Reference no: EM131943607

Many farming households in the developing world use traditional biomass, kerosene and liquefied petroleum gas (LPG) for cooking and lighting. Domestic biogas – generated from the dung of farming animals – has the potential to replace other fuels for meeting basic energy needs. However, high-quality systems such as fixed-dome plants1 can be relatively expensive – especially if constructed in remote areas, where not all building materials are readily available, and where perhaps no skilled masons are located. Farmers might not have either the required capital for cash purchase, nor the required income or creditworthiness for raising – and paying back – a credit. A current debate – particularly in international development cooperation – deals with the question of how local financial institutions (FIs) can be integrated in the financing process. It is debatable, and it may differ from case to case, if lending for biogas is a viable business (and FIs have not yet realised the market potential), or if the lending potential is limited and an involvement of the private financial sector is rather more wishful thinking than a realistic option. There have been several attempts for introducing local FIs to biogas finance. Besides technical assistance (such as trainings, capacity building, business development support), different financial support mechanisms have been considered for making the investment affordable for the farmer, and for introducing local FIs to biogas lending. This assignment should assess if and under which conditions i) a biogas plant is a financially viable investment; ii) local FIs can be involved in the development of a sustainable biogas market. BASIC ASSUMPTIONS • A 6m3 fixed-dome biogas plant (size for a small farmer family) costs 660 USD, and has a 15 year economic life-time; • By using biogas instead of kerosene and LPG, and by using the resulting bio-slurry to replace chemical fertiliser for agricultural needs, a farmer can save on average 147 USD p.a. (given fixed prices); • Interest rates for annuity loans under 1,000 USD are 36 percent p.a. (monthly equal instalments); the loan tenor is 12 months.

2. Assuming a positive net present value (NPV) of the investment, the initial capital expenditure (CAPEX) is often not affordable for small farming households. A bank loan could help the farmer to purchase the biogas plant. It is initially assumed that there is no down-payment (equity contribution) from the borrower, and no subsidy from third parties – i.e. the CAPEX has to be fully covered by the loan.

a. What is the monthly instalment (repayment and interest) to pay back the annuity loan?

b. What is the total (accumulated) interest amount paid after 12 months?

c. How does the total payment over 12 months (initial loan amount plus accumulated interest) relate to the annual savings the farmer can generate from not anymore using kerosene, LPG and chemical fertiliser (again considering these savings as revenues, and having in mind that farmers perhaps do not have regular monthly income)? (approx. ½ page)