overtimeThe Global Cleantechnology InnovationIndex, published by theClean technology Groupand WWF, first publishedin 2012 ranked Denmark,Israel, Sweden, Finland andthe United States as thetop-5 countries for cleantechnology innovation. 49CampaignsCan take many formsand be official (thatis, government-led),commercial, individualor community-basedand broad or specificin focusNeed to be simply, clearmessages most campaigns areconducted online and can lead to“crowdfunding” (that is, a largenumber of small contributions),especially relevant for diasporapopulations to support initiatives intheir home countriesNormally shortterm, targetedUNDP has supported acampaign to “crowdfund”solar energy for schoolsin Croatia, whichdemonstrated the powerof campaigns and thepotential of crowdfundingas a niche instrument. 50ontinued on next page47 For a generally overview of sustainable public procurement (SPP), see: See Brauch, M. (2012) “Sustainable Public Procurement in the Sao Paulo State Government” For the full report, see: For more information on this campaign, see: C. Policy Options and Instruments99

TABLE C3. Market development (continued) 51Name ofinstrumentDescription ofinstrumentEvaluationCommitmentperiodExampleEducationCan operate at variouslevels from primaryto advanced, to eitherraise awareness aboutclean technologyor build specificcapacitiesEducation is fundamental toany enabling framework andpotentially most powerful,influential instrument. In thecase of clean technology SMEs,education can be a means to raiseawareness and hence demandfor clean technology productsand services, though greaterinfluence is more likely throughspecific courses at University level.However can be longer-term,difficult to measure impact.Long term,‘s“Professional Series”seminars and short courseson how to commercializeclean technology. These areonline courses and henceaccessible to potentiallyanyone, worldwide. 5151 See: Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

52 53 54 55 56TABLE C4. Technology developmentName ofinstrumentDescription ofinstrumentEvaluation .(summary of strengths /weaknesses)CommitmentperiodExampleR&D taxcredits 52Various forms oftax exemptionor reductiongranted to SMEsthat pursue cleantechnology marketopportunitiesThis is the primary nongrantfinancial incentive for SMEs toenter the clean technology sectorand is an established benefitoften afforded to SMEs in general,given their higher innovation ratesand job creation. For the cleantechnology sector tax jurisdictionscan extend and/or deepen the taxcredits to SMEs given their positiveenvironmental externalities.To be effective instimulating businessideas, plans andinvestment, taxcredits need to besimple, clear andstable, backed bystrong politicalcommitment in themedium to longterm.South Korea‘s Limited TaxIncentives Law 53 offers a taxdeduction for SMEs of 8-25percent when 40 percent ofcurrent year R&D currentyearR&D expendituresexceed the average overthe previous 3 years.Nonetheless, the relativeshare of R&D investment bySMEs has decreased since2001, despite tax regimesbeing more beneficial thanfor large firms. 54ResearchgrantsMostly public butsometimes privatefunding to conductR&D in a specificarea or application,normallyawarded on acompetitive basisby a committeeof experts.Typically grantsare structured into“phases,” fromexploratory topre-commercial.An important means to providefunding for early-stage businessand innovation ideas that are toohigh risk for private investors,including venture capital. Inthe competition-based awards,naturally high failure rates areexacerbated by the risk of “pickingwinners.” However this can bemitigated by support for businessideas that spin-off from Universitybasedresearch.Normally theseare one-off grantswith no conditions,though can be linkedto the promise ofnext-stage financingThe multi-donor AfricaEnterprise Challenge Fund(managed by KPMG) awardsup to $2.5 million in grantsand interest free loans toinnovating SMEs in Africa,with a primary focus onclimate technologies. 55Launched in 2008 the fundhas grown from $30 millionto $190 million and approved133 projects across 22African countries.Publicly fundedcompetitiveresearchcollaborationsClean technologyresearch andinnovation projectsinvolving numerouspartners to addressspecific, normallycross-boundary,problemsThere is a trend in OECD countriesto combine business, especiallySMEs, into research and innovationprocesses where public researchfunding is no longer the primarydomain of Universities. While thishas been criticized by some forprioritizing business interests, itis likely to enable a faster rate oftechnology commercialization,informed by public-funded R&D.Normally timeboundand subjectto funding cycles,reflecting high-levelpolitical prioritiesEU‘s €70.2 billion Horizon2020 framework 56(2014-2020) mergesresearch and businessinnovation, intended toboost competitiveness ofthe host regions but alsoincludes significant scopefor involving University andSME partners in developingcountries, to develop cleantechnology markets.ontinued on next page52 For a summary of tax incentives for R&D and innovation, see OECD: In January 2014 Korea passed tax reforms including changes to R&D incentives, though these remain favorable to smaller businesses.See:$FILE/2014G_CM4141_KR per cent20passes per cent20tax per cent20reform per cent20proposals per cent20including percent20changes per cent20to per cent20R per cent20D per cent20incentives.pdf54 For a detailed study, see: Song, Jong Guk (2007) “The impact of fiscal incentives for R&D investment in Korea” For more information on the Africa Enterprise Challenge Fund (AECF) see: See: C. Policy Options and Instruments101

