A recipe for Ethiopia’s rural communities
Rural markets and the environment benefit from improved cookstoves
Kemal Kedir looks on proudly as his 18 employees go about their work on a site about the size of a football pitch. His staff are busy – they produce 100 cookstoves per day, 200 at peak times. It hasn’t always been like this: In 2015, Kedir started his business in Asasa, a town in Oromia, Ethiopia’s largest regional state. With a starting capital of 600 euros, he hired two part-time helpers and produced 20 cookstoves per day in his backyard. Because he didn’t have a car, he could only sell to people in his neighbourhood. The simple mud-plastered houses of the 30,000 inhabitants of Asasa are connected by narrow dirt roads, which meant that the delivery of the heavy concrete stoves was a logistical challenge. For the first few years, Kedir’s prospects didn’t look good.
This changed in 2017 when he learned about the results-based financing (RBF)
project in Oromia: cooperatives and small enterprises received a financial incentive for every improved cookstove they sold. The RBF mechanism redefined the relationship between investment and performance. Payments were made only once pre-agreed results had been achieved by the enterprises, instead of making up-front payments for their activities. The incentives helped cover additional costs for transport and marketing, allowing the businesses to sell to more remote rural households. Kedir was among the entrepreneurs who took this opportunity, which led to enormous growth for his business. He increased his production capacity by 500 percent in only 18 months, selling between 600 and 800 improved cookstoves per month. The RBF incentives allowed him to buy a truck, which meant that he could deliver the stoves directly to customers in the 12 areas of Oromia. His capital increased to 125,000 euros and he developed a successful marketing strategy; attending local government meetings, the entrepreneur identified influential villagers who would promote his cookstoves in return for a commission.
Results-based financing: a solution for developing rural markets
In addition to Kedir Kemal’s business, four other companies in Oromia participated in the RBF project, as well as eight companies in the northern Tigray region. In both regions, the project recognised that there was a thriving urban market for cookstoves. However, high transportation costs to remote rural areas made the products unprofitable and discouraged investment by retailers in the sector. The so-called ‘Tikikil stove’, for example, costs 7.50 euros in urban markets. Adding costs for transportation, loading and unloading in rural areas, the retail price climbed to 11.50 euros – an increase of 30 percent and a very real affordability barrier for potential customers in rural areas.The RBF incentive scheme tackled this by linking rural cooperatives and retail enterprises with urban-based stove producers. Retailers were incentivised to cover transportation and other overhead costs, thus improving their marketing capacity and reducing costs to maximise retail profits. This meant that stove prices in the rural markets could be set at a fair level. This led to increased demand from rural households and stimulated market development in remote areas. In the case of the Tikikil stoves, retailers were able to offer the cookstoves for the same price as in urban markets and received 4.30 euros for each sale from the RBF project, off-setting transportation costs while generating additional profits. Eventually, companies were able to expand into the wide-scale commercial sale of improved cookstoves and manufactured their products to sustainably meet the needs of the market.
Objectives: overcome market failure in rural Ethiopia through the provision of incentives, which made sales profitable. Due to logistical reasons stoves in rural Ethiopia are more expensive than stoves in urban areas. RBF incentives rendered the price of stoves in rural Ethiopia on the same level as in urban Ethiopia. Thus increased demand and resulted in higher profits for stove producers.
Results in a nutshell
Within two years, 28,000 improved cookstoves had been sold in Oromia and Tigray. The climate-friendly technology reduced cooking times and improved energy efficiency in domestic cooking for around 70,000 people. Customers now use much less firewood, which improves the air quality inside homes and so benefits the health of women and children in particular. Time spent gathering firewood was reduced, and forests were protected against deforestation and degradation. This saved the equivalent of 25,000football fields of forest between 2017 and 2018 alone. With a reduction in fuel consumption there was less carbon dioxide: the cookstoves cut the annual emission of carbon dioxide by about 115,500 tonnes – roughly equal to the emissions produced by 77,000 cars per year. Finally, 98 jobs were created in stove production and marketing in the regions, which motivated other businesses to invest in this sector as well
Lessons learned and ways to improve
RBF proved to be a powerful tool for steering and stimulating market development, unlocking the growth potential of the many micro enterprises active in the cooking sector. The design and implementation of the RBF project generated valuable lessons. For projects or organisations active in the same field, read here about our experiences and conclusions:
1. Target the right actors in the value chain
At first, the RBF project targeted agriculture and energy cooperatives. Cooperatives are well established in Ethiopia and have good rural outreach and a broad member base. They were therefore thought ideal as an intermediary to bring urban produced cookstoves to rural families in the absence of other distribution and retail structures for improved cookstoves in the countryside. Contrary to the project’s original assumption, however, their capacity to participate in the project was very low, requiring a lot of technical support. Moreover, the cooperatives had limited to no financial ability to pre-finance the RBF activities, making them highly dependent on microfinance institutions. More often than not, the microfinance institutions could not satisfy the financial needs due to limited lending capacities, the complexity of their lending procedures, and other priority lending areas. As a result, all contracted cooperatives performed significantly lower than expected and only about 1,000 improved cookstoves were sold.
- A fresh look at the value chain: After two years – and in light of poor performances – a decision was made to work directly with stove producers instead of cooperatives. This resulted in the intended changes and during the last 18 months of the project more than 25,000 stoves were sold. Producers themselves could now decide how and where to sell their stoves, while directly benefitting from the incentives and using these to invest in the growth of their businesses. This highlights the importance of knowing and incentivising the right actors in the supply chain. Be sure to thoroughly research the market before designing an RBF scheme to determine where to target the intervention so that it is most likely to succeed; and don’t hesitate to re-design your approach if needed.
2. Be wary of data collection challenges
Cost-efficient data collection for verification purposes is key to successfully implementing an RBF approach. In the ideal case this means: sales- and customer data is collected and available and is fully digital. In Ethiopia – and especially with small informal businesses – paper-based reporting is still the norm, making customer data collection, which is required for RBF verification, a difficult and cost- and time-intensive endeavour.
- A lack of digital customer data management systems can become a real burden for RBF verification – but if data collection and reporting requirements posed by an RBF project are too strict, smaller less formal companies might be discouraged or outright excluded from participating in the project. Consider whether the extra effort and cost for verification are worth the benefit, and be prepared to accept higher verification costs and more technical support for building up reporting systems if you work in a less developed pre-commercial market setting.
3. Don’t underestimate the need for technical assistance
There is still limited awareness among rural communities in Ethiopia of the benefits of cookstove technology: improved cookstoves have health, environmental and economic benefits, especially for households that purchase fuelwood.
- This challenge remains despite the RBF: To-date, limited awareness still hinders the successful market-based roll-out of improved cookstoves. While the RBF approach as applied in Ethiopia can make it profitable for stove producers to reach out to rural customers, it did not take companies to the point to actively engage in marketing on their own. In market settings like Ethiopia – with mostly small artisanal cookstove producers – large scale public awareness campaigns are needed to complement and support the efforts of companies. Don’t underestimate the required technical assistance support and broader market development challenges if you enter into pre-commercial markets.