Off Grid Solar Needs Government Supported Vendor Financing – That Means China

Ten years now in off grid financing in Sub Saharan Africa and I have never worked directly with a Chinese Bank or state actor.  Thats unusual because all the equipment I have financed is made there.  It feels like there is a very real wall when it comes to overcoming market challenges in a way that involves all the stakeholders.  Standing back I have to wonder why the export oriented Chinese state banks are not providing end user financing to drive scale into the Africa.  With 100 million and more unserved household customers, there are not many bigger markets.

My reasoning is not groundbreaking.  Sales for cash and without financing are a very small fraction of sales made with credit.  This is true in big poor markets just as much as big rich ones though for slightly different reasons.  In both cases people and organisations like to pay as they use.  However in rich markets this is as much a matter of convenience while in poor ones is a matter of  necessity.  Poor households and small companies do not have reserves of cash to buy equipment in one single transaction.

Vendor finance was a breakthrough when it became clear that the credit risk was more than compensated by the huge increase in sales that results from offering credit.  Originally in the US this was done by the appliance manufaturers and leasing companies when the banks refused to engage and take the risk.  The vendors benefitted from manufacturing AND finance margins.  The leasing companies used volume discounts on buying and additional income from fees and the secondary market.  Never ones to lead when they can follow, the banks gradually got involved.  Government helped with substantial tax benefits to encourage the purchase upgrading of captial equipment and appliances

We face the same situation now in off grid solar with clear demand but low bank participation.  We have huge demand in Africa, and large scale manufacturing in China, but the market is functioning only with relatively small amounts of development grants, soft loans and venture capital.  Numerous studies show the amount of financing needed is in the billions of dollars, and there are only two places to get that kind of money – big governments and the international capital markets.  We are talking and promoting to the latter.  I advocate we do a lot more work on the former.

For the Chinese government and banks, supporting manufaturing is already something they do..  Vendor financing could also be done in a variety of ways.  They could lend to the manufacturers to set up their own financing vehicles.  They could set up a trade bank to purchase receiveables of African customers, mixing portloios from different countries to balance credit and currency risks.  They could provide guarantees and other loss mitigation instruments to support and encourage Chinese banks to engage.

This blog is a first step for me.  In ten years I have never been in a negotiation with Chinese funding represented directly.  When I hve done market studies to look at all available forms of financing for SMEs, or PAYGO companies, or MFIs to particpate in the off grid sector, I have never managed to talk to my Chinese peers.

So if anyone reading this can help me change this and get these conversations going, reach out.

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The Perils of Being a Baby Giant – Hard Times in Store for PAYGO

I say too often when talking about PAYGO Solar that there is no such thing as a small mobile phone company.  I remeber how one of Hong Kong’s richest entrepreneurs invested in the sector back in the 1980’s, initially picking the ‘wrong’ technology.  However such was the scale of his investment, the licences, the human capital, and the number of customers he built up, it all worked out in the end.  But even he is no longer in the sector having long ago sold out to one of the remaining global players.  Mobile telephony moved very rapidly from the lab to national, then international and finally global marketplace.

PAYGO Solar is not mobile telephony, but it is the part of the mega infrastrructure markets where there be giants, and only giants.  It is also part of another huge sector, namely financial services.  Here you can find smaller companies, and even small banks, but they tend to be very specialised fee making institutions, or brokers feeding the big players.  When you are making small amounts of cash from thousands if not millions of customers, you get big in order to be efficient both in terms of transaction costs and costs of capital.  When the business is standardised, expensive senior management can cover a lot of territories.  And then there’s data where scale becomes a positive feedback loop of insights and product refinement opportunities.

The PAYGO sector has seen rapid growth as early movers hoovered up grants, equity and debt.  There can be little doubt that the number 1 goal was new accounts.    We had our own little positive feedback loop going where lots of funding was channeled into top line growth, which became the most attractive PAYGO feature for new investors.   As a result we saw the early movers establish an unassailable lead in fund raising and growth.  Those 5 companies looked so big and strong from the outside – destined to dominate perhaps

But even before COVID the non negotiable commercial challenges of low value high volume consumer finance had started to manifest themselves.  Low transation costs are fundamental.  Higher losses are possible but only if you can predict them with reasonable accuracy, and you have the gross margins to cover them.  Your funding structure needs to be lowest cost and very well structured, and you have to have the cash to pay back your loans on time.

The PAYGO sector had not yet met the challenges of large scale consumer finance, and COVID has made these challenges completely irresistible. Perhaps we felt like we were already big in comparison to the past – but COVID has revealed we are just babies.   It looks like customers are not paying, even if they can, as they take the payment holidays the goverments are mandating.  The growth engine has stopped, and so has cash flow.  Lenders and shareholders who were already frustrated at the lack of cost discipline can now see no way to get cash out, even in the medium term.  We have no reserves – only the promise of more growth.  In this situation the backroom functions of portfolio management, cash and cost control take over.  At least one company has already appointed a hard core finance person to replace the growth oriented CEO.

The prospects are grim not only for the baby giants that we thought we were, but it is hard to see who would risk any serious commercial money in a start up PAYGO company anymore.  I predict a very brutal consolidation at very low cents on the dollar.  New companies and new markets will swing back to being much more dependent on development aid.   Is there any upside? In my opinion, yes.

First the business model is proven.  No one doubts anymore that it is possible to combine low cost quality solar, mobile money and data to offer a level of access to rural populations.  Utility companies are looking at new models.  Governments can see a way to enhance energy access strategies by combining gird and off grid.  Second, the survivors will be formidable.  They will run their businesses better.  They will structure their funding better and the investors will be more realistic.