57 58 59 60TABLE C4. Technology development (continued)Name ofinstrumentDescription ofinstrumentEvaluation .(summary of strengths /weaknesses)CommitmentperiodExampleCompetitionsMostly launchedby publicorganizationsto incentivizethe invention ofnew hardware orsolutions, designedas either opencompetitions basedon the merit ofidea or to addressspecific technicalproblems ortargets, normallybacked by asignificant financialincentive (prizemoney)Can be a simple and powerfulmeans to stimulate technicalinnovation and progress in specificareas, often more effective whena target-based criteria is used,for instance, to invent a lightbulb that uses less than X unit ofenergy. Competitions are open toanyone and can have unintendedpositive spin-off effects, thoughwhere the scope and parametersof the competition itself is setby technical experts they mayoverlook more relevant or pressingtargets or problems.Normally timeboundeventswith an entrancedeadline, dependingon the nature of thechallengeSouth Africa‘s “Step-UpTechnology InnovationCompetition” for SMEsdoes not specify technologytargets or sectors. It is anopen competition to alltechnology innovations,where the prize is acombination of businessdevelopment training andcontact with potentialinvestors. 57Publicinvestment inR&D 58Fiscal spendingon R&D as part ofnational strategyto boost cleantechnology, eitherthrough directfunding to SMEsor through publicinstitutes andUniversitiesHas been a powerful means toboost innovation and technicalcapacities in many developedand emerging economies. Ismost effective when markets ortechnologies are well-defined andin support of strategic nationaldevelopment goals, ideallybuilding upon pre-existing nationalcapacities. However can run riskof undermining market forces ifdesigned to pick winners.Strong topdownpoliticalcommitment andstability is essential,ideally with clearlydefined phase-outor exit strategiesBrazil‘s National BioethanolScience and TechnologyLaboratory (CTBE) wasset up in 2008 to buildthe country‘s competitiveadvantage in biofueltechnologies, co-located withthe Brazilian SynchrotronLight Laboratory (LNLS)and the State University ofCampinas (UNICAMP) andfunded by the BrazilianMinistry of Science andTechnology. 59Public orprivateagreementson technologycooperationCan begovernment-togovernmentor viatrade associationsMost such agreements aredesigned to promote mutualinterests in clean technologydevelopment and marketexpansion, based upon sharing ofknowledge and skills. Most tend toinvolve larger corporate players.And while much depends on thenature of the sector, technologyand type of agreement, there iscertainly great scope to involveclean technology SMEs, especiallyfor sectors with distributedoperations or more complicatedsupply chains.Success dependsupon trust andrelationshipbuilding,so tend tostrengthen over time“Bridge Clean technology,”launched in 2010 and hostedby UK-India BusinessLeaders Climate Groupaims to “bridge the gapbetween businesses,technology developers,financial institutions andpolicy makers with theobjective of promoting cleantechnology development,commercialization, adoptionand diffusion.” 60ontinued on next page57 For more information see: For more information on the role of public R&D and international Science, Technology and Innovation, see OECD (2012) Portal for Brazil’s National Bioethanol Science and Technology Laboratory (CTBE): See: www.bridgecleantechindia.com102 Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

