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Stimulating pay-as-you-go energy access: The role of development finance

PAYG technology has significant advantages in terms of helping consumers at the “bottom of the pyramid,” who are accustomed to buying energy in small increments, switch over to renewable energy systems. PAYG companies in Kenya and Tanzania are currently offering products that meet the Tier 1 (very low) and Tier 2 (low) energy access levels of the multi-tier framework for defining and measuring levels of energy access.

Even at these levels, numerous benefits are realized, largely through substitution of kerosene and other fuels. The product offerings are currently expensive in terms of the effective interest rate paid by the customer. Nonetheless, target customers seem to accept the products, and PAYG company sales are reportedly growing fast. PAYG companies have also attracted international private sector investor interest and have been successful in raising grants (for product development and launches), equity capital (for business development), and debt (for scale-up as business models have been proven). However, this international capital has not been matched by interest from domestic financial institutions.

The dependence of the sector on international debt capital providers, in particular, is risky because of foreign currency volatility. Companies can either absorb foreign currency fluctuations or pass them on to customers, who pay in local currencies. In turn, costs of raising international capital are high because transaction structures tend to be complex and this, in turn, can lead to offerings being more expensive than they otherwise would be.

 

To provide energy access to the large populations in Kenya and Tanzania, in an affordable manner, it will be necessary to create market conditions that allow the entry of a large number of players. Greater competition should increase the number of product offerings available to underserved populations, make available and decrease the costs of auxiliary services, and reduce the overall risks (and therefore expected market returns) of market players.

We argue that many of the technical entry barriers to the PAYG market are already falling and that the key entry barrier is the availability of finance that would enable PAYG providers to finance customer deployments.

We argue that, if this source of finance were locally available, it would protect companies and customers from the fluctuations in foreign currency markets. More important, the market would attract a larger number of players, including local companies. Local entrepreneurs find it particularly challenging to navigate international capital markets, especially when the financing structures are complex.

The international DFIs and donors already have longtanding relationships with banks in Kenya and Tanzania. They should leverage these relationships to help stimulate local lending in the PAYG sector. Local banks often have limited understanding of the sector and an exaggerated sense of the risks of lending to companies in the sector. These challenges can be addressed with creditguarantee schemes, mechanisms to understand the underlying cash flow patterns of PAYG companies, and technical assistance to companies preparing loan applications and to banks seeking to understand loan applications.

 

The IDCOL program of Bangladesh has some very useful lessons for Kenya and Tanzania. The POs of Bangladesh played the same role as the PAYG companies do in Kenya and Tanzania, providing a onestop shop for customers. Unlike in Bangladesh, however, where international DFI and donor money was channeled through a non banking financial institution that performed a wide variety of roles, we believe that, in Kenya and Tanzania, commercial banks should be involved early on in channeling capital. Involving the commercial banks should aid in the sustainability and scale-up of the sector because the financing would not depend only on donor funds.

The banks can adopt the methods that IDCOL used to monitor cash flow patterns of energy enterprises to define more accurate methods, based on the data, of valuing the solar assets for collateral and loan-servicing purposes. IDCOL played roles other than financing and these additional roles were critical to ensuring access with the necessary service attributes of affordability, reliability, legality, and health and safety.

 In Kenya and Tanzania, responsibility for these roles could be handled by organizations in the public sector. Public sector organizations—such as those responsible for rural electrification—can develop, adapt, and monitor standards that protect not only consumers but also investors and lenders. In addition, if grid expansion plans were to be made publicly available, companies could focus on areas where the chances of the grid arriving during the repayment period of the system are small.

 

Results-based financing programs, an important service performed by IDCOL, can be run by NGOs (SNV, the Dutch NGO, runs one such program in Tanzania). Results-based financing programs help companies invest in the lastmile marketing and distribution infrastructure that is necessary to market and service rural energy (including PAYG) systems.

To ensure that service attributes are met, public organizations in Kenya and Tanzania should take on the other roles performed by IDCOL. In particular, they can set up countrywide monitoring and verification systems to ensure that products in the field adhere to WBG Lighting Global and Lighting Africa standards. In some areas, such as standards for recycling, standards would need to be developed.

As we have already seen, 17 foundations, 21 impact funds, four venture capital funds, two corporate venture capital funds, and eight large companies have invested in PAYG companies in East Africa. DFIs should consider investing in a “fund of funds” run by professional impact fund managers, rather than taking the riskier option of investing in individual companies.

 

 

Excerpt of: Stimulating pay-as-you-go energy access in Kenya and Tanzania: The role of development finance, by Sanjoy Sanyal, Jeffrey Prins, Feli Visco, Ariel Pinchot. Edited by World Resources Institute (WRI), Washington D.C. 2016.

 

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