As to how we can continue to spread the access into new markets?  I believe  there are two options  – a form of franchising, and then broking.  I belive PAYGO solar will end up  end up as part of large regional, if not global utilities, in energy, telecoms or financial services, or huge partnerships between these players.  In this case new companies – start ups must make themselves attractive consolidation targets.  Development money should insist on standardised models with data and credit managementment based on well established processes.   Cost efficency from the start, and a clear view of total organisational health [ie profitabiltity] is a must from the start.  In this way even new companies have an exit based on real value.  They are worth consolidating.

However, there is an easier less costly route which is brokerage.  If we can bring just some few banks on board to hold the receivables at a national or regional level, we can set up networks of brokers managing the last mile distribution and funneling the consumer credit on standardised terms through to these banks.  This is a strategy that lies between expensive and cimplicated PAYGO companies on the one side, and unsophisticated last mile agents on the other.    It is more attuned to the reality of low initial investment combined with immediate, same year fee income.  Locally based, minimally capitalised brokers source the deals and had off to institutions that can mnage portfolios that realise income over the medium term and have the systems to support this.

Vamos a ver


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Integrating What We Know Into Our Off Grid COVID 19 Response

Off grid energy has been small but growing.   The installed base is already in the millions.  Businesses are present across the continent though still not in all countries.   It is increasingly seen as an important part of electrification, and as a result investment continues.  It has been exciting to be involved in forward looking change impacting people and societies for the better

Now COVID 19 is sweeping across the world, irresistible in its impact.  The off grid sector becomes just one tiny part of local and national and regional economies in shut down. In addition to the tragedy of lost lives and suffering, customers cannot pay, or buy.  Employees cannot work. Supply chains are unpredictable.  And young management teams are being tested to do more than sell and grow. So those of us in investment, consulting and development are developing and rolling out our response.  In doing so I advocate we should bring our hard won expertise and experience to bear.  Our criteria must be speed, effectiveness and long term impact.  We should apply what we know and embrace complexity.

Speed:  As funders we talk fast and deliver slowly,  making promises to beneficiaries that we simply don’t keep.  Our chronic slowness and this is not going to change with COVID.  What might be good however is to get real about our timelines for this emergency.  Lets plan backwards from the disbursement and plan our delivery around the conditions at that point.

Effectiveness and Complexity:  As the period of crisis will stretch beyond 12 months, our funding will be needed even 9 months from now.  Our technical assistance will be different, but still impactful.  Lets think through multiple scenarios and linkages.  What companies will still be around when our funding or TA hits?  What will the market look like?  Will they have to pivot and adapt their business model?  Will specialist distributors surivive or will they need to diversify or consolidate?  If we return to distribution of free equipment [please no …], how can the local companies get into the procurement?  Can we seed the market rather than flood it and kill it?

Long Term Impact If we succeed in mobilising and disbursing more funds, let’s keep our perspective and discipline.  We have been dealing with a realisation that portfolio and cost management has been weak in many PAYGO companies.  We have seen that the price point for equipment is dropping rapidly with the disintermediation of wholesalers and the direct entry of quality approved Chines manufacturers.  We are at the cusp of engaging the private sector to electrify public institutions based on remote monitoring and robust and timely payment structures.  Rather than respond to the clamour, lets keep our focus on much needed restructuring and changes for the better in the market.  Conditional and not free funding

Apply What We Know: I have waited in Mozambique [and still wait] for emergency funding to move from the conference to the real world.  In Uganda I have tried to compete against phantom companies set up to soak up development money without real output.  I have visited rural health clinics and schools in multiple countries where there are not one but multiple systems installed.  Maybe they are not working for lack of maintenance. Maybe there is no equipment to connect.  Often no people to operate them.   Our emergency response cannot and should not ignore what we know on the ground.

What is the impact of shutting down an economy where the majority of the population is in the informal sector rather than the formal; in rural areas rather than in cities?  Maybe rural incomes will not be greatly impacted?  Maybe TB and poor maternal health will remain more lethal than COVID.    What should money actually be spent on?

So  lets be realistic and expert in our response.   Let’s have real impact rather than headlines.  And lets move forward and continue to change for the better

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Franchise – The New Paradigm for PAYG Solar

The pay-as-you-go (PAYG) market for scaling access to solar energy is maturing quickly. Building market share through customer acquisition is no longer the top priority, being replaced by cost efficiency and portfolio management. Instead of plowing money and time into new start-ups, ever savvier funders are now embracing consolidation, thoughtful expansion or franchising. The era of the PAYG start-up is dead.

The main promise of PAYG is to provide 10s of millions of customers with basic power and financial services. But that can only happen with constant price reduction, and that requires scale: i.e. larger companies with a relentless drive for efficiency, a low cost of operations, equipment and capital, and thus minimal losses. Unlike start-ups, these companies can also hire the best managers across their entire business, including sales, finance, operations and credit. Finally, they have the capacity to generate big data, and the analysts and systems to exploit this data will not be working in a greenfield operation in Malawi, but commuting to their desks in Paris or Bangalore.

Leading PAYG companies will be formulaic: they will follow mobile money or mobile banking platforms into emerging solar markets, perhaps moving earlier than expected, while avoiding countries without mobile money. Losses will be high on the first 50,000 customers, but recouped through building last-mile distribution, brand and partnerships with mobile phone companies. Such partnerships are extremely valuable and will be available to companies with proven track records, not start-ups.