61 62TABLE C4. Technology development (continued)Name ofinstrumentDescription ofinstrumentEvaluation .(summary of strengths /weaknesses)CommitmentperiodExampleDemonstrationprojectsSpecific cleantechnologyprojects, normallybacked by nationalor multi-lateralpublic funds todemonstratefeasibility of nearor far-from-markettechnologiesIf well designed can be of strategicvalue, accelerating learning-bydoingand rapidly reduce futureproject cost with high visibilityleading to public acceptance.However can be overly expensiveand/or demonstrate failures andwell as successes, translatinginto political risks that may becounter-productive.Only necessary forthe duration of theproject itself, thoughmakes sense if thereis wider strategyor commitment todevelop and applythe technology inthe demonstrationcountryTurkey‘s InternationalCentre for Hydrogen EnergyTechnologies 61 (2003-2012),funded by UNIDO andthe Turkish Government,provided technical andfinancial support tothe development andimplementation of hydrogenenergy demonstrationprojects, conductingapplied R&D for developingcountries, training andeducation programs.AppliedResearchNetworksA network ofresearchersfocusing on appliedtopics, in eitherNorth-Southand South-SouthcollaborationsA proven means to conductimportant problem-drivenresearch, based on knowledgeand resource sharing betweendeveloped and developingcountries and to avoid duplicationof data gathering and analysisEffectivenessis linked toestablishing longtermrelationshipsThe CGIAR 62 umbrellagroup funds and coordinatesresearch via 15organizations, mostly basedin developing countries,into sustainable agricultureand forestry enabling ahigh degree of knowledgesharing.61 For more information on Turkey’s International Centre for Hydrogen Energy Technologies, see: See: C. Policy Options and Instruments103

63 64 65 66TABLE C5. Legal and regulatory frameworkName ofinstrumentDescription ofinstrumentEvaluation .(summary of strengths /weaknesses)CommitmentperiodExampleCap-and-tradeemissionschemesThe trading ofpermits, normallybetween privateentities, for the rightto emit X tones ofindustrial gases (CO 2,SO 2, NO x) or extractnatural stock (forinstance, fishingquotas), subject to anationally-set limit(cap)This is the most commonmarket mechanism toincentivize investment in cleantechnology, popular with bothgovernments and businessesin OECD nations for the easeof administration. Howeverunless the caps are revised inline with technological changeand economic growth then theprice signals may be too weak toinfluence investment behavior.More effective if permits areauctioned instead of being givenaway, within a broad cap so as topresent “leakage.” Furthermore,it is difficult for developingcountries to implement ETSand offset schemes as manydon’t have the data or capacityto establish GHG emissionsbaselines and projections.To be effective capand-tradesystemsneed to be in placeindefinitely, withclear indicationsthat caps willbecome tighter overtimeEuropean Union‘s EmissionsTrading Scheme (EU-ETS)is the world‘s largest andlongest-running, coveringaround 12,000 industrialinstallations responsible for45 percent of the EU‘s totalGHG emissions. 63 Similarschemes are operating orplanned in emerging markets,for example in China where7 cities are launching theirown ETS, starting withShenzhen which covers 635installations. 64 However noETS has, as of 2013, managedto push carbon prices upto levels likely to stimulatesignificant investmentin climate mitigationtechnologies, mainly becauseof weak caps.EmissionReductionCredits 65A system wherebusinesses arerewarded forreducing emissionsbelow a baseline,usually intensitybased(for instance,CO 2emissions perunit of production).These reductionsare converted intotradable creditswhere liable partiesmust purchasecredits and thensurrender them tothe regulator at theend of each year,to meet their shareof an economy orsector-wide reductiontargets.As with cap-and-trade systems,baseline-and-credit tradingcan provide simple economicincentives to invest in cleantechnology. However sincebaselines are normally setagainst intensity targets,increases in total productioncan outweigh the emissionsreductions. Furthermore, itcan be difficult to establish“additionality,” that is, to knowif the emissions reductionsawarded credits under thescheme would have occurredanyway.To be effective inreducing emissionsin the long term,baseline-and-credittrading needs to befollowed with longtermcommitmentsby all countries toreduce absoluteemissions levelsThe Clean DevelopmentMechanism 66 (CDM) is thebest known example of thetrade in Emission ReductionCredits, which issues 1 billionCertified Emission Reductions(CERs) credits between 2001and 2012. However the priceof CERs collapsed to below 1EUR by 2012 following hugeoversupply in the EU-ETS andthe failure to secure a post-Kyoto agreement on globalreductions. Furthermore, 60percent of CERs have beensold by Chinese companiesfor the destruction ofnon-CO 2gases, as opposedto investment in low-carbontechnologies.ontinued on next page63 For detailed analyses of the EU”s ETS see: For a summary of the Shenzhen pilot ETS see: For a succinct explanation of Emission Reduction Credits, see the Australian government’s Department of Environment (2010) guidanceon “Baseline and credit schemes” For detailed analysis of CDM projects in emerging economies and developing countries, see: Building Competitive Green Industries: The Climate and Clean Technology Opportunity for Developing Countries

