Stimulating Pay-As-You-Go Energy Access in Kenya and Tanzania: The Role of Development Financeby , , and -
The solution to the challenge of financing the scale-up of Pay-As-You-Go (PAYG) energy access lies not so much in the development of new initiatives but in the use and redirection of existing approaches for PAYG, particularly the use of credit guarantees, lines of credit, technical assistance, and investment in a “fund of funds.” We offer recommendations to key stakeholders for developing a coordinated approach, including international DFIs and donor agencies, national government agencies involved in rural electrification, and private sector investors who are increasing their investments in the energy access area.
This issue brief draws on findings from desk research, workshops, and interviews with PAYG companies, donors, and development finance institutions (DFIs) active in energy access in East Africa to assess how PAYG companies have stepped up to serve the approximately 35 million people in Kenya and 36 million people in Tanzania who lack access to electricity, as well as additional millions who are underserved. Our paper also draws on interviews with stakeholders involved in Bangladesh’s IDCOL program to provide insight into how DFIs and donors supported the Bangladesh program, in order to elicit lessons relevant to the Kenyan and Tanzanian contexts. We chose Bangladesh’s IDCOL program as a reference point for two reasons: the energy enterprises in Bangladesh perform the same one-stop-shop role as the PAYG companies, and IDCOL provides an example of where DFIs have played a significant role in channeling finance (US$750 million) to achieve substantial energy access goals (three million solar home systems).
Given the nascent stage of most energy access markets, much of the existing PAYG literature focuses on analyzing the innovative variations of business models as well as factors that could improve the enabling environment. However, market players in both Kenya and Tanzania have evolved beyond an early-stage pilot phase. These pioneering companies have successfully raised grant, equity, and—more recently— debt finance to pilot, develop, and scale their businesses. According to our estimates, they have reached more than half a million households through rapid sales growth. The market overall is also evolving, as suggested by the participation of 52 international private sector investors—ranging from foundations to large companies—and five debt deals struck in 2015, the largest of which was a US$45 million raise by one company. Market leaders such as M-KOPA, Mobisol, and Off-Grid Electric have begun expanding into regional markets.
While encouraging progress has been made, the addressable markets in Kenya and Tanzania are much larger than those reached by existing companies so far, and the products they offer need to be larger in capacity if they are to provide more than basic lighting and mobile charging. PAYG companies will require about one billion dollars across these two countries to scale for broader impact. Therefore, this issue brief focuses on how this broader impact can be created. We look at how successful PAYG businesses operating in Kenya and Tanzania have raised finance and the constraints faced by the industry, and we propose recommendations for how donors and DFIs can continue to support the development of these markets.
Currently, the various types of capital (debt, impact equity capital, grant) that PAYG companies need are available almost exclusively from international investors. Local financial institutions in Kenya and Tanzania have been hesitant to provide financing to PAYG customers: they perceive PAYG companies as early-stage, risky businesses and are unfamiliar with the technology as well as the creditworthiness of rural consumers. The absence of local capital sources to some extent explains the fact that almost all the successful PAYG companies are foreign owned and foreign managed. Local companies often lack the initial resources, as well as the networks and skills, to raise both early-stage capital and develop complex financial structures to raise debt capital from international markets. Local companies are also hesitant to take on foreign currency risk.
Technological barriers to the PAYG business are falling, and the sector is likely to see the entry of a larger number of companies. This is not yet happening, because access to finance remains a key entry barrier, particularly for locally owned and managed companies. Finance is most critically needed to build out marketing, sales, and service infrastructure and to provide customers with financing. The relative lack of access to finance results in fewer companies and less competition in the PAYG sector.
Local currency debt could eliminate currency volatility costs, reduce the transaction complexity associated with raising international debt and reduce entry barriers for local companies. In turn, new entrants and increased competition could lower prices and allow offerings of products and services that offer higher levels of electricity access at affordable prices. DFIs and donors have a role to play in supporting local financial institutions to extend local currency debt. In Bangladesh, international DFIs and donors channeled funds for energy access through IDCOL, a government-owned financial intermediary. IDCOL also played a strong role in market development. The market support roles played by IDCOL can be adapted to the Kenyan and Tanzanian contexts. The debt-financing role in Kenya and Tanzania can be played by commercial banks from the very beginning. Involving commercial banks would have the advantage of ensuring that funds are available to the sector even after donors withdraw. Results-based financing involving private donors and civil society organizations could help private sector operators build up their marketing and distribution infrastructure under a limited period of donor assistance. Monitoring and verification functions could be housed within public organizations such as rural electrification agencies, in partnerships with the respective bureau of standards, as per World Bank Group (WBG) Lighting Africa standards.
Drawing on the success of the IDCOL program and the unique needs of PAYG companies, we offer recommendations targeted primarily to DFIs and donors regarding how they can support local financial institutions in their efforts to expand energy access in Kenya and Tanzania.
International DFIs and donors can leverage their long relationships with local financial institutions in Kenya and Tanzania to stimulate local finance for the PAYG sector. DFIs and donors can provide guarantee schemes and lines of credit to local banks. This support would help banks develop a deeper understanding and familiarity with PAYG business models, and make finance more accessible to local companies. International DFIs and donors can “crowd in” private sector investment in PAYG by channeling their investments through fund of funds run by professional impact investors and incentivize PAYG companies to invest in targeted marketing and distribution infrastructure through results-based financing. DFIs and donors can also provide technical assistance to public organizations to support capacity building in monitoring and verification.
Local commercial banks can begin to explore the PAYG sector, and understand company cash flow patterns, through the provision of short-term trade finance. They can also explore mechanisms such as a debt service coverage account to partially cover for default risks. National governments can provide support through a suite of policy and regulatory measures to unlock domestic commercial financing for distributed renewable energy including, for example, the development of mechanisms to coordinate roles of institutions in this space and encourage private sector activity by setting clear national priorities and releasing grid extension plans to the public. Private sector investors can help companies to access different types of capital and partnerships in response to evolving business needs. This may include support for raising capital from local commercial banks. Foundations and family offices can provide loss guarantees to local banks. Private sector PAYG businesses can adopt standardized accounting standards to assist in transactions with local banks.
The scope of this issue brief is confined to analysis of financing in support of PAYG solar home system companies. While we recognize that PAYG products providing lower-level energy services are not comprehensive solutions to the energy access challenge, we believe that our recommendations will also support the broader energy access sector, including mini- and micro-grids.