A revolving fund boosts the supply chain of greener cook stoves
Producers of improved, greener cookstoves in Lao PDR often encounter challenges in securing capital to run their businesses. Many banks, both commercial and development ones, are unfamiliar with the product and proved to be uninterested in providing loans in areas with limited populations - such as those where producers typically operate - and as the average amount is too small, sometimes only about EUR 460.
However if producers have no money for labour or to buy raw materials such as metal buckets, then production halts. Retailers on their part are afraid of taking the financial risk of pre-investing in a new product and in turn fewer improved cookstoves end up in shops, meaning that customers and end users lack access to improved cookstoves, which keeps the demand low and affects the income of producers.
In its efforts to help small and medium-sized stove producers sustainably manufacture high quality cook stoves, the SWITCH-Asia project Improved Cook Stoves (ICS) set up a revolving fund of EUR 9,300 to frontload costs of production and sales of improved cookstoves that would have otherwise been constrained by cash flow challenges.
Producers affiliated with the SWITCH-Asia project, who have been trained to make stoves according to ICS specifications, can borrow money from the fund and, upon successful repayment, access successive loans.
The entire supply chains benefits of this new mechanism: producers, with the availability of the working capital, are able to continue production and have the flexibility to sell improved cookstoves on consignment to retailers. Retailers, in turn, stock their shops and shelves with ICS, increasing access and awareness for end users, who then reap the benefits of a cleaner, more energy- and time-efficient stove.
The project partner "Association for Rural Mobilisation and Improvement" (ARMI), which is managing the fund, has seen a gradual uptake among producers. "Producers were initially hesitant because they feared being in debt. However, as more producers are enrolling, it's becoming more apparent that the fund helps them increase their production and eventually their income," says Khamleth Sengsoulichanh, ICS Programme Manager at ARMI. "We hope that with the fund, producers are able to improve their business on their own and will no longer need the fund but rather manage their capital wisely."
Approximately one year after the fund was launched, nine producers in Savannakhet, Champasak and Vientiane Capital are making use of this facility with 50 short-term loans already having revolved over the past 12 months. Loans are usually given for a period of 45-60 days, with no interest rate.
Mr. Bouthieng, one of the project's star producers - who on average produces 500-600 cookstoves per month - noted, "With the money from the revolving fund, I am able to buy raw materials more easily. I'm even able to buy raw materials in bulk during the dry season when they are cheaper, which allows me to lower my production costs for larger profits."
Thus far, this fund has contributed to 9,650 cookstoves that otherwise may not have been produced due to cash constraints. Producers have learnt to better plan and manage their cash flow by distinguishing between 'working capital' and private money. This has increased the resilience of their businesses, making them less susceptible to unexpected financial shocks and has helped to ensure a more balanced cash flow and income level.
"In the past, cookstove producers were often unable to pay for the metal buckets upfront and would ask to pay later. But now that the ICS producers are able to borrow money from the revolving fund, they are able to buy buckets for their cookstoves outright," says Mrs. Syfong, a bucket producer at Phonsykhai village in Champasak province.
As the SWITCH-Asia project approaches completion in January 2017, it will assess the experience of its revolving fund and review pay back and savings after its more than one year in operation, so to decide how to move forward with it.
Written by: SWITCH-Asia project
Edited by: SWITCH-Asia Network Facility