A large company can take a hit on the first 10,000 customers and dilute it against the next 200,000 yet a start-up will dream of getting to its first 5,000, a number that may convince first round investors but will not be competitive in the long run.

Product sourcing also favors larger companies. The more they source, the lower the unit cost, with orders above 100,000 units being half the unit cost of small orders. Centralized sourcing and lowest cost logistics are the most basic part of cost management for PAYG companies. Big companies will source straight from manufacturers and suppliers in China and bypass intermediaries, something beyond the reach of start-ups.

For PAYG companies to make a significant improvement in the accessibility, affordability and reliability of modern energy for underserved populations, they require large-scale consumer financing. PAYG is essentially a consumer finance business, and there is no such thing as small-scale consumer financing.

Already we are seeing the new paradigm. Engie has consolidated its position as energy transition leader in Africa and India (through acquisitions of Fenix and Simpa Networks), BBOXX has a major strategic, fully commercial investor while Ignite Power and M-KOPA already have the scale. Greenlight Planet and d.light are as much distributed energy service companies (DESCOs) as they are wholesalers and equipment designers.

As a solar company founder in Mozambique, it was clear to me in 2018 that funders had no illusions about PAYG start-ups. For them, market potential is just that – potential.  A million potential customers is meaningless unless you can convince funders that when you have 100,000 customers your expense ratio and losses will support distribution and customer acquisition. If you haven’t already done this in another country, the risk is too high.

So are we now limited to the slow methodical organic growth of a few players? How can we accelerate the spread of PAYG to the rest of Africa? The fastest and safest strategy now is to move rapidly to a franchise model. Development money could be targeted at establishing a start-up that is easily acquired. Current PAYG leaders might share their model if their initial equity exposure is limited but a call option is in place if the new franchisee makes progress. Local entrepreneurs should embrace franchising where equipment and systems are aligned with the franchisor business model. Consequently, development funding and development goals will be assured, expansion will be facilitated and efficiency and ownership will be promoted. Any takers?

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Expanding the Horizons of Pay-as-You-Go Solar

Written as a contribution to the CGAP Blog Series ‘Financial Inclusion and Energy’

As a CEO, investor and consultant in Africa’s pay-as-you-go (PAYGo) solar industry, I would characterize PAYGo solar as a successful innovation. A number of pioneering companies have proven that there are viable alternatives to home solar system financing that can be more accessible and appealing to low-income customers than collateral-based loans offered by banks. Internet connectivity, remote lockout technology and low-cost mobile payments have made it possible for PAYGo companies to reach rural families living off the grid. As a result, access to solar energy has expanded rapidly across East and West Africa. However, I wouldn’t say PAYGo has been an unqualified success.

PAYGo has made huge leaps forward in two areas: control of the asset and payments. Remote lockout technology has enabled companies to monitor and collateralize assets in areas that are miles from the nearest road. Mobile money has helped borrowers in those areas to easily and regularly repay. While these innovations are significant, there has been a lack of attention to the tougher parts of equipment financing: cost control and portfolio management.

We in the industry have more work to do to match our prices to poor customers’ income levels and to improve repayment rates. These are challenges for those of us who are building on the work of PAYGo solar pioneers by expanding into less attractive markets, where incomes are lower, mobile money is nascent and infrastructure can be dodgy. My company, Epsilon, is working on these challenges in Mozambique, where we now have the added challenge of dealing with the aftermath of Cyclone Idai.

1. Lower costs to reach more customers at the bottom of the pyramid
If your PAYGo solar company is selling to customers at the middle of the pyramid and you’re moving up, you’re moving away from the market. Most potential PAYGo customers are at the bottom of the pyramid. To reach them, PAYGo companies must lower their prices at the point of sale or they will run out of customers. At Epsilon, we have focused on driving down the costs of the solar equipment we buy off the shelf and on improving our scale and credit rating to reduce our borrowing costs. We are also trying to reduce our organizational costs and get more done with less.

To fully reach the hundreds of millions of potential off-grid solar customers, however, the PAYGo industry needs to find multiple ways to offer lower costs. Moving into the secondary market is another option that Epsilon is exploring. PAYGo companies can sell refurbished solar units with warranties using the same distribution channels. With useful life cycles of five years for quality solar units, providers could aim to upgrade customers within a couple of years and redistribute (and refinance) their used systems to customers in the same communities with less disposable income. In Mozambique, we will need to build the infrastructure for quality refurbishing and resale, and that is a challenge we are excited to undertake.

2. Understand low-income customers to improve repayment rates
PAYGo solar doesn’t reduce credit risk or make the bottom of the pyramid inherently more bankable. Remote lockout technology, which enables lenders to deactivate delinquent borrowers’ solar systems, is a powerful tool to influence payment behavior, but it does not turn a bad customer into a good one. If you accept customers who are ill-equipped to repay you, they will not complete their contract.

PAYGo companies know what to do when customers stop paying, but we know considerably less about how customers will pay over the life of the portfolio. What are the behavioral groups that characterize the majority of customers? Have we gone through enough full payment cycles to know? In Mozambique, my experience is that customers repay but take longer than the agreed contract term. We have more of a timing risk than a credit risk, and we need to adapt this to get the right balance of price, repayment period, collections cost and cost of borrowing.

Overall, PAYGo providers should make sure that internal incentives align around sustainable repayment. They should also invest in research and experimentation so that they can offer appropriate products, terms and flexibility to different customers.