67 68 69TABLE C5. Legal and regulatory framework (continued)Name ofinstrumentDescription ofinstrumentEvaluation .(summary of strengths /weaknesses)CommitmentperiodExampleTaxation onpollutionor naturalresource useTaxes can be leviedon specific pollutionoutputs or on theabstraction orconsumption ofnatural resourcesincluding water userfees, wastewaterdischarge fees, andsolid waste disposalfeesBorn out of the “polluterpays principle,” that is, thata company causing pollutionor resource extraction shouldpay for the cost of removingor replacing it, or providecompensation to those whohave been affected. While suchtaxes can raise revenue streamsto finance clean technologyventures and businessdevelopment they do not, unlikemarket-based mechanism,ensure pollution reductions.Rather they simply penalizeunsustainable behaviors, whichmay not trigger investment inclean technologies.As with mostfiscal measures,its effectivenessdepends uponsustainedgovernmentcommitmentAmong developing countries,India introduced a carbontax in 2010, though only forcoal, charged at $1.07 perton either produced in orimported to India. 67 SouthAfrica, as another carbonintensedeveloping economy,has embraced the idea ofa carbon tax, though hasdelayed implementation until2016. 68Import taxreductions orwaiversKey fiscal measurethat can be targetedfor specific cleantechnology importsCan assist clean technologySMEs that depend upon theimporting of specific, oftenhigh-tech, inputs. Most relevantto Less Developed Countries. Amain challenge is to maintain anup-to-date list of technologiesand associated equipment(such as inverters used for PVsystems) that is fair and notopen to abuse by traders whowould avoid tax but use theequipment for other, that is,nonclean technology, sectors.As with mostfiscal measures,its effectivenessdepends on stableand long-termcommitment fromgovernmentSenegal‘s 2010 RenewableEnergy (RE) Law includes a0 percent corporate incometax (normally 30 percent) forinvestors in RE and 0 percentVAT (normally 7 percent) forRE products and services,which has been of particularbenefit to the solar PVmarket. 69Attractingtalent (“stickycities”)Government policyto attract and retaintalent and humancapital throughincome tax breaksAims to attract creative andscientific talent for cleantechnology, especially relevantfor less developed countriesthat have suffered a “braindrain.” However needs to beimplemented in concert withother enabling policies andalso to significant enough totrigger a flow of talent to besuccessful. Policy risk is higherin the countries that would standto benefit most and eligibilityrequires strict oversight so as toavoid gaming.Strong topdownpoliticalcommitment andstability is key toeffectivenessVarious African governmentscommitted to the ideaunder the New Partnershipfor Africa‘s Development(NEPAD), though it has mostlybeen implemented on anad-hoc basis with no formalmechanisms in place ormeans to measure impact, todate.67 Information on country carbon taxes is compiled by KPMG: News report of the South African government’s 2014 decision to delay carbon taxation until 2016: See Senegal’s ‘Renewables Readiness Assessment’ (2012) published by the International Renewable Energy Agency (IRENA) per cent20Senegal per cent20RRA.pdfAppendix C. Policy Options and Instruments105

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