The state should build markets, not become them 

Bangladesh's solar home systems programme did something public policy often struggles to do. Starting in 2003, IDCOL brought together development finance, microfinance institutions, NGOs and private companies to take solar electricity to places beyond the reach of the grid.

By 2018, more than 4.1 million solar home systems had been sold, providing electricity to approximately 20 million people. This growth fostered an ecosystem around the solar value chain, creating new business opportunities for cottage, small and medium-sized enterprises (CSMEs) across Bangladesh.

But then the grid arrived, much faster than expected. Another public programme, TR/KABITA, was also providing solar systems free to eligible households.

IDCOL had effectively created a market and, as the World Bank's retrospective, "Living in the Light: The Bangladesh Solar Home Systems Story", observes, rapid grid expansion was the dominant cause of the market's decline, while the free systems added to the pressure. Better coordination between these public interventions could have reduced the damage.

This raises a fundamental question, one that goes well beyond solar.

What exactly should public money do when we are trying to build enterprises and markets? Should the state keep becoming the market? Or should it use regulation, incentives and public money to make the first move, then allow entrepreneurs and competition to do the rest?

This author's contention is that public money should show the way and take the first risk.

But we need to be much clearer about which risk that is and who should take the next one.

Often, the first risk lies in coordinating institutions, making reliable information available or building infrastructure that everyone needs but no individual enterprise can sensibly provide. An entrepreneur must still take the risks of entrepreneurship. Public money cannot make those disappear.

A small producer cannot create a national quality standard, much like a small group of farmers cannot build a national cold chain. Neither can one entrepreneur create a functioning national collateral registry or fact-check reliable market information across an entire sector.

These are macro constraints. Solve them, and private enterprise can do more with the capital it already has and become easier to finance at the same time.

Agriculture makes this especially clear. A recent World Bank review of Bangladesh's agricultural public spending found that, between FY19 and FY23, 45.1% of agriculture-specific expenditure went to payments to producers. Agricultural research received 4.2%. Knowledge dissemination received 8.5%, and agricultural infrastructure 5.6%.

Of course, producer support is vital. Protection against shocks, volatile prices and rising input costs matters enormously for farmers and the national economy. But the numbers should still make us uncomfortable because we are spending a great deal helping farmers produce, but far less helping them become more productive, perpetuating a cycle of subsistence for millions of households.

A small producer cannot create a national quality standard, much like a small group of farmers cannot build a national cold chain. Neither can one entrepreneur create a functioning national collateral registry or fact-check reliable market information across an entire sector. These are macro constraints. Solve them, and private enterprise can do more with the capital it already has and become easier to finance at the same time.

Investments in productive assets, infrastructure and technology diffusion will help break this cycle.

They can also help alleviate an entrepreneur's biggest challenge: access to finance. A business can be perfectly real and still be almost invisible to a bank, while a paper tiger can look convincing in a credit file. The real business may have customers, years of sales and reliable suppliers, yet little that a conventional lending process knows how to assess.

Bangladesh already has many of the pieces needed to make smaller enterprises easier to assess, including credit histories, transaction records, identity information and a legal framework for movable collateral.

But these pieces do not talk to each other particularly well. Nor is there enough clarity about how they should come together to help a viable business obtain finance suited to what it is actually trying to do.

Making those systems work together is a useful place for public money to take the first risk. It gives lenders a better basis for judging a business. But the lender must still decide whether to lend, and the entrepreneur must still make the business work.

The IDCOL story offers another warning: public policy must plan for what comes next.

The World Bank's retrospective is candid about the need for an exit strategy from the start. The programme was designed to provide electricity before the grid arrived. Eventually, the grid did arrive. What hurt was the speed of that transition, combined with parallel public programmes working on different assumptions.

One arm of public policy had spent years helping build a commercial market.

Another was giving away a similar product to poor households. Grid expansion was proceeding on yet another track. The transition displaced much of the rural solar ecosystem that public policy had spent years helping to build.

Grid expansion was itself a public achievement.

There was no reason to preserve demand for solar home systems where households now had a better option. But the financing relationships, technical skills and service networks built around solar were worth carrying forward. Better transition planning could have helped firms adapt and put those capabilities to use elsewhere.

That is the part of the IDCOL story worth carrying into other sectors. Public money should concentrate on things no individual entrepreneur can sensibly provide, and it should anticipate how the market it helps create may change. Shared infrastructure, credible information and functioning institutions benefit many firms at once. That is also why any one firm has too little incentive to pay for them.

Once those foundations exist, the role of public money should change. Temporary support should come with a built-in exit strategy. Standards, registries, research and public infrastructure will still need maintaining. The test is whether entrepreneurs can thrive without continuing to depend on the programme that helped them get started.

Public money should take the first risk. Entrepreneurs should still have to take the next one. If we get that division right, the state can leave behind something more valuable than another programme: a market capable of carrying on without it.

Saba El Kabir is a sustainability practitioner and the founder of Cultivera Limited. He can be reached at saba@cultivera.net.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.