The future of PAYGo solar is bright
Even if PAYGo companies address these challenges, success still requires a bit of luck. This spring, Cyclone Idai hit our sales zone in Mozambique. While there was limited flooding, loss of life and house damage, our customer’s crops were destroyed, and they were suddenly without any source of income for payments or deposits. As a result, we are facing a 75 percent reduction in payments and a six-month halt to new sales. Some risks can be managed; some are just risks.

But our misfortune with the cyclone doesn’t change the fact to me that PAYGo has a bright future. There is a huge demand for PAYGo solar. If PAYGo companies can reach a price point that supports scalable operations, and if they can leverage software and management tools to collect against their portfolios and run their businesses cost-effectively, they could completely remake equipment financing not just for solar, but for any number of other assets and services that benefit poor customers.

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PAYGO vs Funding Delays and a Cyclone

This is my most expensive post. So far it has cost me $150,000 and 18 months. I’m writing of my PAYGO business which I started with my partners in Mozambique 18 months ago Back in 2017 they funded and I designed, part funded and operated a stripped down PAYGO solar 2.0. We went into this project with a lot of optimism. We agreed that we had both a wide open country opportunity to be the first to sell into the rural Mozambiqcan market.  We felt the PAYGO model was ripe for innovation. Pull away the hardware design, the software development development, the whole run before you can walk approach, and deliver the lowest cost, simplest version possible. We launched with $300,000 including $100,000 of grant funding from DFID to support the first expansion of digital finance into rural Mozambique. We had enough money to build a portfolio of 3000 clients, and full proof of concept, which we felt was essential to underpin the first round of serious fund raising. Towards the end of the first year we received a concessional loan of $300,000 form KfW at an interest rate of ……20%. Such is local funding in Mozambique We thought we had enough money, momentum and forward planning … but then the funding gap kicks in. There are aspects of the funding gap that don’t get discussed much. Clearly there’s a time issue. Funding is complex and needs time.  Knowing this and in spite of my my experience, I was still caught out be the incredible slowness of fund raising, particularly from development sources. And then there is the clear view that potential beneficiaries are not clients, and should put up with anything that is thrown at them.  Without exception, timetables presented and met by me and other applicants were completely ignored by the agencies who made the timetables in the first place.  Incredible delays without any explanation.  Not only does this require levels of working capital to survive the delays.  It also fatally undermines business plans that are time sensitive.  A business that is doubling every 3 months is a different business with a funding gap of 6 months.  So of course our $300,000 of mid year funding had to be made to last 1 year. All growth was put on hold. Every $ was for operations and nothing for expansion and deepening the team. The second surprise was the ‘what if’ – the black swan. OK, no one can necessarily plan to accommodate a cyclone such as hit us.  But we should have built in the pessimistic,’ not our fault but …’ scenario of something less than a triumphant march to success.  Its not easy to justify funds for time delays, and catastrophes.  I started my planning with a 25% buffer and by the time we signed every buffer had been stripped out and we ended up with nothing.  So, when Cyclone Idai hit us last month we were looking for a cushion that we did not have.  The consequence will be a set back in portfolio quality and sales that no private investor or bank will tolerate.  Its a tough situation. My mistake, my lesson learned? Raise more money that you think you could possible use. Imagine success. Imagine funding delays. Raise double or triple what you need and get it tranched. The funders don’t need to release it unless you hit the milestones. But have it available
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Taking PAYGO into More Challenging Markets ….

Iconic Image 2018-09-04We are now well into the second round of PAYGO solar.  I would characterise the first round as a wildly successful innovation and launch.  Some great pioneer teams and companies proved that software and connectivity could take solar lending beyond the collateral bank based loan that had been kept it sub scale for so long.  Connectivity, on/off control and low cost mobile money payments delivered a formula that worked for the lender while opening up the product to its true potential of rural families off grid.  Witness the explosion of access in East and West Africa that followed.  Witness too the over enthusiasm, the over sell and the lack of attention to cost and real collections management.

The second round is here.  Those of us who follow the pioneers have to limit our scope, focus on the basics, and make our way in less attractive markets.  We buy off the shelf.  Our organisational energy is on last mile and customer service which is different in every country. Our management talent accepts the challenge of low cost operations.  We look to solve collections issues with repossessions, refurbishment and resale. We accept and price in that a customers who takes longer to pay can still be a good customer.

PAYGO does not reduce credit risk. It provides a powerful tools to influence payment behaviour through remote switch off and the sale of prepaid bundles.  Mobile money reduces transaction costs.  It does not turn a bad customer into a good one.  Accept weak credits and they will not complete their contract.  But the banking offer to rural populations in developing markets has been so poor in developing markets for so long, that these two breakthroughs allow a leap forward, if we manage the whole consumer financing business properly

All talk?  Together with my local partners I took this PAYGO 2.0 to Mozambique.  Third tier market by any analysis, but also with 4.5 million families off grid, no competition when we arrived, reasonable and growing mobile money penetration.  We felt we could hit the key price point in this or any market, which is the need to match or beat the average monthly energy costs of a family.  We bought everything off the shelf and focused on distribution.  We refined how to activate our customer base.  We tested various terms, deposits.  We learned local accounting and bureaucracy.  We hired, trained, retrained, adapted, encouraged, fired, hired more.  Over 18 months we got our engine revving.  We started fund raising to expand.

And then Cyclone Idai hit our sales zone.  In our single sales zone, while there was limited flooding, loss of life and house damage,  all standing crops were destroyed.  Our customer base is suddenly without any source of cash for payments, or for deposits.  Our baby business is in big trouble and may not survive.  We do not have enough equity or funding to survive a 75% reduction in our payments and a 6 month halt to new sales.

The cyclone and our misfortune does not hide the fact to me, as an investor, consultant and manager that PAYGO 2.0 works.  A huge demand, a price point that supports scale operations, and the software and management tools to collect against your portfolio and run a new business model in a cost effective way – this can only be the beginning. Especially when there are other assets and services that can be folded into our new consumer financing approach

So to finish, the lessons learned for PAYGO 2.0 in more challenging markets

  • Minimum market conditions of customer base, mobile money and ability to hit the local price point
  • Raise enough equity to cover success and setbacks – you don’t have to draw it down until it becomes necessary
  • This is not a technology led business. Nor is it a distribution led business. It is a fully integrated sales and financing business selling someone else’s product and using someone else’s software. Start with at least 3 skill sets – sales, credit management and finance.
  • Finance = accounting, cost management, planning and useful commercial information
  • Train, retrain, and test
  • Distribution and customer service with local language
  • Find out what your real term is fast. Just because you offer 24 months, if you collect 90 % of your money over 28 months then that is your term, and that is what you should price
  • Find any and every way to drive the price to the end user down, while maintaining a sustainable business
  • Credit losses in your first 18 month are not your long term level, as long as you are driving them down systematically
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The Irishman bringing solar electricity to rural Mozambique

Kevin Kennedy’s company sells solar systems to the 4m households without power

Each week, Irish Times Abroad meets an Irish person working in an interesting job overseas. Here, Kevin Kennedy from Rathgar tells us about selling and financing solar systems to families in rural Mozambique

When did you leave Ireland?

I left  in 1983. I was one of those people who used to take the ferry to Holyhead to save money. At least 30 per cent of my year of science graduates emigrated. We went to London and other English-speaking places. Though I left Ireland when economic migration was high, for me it was always going to happen. I wanted to get to know other places, so once I started to travel, I just kept adding other countries such as Peru, Uganda, Spain and Mozambique. Learn a few languages and the world opens up . England was not my destination. It was a place to earn money and a stepping stone.

“So much of what I am was formed in Synge Street. I still feel it”

Did you study in Ireland? 

Over the years and after Trinity College, I’ve picked up a few degrees. The university environment is perfect for learning, but terrible for doing – and I like both. So I’ve used each degree to help me shift direction – from zoology to accounting to social enterprise. In 2009 while dealing with the new reality that a 50-year-old man was never going to get another job in financial services in Europe, I did a Master’s in International Development and used it to get into solar system financing and then mobile money in East Africa. And yet so much of what I am was formed in Synge Street. I still feel it.

Where have you worked since you left Ireland?

I spent five years in the US, and 20 in London riding the financial services boom and raising a family in Surrey. After selling my business in 2008, I lost half of my money trying to rent art online in something that seemed very cutting edge at the time, but was like trying to light a candle in a hurricane. So I stopped that and went to Uganda to help a new company learn how to rent solar systems. I did the “I liked it so much I bought the company” thing, though the reality is I made a small investment which represented the last of my capital.

I managed that company for 18 months and then started being asked to work in other countries in Africa to help do the same. Last year, beginning to feel like consulting was becoming too much like talking about something rather than doing it, I decided to set up another company. I liked the look of Mozambique, got on a plane and did the damn thing.

Kevin Kennedy far off-road in Mozambique
Kevin Kennedy far off-road in Mozambique

Tell us about your work now.

My company here, Epsilon Energia Solar, sells small solar systems to the four million Mozambican households that do not have electricity. We’ve sold about 1,500 so far, so there’s a way to go. The systems cost about €140, which is what many households already spend over a year on kerosene, batteries and the weekly trip to charge up the phone. So while our system represents great value given that it lasts four to five years, the challenge is that almost no family has a year’s expenditure on hand. So we offer hire purchase, and collect the payments using the mobile money system MPesa. This is finance for the poor. Like paying for the telly on the never never in another place and time. Well, in Mozambique we use mobile money as I said, and “never never” becomes “poco a poco” [little by little] over the course of a year, and then it’s done, and family expenditure on light and phone-charging drops to zero.

“A stalwart support base for Benifca, Porto, Sporting Lisbon. Eusebio came from here”

I spend half my time raising money for the business, and half working with staff to build up the company. The team sells far off-road in Central Mozambique where electricity poles will never ever come. We meet local community leaders and begin the process of introducing ourselves, our product and mobile money. It is amazing that where electricity will never arrive, mobile money is already present. So we are filling the gap creating what is beginning to be called the “distributed grid”, which means families with their own stand-alone solar systems.

What challenges are there?

We are taking solar to places where it is unknown, and trying to persuade people to switch over their spending from batteries and candles. And then we tell them that they will be paying using their mobile phones. So it takes a while to get things off the ground, but people learn very fast, particularly when some neighbours take the leap and demonstrate that it actually is a good idea that saves them money and houses full of smoke.

If you wanted to come and work in Ireland, what would your career opportunities be like?

I would estimate the chances of me getting a job in Ireland as a shade over absolutely zero. I am 56, and by now indelibly labelled strange and too independent to manage. There’s no happy return to a professional career when you have been an entrepreneur in strange places. You’ve see behind the curtain and know how companies are made and run and sometimes fail.

What is it like living in Mozambique?

It’s beautiful and interesting. It’s a strange anachronism being a large ex-Portuguese colony, speaking the language of the old oppressors, embracing their music, importing vast quantities of olive oil and wine, and representing a stalwart support base for Benifca, Porto, Sporting Lisbon. Eusebio came from here. Maputo and all the regional capitals have their cafés and villas. There are 4,000km of Indian ocean coast which offers access to the islands, reefs and beaches of Tanzania and Kenya. And then there are the parks – big and empty. Empty because the animals were mostly killed during the long long civil war.

What advice would you give to someone interested in pursuing a career away from Ireland?

I don’t know that I can give advice. For me the urge to get to know the world is an irresistible force. If I am somewhere interesting, and I know it well, there are other places that are more interesting that I don’t know yet. But I suppose what I would say is give it time. A couple of weeks or months doesn’t get you under the skin of a place, and for me, working in a new country is the way to understand more.

What do you think your future holds?

If I have the health and some savings, the future will be interesting because I won’t accept anything less. I think Mozambique will be the last country in Africa that I live and work in though. If we are successful here, I will want to take another leap of faith. Russian is a beautiful language … but maybe now that I speak Portuguese, Brazil might be more fun.

What emigration meant for me as a child simply doesn’t exist any more

Is there anything you miss about living and working in Ireland?

My aunt and her young husband took the boat to New Zealand. Another one went to Canada. It was accepted that we would hardly ever see them. The distances were unimaginable, and I always felt a bit sad for my mother who was close to both. But now, if you miss people, you get on the plane and there you are. What emigration meant for me as a child simply doesn’t exist any more. We have extended absences and much more ability to decide how long we stay away, and how quickly we return. In the return suitcase… scotch eggs and English mustard.

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Renewables using Vendor Finance, Insurance and Islamic Finance

There are more options to funding solar systems to the 600 million who need them than development bank loans

Vendor Financing

  • More is sold on credit than for cash.  This effect is multiplied in developing markets.
  • Major global brands exist in relevant assets in agriculture, transport and equipment.  There is not yet a major global brand in small solar but some Chinese producers of lighting Africa approved products look promising
  • Major vendors are willing to assume or subsidise credit risk because of the dramatic impact on their sales.
  • In developed markets major vendors may well have their own in/house financing companies and achieve a blended higher profitability by combining a manufacturing, distribution and financing margins
  • In developing markets manufacturers have shied away from vendor finance because they do not have the in house credit skills
  • The opportunity is to bring them into the pool of potential funding offering either buy back structures for repossessed equipment; loss pool structures where they absorb losses above a predefined limit or direct subsidy to open up new markets


  • The sector has the risk expertise to support innovative structures to fund portfolios of solar equipment through in house or niche advisory that offer bespoke insurance products for projects and trade in developing markets
  • The sector also needs to diversify their investments to match premium to pay outs.  The funding of portfolios and the repayment profile is a good fit with their financing needs
  • Insurance is a complimentary product for equipment sales into the base of the pyramid for theft, life, health and crop protection
  • The opportunity is to bring them into the pool of potential funding offering offering insurance wrap products for portfoilos; first loss’ catastrophic loss; and default risk

Islamic Finance

  • Equipment financing structurally suited to Islamic finance where shared ownership and sale in place allows one to overcome prohibitions against interest
  • A large part of the target population for financing in North Africa and the Sahel, as well as significant minorities throughout Africa are likely to be more open to sharia compliant structures for solar and other productive assets
  • Islamic governments are also looking for compliant funding structures to invest at the institutional and development level
  • Islamic finance has focused on bonds, property and not on equipment in a systematic way
  • The challenge is to develop the offer at a household level supported by the compliant funding all the way back through the delivery institution to the funding consortium

My recommendation is to drive for proof of concept in a single market. In the case of vendor finance and insurance the counterparts are amongst the largest commercial entities and are currently unfocused on their potential role, failing perhaps to see a short term commercial benefit. To get them to the table one would need something like the PowerAfrica initiative which successfully engaged with major global companies like GE, but in this case it would need to be extended to insurance.

For Islamic finance the issue would seem to be that there is a blind spot to the immediate large scale potential for an Islamic financing program  designed around a particular asset such as small domestic solar.  The same effort needs to be made as in non Islamic finance to figure out and then the detailed financial needs of sourcing, financing and last mile distribution but in this case from an Islamic finance perspective.

This note lacks detail because until there is exchange of ideas at a senior level between the WB and global manufacturers, insurers and providers of Islamic finance, any guess at detail would be just that

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MFIs and PAYGO Companies Need to Get Together

Executive Summary

This overview was funded by PAMIGA

As the installed base of Pay As You Go solar companies in East Africa surpasses 1,000,000 households this form of consumer financing has come to dominate discussions of solar energy equipment lending.  Previous growth strategies of working through partnerships between MFIs and non PAYGO solar companies have generated far less access over a longer timeframe.  However, while PAYGO companies are currently successful as stand-alone companies they face difficult growth hurdles unless they can match costs of funding at bank levels, borrow in local currency, and negotiate a light touch approach to inevitable regulation.  The early competitive advantage of running a dual finance and distribution model will be eroded as agency banking models are adopted by microfinance and other banks and transaction costs are driven sharply down.  Governments and large scale multilateral funding programs seeking to achieve massive scaling of energy access with financing need to encourage a new partnership model where MFIs embrace fully the potential of digital finance and become expert at large scale vendor financing. The best allocation of resources is where MFIs handle credit while PAYGO solar companies provide distribution and manage the software interface for payments and equipment control.

1.  Introduction

The Pay As You Go Solar business model represents a breakthrough in energy access and equipment financing.  The combined portfolios in sub Saharan Africa are already in excess of 1,000,000 households less than 10 years after launch and continue to grow.

Connected equipment provides on/off control of equipment and substantially reduces equipment risk.  Connectivity also provides valuable data about usage which improves portfolio management and feeds into credit scoring models.  The ‘airtime’ model for loan repayment is cheap, flexible and enables matching of repayments to pre-existing household energy budgets, even down to daily instalments.  Equity and debt financing has crowded in to the few companies that have successfully deployed the model to date.

Affordable access to electricity through the medium of PAYGO solar has huge potential to expand – so how can this best be supported beyond the crowding in of equity and debt to a limited number of start-ups?  This short piece looks at some of the obstacles to massive and how to overcome them.  In particular it proposes a revised role for MFIs to engage with the technology and play a fundamental role in expansion.

2.  PAYGO is Transformational for Equipment Lending

Pay As You Go models for the purchase of [solar] equipment combine the supply, service and financing of solar equipment in the same company.  What takes this beyond classic consumer financing arrangements such as car financing is connectivity.  Solar equipment is under the control of the PAYGO company until fully paid.  Various technologies from Bluetooth to mobile phone allow a two way data exchange between the equipment and the PAYGO operator.  In turn data can be managed to enable control of the equipment, switching it off when instalments payments are not made, thus brining the mobile phone ‘airtime’ model to solar.  Where mobile money is available, payments can be made in very small amounts at a very high, even daily frequency.

Connectivity: The ability to turn off the equipment when a customer does not pay has substantially reduced the downside of equipment risk while adding upsides of better screening and information about usage.  In the absence of cost effective repossession, disabling the equipment is a powerful message to the borrower that default has consequences.  Switch off happens immediately a payment is missed and is therefore much more effective than negotiation over days and weeks that is typical of a bank led collections process.  With solar, but also with any income generating asset, the loss of the benefit of light is a powerful incentive to resume payments in the very short term

Data: Connectivity allows data to flow from software platform to equipment and vice versa.  Data flowing to the equipment controls not only the ‘on/off’ state but can be programmed to achieve far more.  Most notably it can control the operation of the equipment in direct proportion to the payment made – just as airtime on a mobile phone.  Data flows the other way, from the equipment back to the software management platform communicate how the equipment and even its various components are working.  Information about usage aids proper management and maintenance of the system.  This allows a customer service function to help rural households get the best from their equipment without the need for a visit from a technician.  Data collected about the installed base and how it is actually used by consumers allows for better design by manufacturers.  Data about customers combined with equipment usage feeds credit scoring models, pricing and marketing

Mobile Money: As mentioned above data and connectivity together allow equipment usage to be tied exactly to the amount paid by the customer.  Mobile money, or mobile banking apps bring a critical third element to bear which is the payment in very small amounts, at very low cost.  The affordability issues of paying for a $100 system are solved only in part by turning this into 12 payments of eg $10 per month.  For a rural household finding and saving $10 is a challenge of itself.  Apps that allow payments in very small amounts can match the actual spending on eg kerosene, candles and batteries, so that no ‘saving’ is required.  Payments for solar energy can be made at the same frequency and in the same amount as payments for previously used energy sources.

The triple effect of connectivity, data and low cost micropayments are what take PAYGO consumer financing models into breakthrough territory from a sales and customer acquisition point of view.  However, the scaling of a company goes beyond a successful product and customer interface

3.  How MFIs Contributed to the Emergence of PAYGO

Financial inclusion and energy access have been the focus of government and international development lending and support for over two decades.  They overlap in programs that seek to use microloans to enable rural households to purchase solar equipment to replace kerosene and achieve basic levels of electricity provision.  The rationale for the involvement of MFIs in solar lending includes their presence in rural communities; their social mission to improve the lives of their clients; their core activity of lending and their access to social funding.

However MFIs have not developed substantial activities in solar lending in Sub Saharan Africa.

  • The cost/quality equation of solar equipment has only reached an affordable level in the last 5 years.  Prior to this good quality equipment was too expensive and poor quality equipment did not last long enough for loans to be recovered without equipment failure causing collections issues.   Equipment risk has been too high for MFIs
  • Equipment financing requires a formal partnership between two completely different types of company – a bank and a technology distribution company.  Without strategic intent on both sides to a systematic approach of shared customer acquisition, customer service and collections, significant volumes cannot be achieved.  Where MFIs have tried to create and run distribution themselves, they have found the second business model too different from their core business to manage effectively
  • The transaction costs for both financier and supplier have high and can only be reduced through scale and good management.  Suppliers must be able to source, deliver and support equipment across large territories and over a long period of time.  Banks must be able to make sufficient margin when repayment amounts are small and disproportionately expensive to process

The cumulative effect of poor experience over more than a decade has made MFIs and banks uninterested to engage at a time when digital finance was transforming the model for solar lending.  When new entrants to solar distribution sought partnerships from banks to launch PAYGO models they encountered very little understanding and no enthusiasm.  This contrasts with the early interest of the mobile network operators who recognised the transformative potential of solar powered phone recharging and who moved quickly to make partnerships in Kenya, Uganda and other markets.

As a result new PAYGO companies set out to understand and incorporate the financing challenge of large scale solar distribution in house.  By combining connectivity, data and mobile money they created a consumer financing model that exists in the digital finance space and outside the regulated activities of banks and MFIs.

In retrospect MFIs have been critical to the development of PAYGO.  Their absence from the market has left a gap that others have filled.

4.  There are Real Barriers to Scaling Stand Alone PAYGO

There is exuberance at the early success of solar PAYGO business models.  In December 2016 Lumos in Nigeria announced $90MM of investment to roll out this business model in Nigeria based on the potential market in Nigeria, its partnership with MTN, its technology platform and the track record of its founder in running technology businesses.  As with other companies in the sector it highlights the sales and technology aspects and downplays the financial service elements.  However, a company that plans to finance multiple millions of customers cannot long avoid the realities of vendor finance – cost of funds, credit risk management, regulation and currency risk where funding is raised in dollars and euros when customers will be repaying in naira.

Cost of Funding:  Small companies pay more for financing than larger companies.  Commercial companies unless they have a ‘cash cow’ in their group, generally borrow higher than banks and MFIs that can leverage customer deposits.  In addition the market will price in a premium if it feels that it is operating a credit based business without the systems and management appropriate to the activity as found in a bank or MFI.  If banks and MFIs get into the business of solar lending at scale, they will have a sustainable and long term advantage of lower cost of funding.

Credit Risk Management: Equipment financing when done ‘in house’ is based on a tension between adding customers and collecting from them – between the short term and the long term.  Financing makes the acquisition of customers easier, but the company only survives if it can collect all the payments due.  Losses must be covered, and provisions push up the price.  It is easier to create an installed base than to collect all the monies due over 2 or 3 years.  While software and connectivity are new tools for managing this tension, ultimately management teams must embrace and include credit risk management into their core strategy and competence.  In the global sector of vendor finance far fewer distribution companies achieve this than choose a partnership route where credit management [and financing] is outsourced to a bank

Regulation: The regulation of vendor financing in Africa is less well developed than in in other markets.  While it is true that the risk of credit losses in companies that retain financing in house is ultimately borne by the shareholders and lenders, there is an overarching risk of abusive practices such as complex and predatory pricing, and upgrades that prolong hugely the indebtedness of the customers.  At present PAYGO companies are not subject to regulation and are seeking to preserve this situation by claiming that they are engaged in ‘credit sales’ or rentals rather than in financial transactions such as leasing, hire purchase or indeed lending.  As their scale grows it is unlikely that this situation will remain unchanged, particularly given the support from multilateral development organisations that promote fair financial inclusion.  The adjustment when it comes will have a price and an administrative effect as PAYGO  companies adjust their models to what banks and MFIs already do

Currency Risk: PAYGO companies are raising money mainly in dollars and euros, but have ever larger customer bases paying in local currency.  In uncertain economic environments this results in a mismatch where at best profitability is impacted, and at worst loans cannot be repaid in full and the company defaults.  Generally banks and MFIs are better matched due to their access to funds in local currency

In summary, the initial exuberance of a sector that has defined an exciting and important way to finance solar equipment must be balanced with a view on how they are positioned to deal with the medium and long term challenges of funding, credit risk management, regulation and currency risk.  Distribution is a short cycle business, and financing is a long cycle business.  Doing both of these in the same company requires a level of management skill that goes beyond sales and technology.  Globally the vendor finance sector has delivered scale more through partnership than though on stop shop distribution finance companies.


5.  Partnership … but not as we have known it

Despite the unpromising start to partnerships between the financial sector and solar distribution companies – even to the extent of solar companies going it alone and creating the PAYGO model, a future restructured partnership seems to promise the best long term outcomes for clients and for both PAYGO companies and banks.

The barriers to partnership in the past were very real for banks, just like the barriers to future scaling for PAYGO companies are also very real.  While it is possible for a PAYGO company to become a large scale, well funded, regulated fully integrated distribution and finance company, it hard to see this being the dominant model in 5 years.  Investors will become more knowledgeable about the true embedded costs and will price their investments accordingly.  Some PAYGO companies will get the sales/credit loss balance wrong and will fail.

More compellingly a positive incentive to partner with banks and MFIs will emerge.  Financial institutions will catch up with digital finance developments and become much more effective at the finance ‘side’ of the vendor finance equation.  Commercial PAYGO companies will look at the challenge of scaling PAYGO across SSA as a dual function company, and they will conclude that a partner that can offer a cost effective and integrated solution for the funding and credit activities frees them up to concentrate on expanding their footprint and bringing new products to market.

The partnerships of the future will be different, and there will be fundamental requirements for banks/MFIs before they can be considered ready.  Some of the requirements:-

  1. Hugely expand mobile banking
  2. Engage fully with digital finance encompassing substantial reductions in transaction costs that can be passed on to end users
  3. Catch up with new credit assessment techniques based on large data analysis and behavioural factors
  4. Lend based on cost savings and embrace equipment control in place of collateral
  5. Become expert at partnership with PAYGO companies
  6. Develop a PAYGO offer that is compliant under Islamic finance principles

The new partnerships will have to explore which tasks should sit in which organisation.  Both PAYGO and new digital finance enabled banks will both be software and data fluent, so potentially either could manage the platform that controls payments and equipment function.  The value of data generated by payments and by equipment needs to be allocated through negotiation.  Differences in initial scale and network need to be accommodated.  In summary a detailed and serious process of match making and partnership will need to be defined to marry separate but utterly complimentary activities and organisations.

But in the short term, banks and MFIs need to make the strategic leap and commit resources to this enormous market, and supporters need to encourage them.

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