Receivables financing – the true revolution that will power Africa
Some 600 million people in Sub Saharan Africa and approximately 90 million Nigerians lack access to electricity. It’s a problem that is progressively being fixed in other parts of the world but in Africa as a whole, the increased demand from population growth continues to outstrip the collective efforts of governments to bring power to off-grid households.
As noted recently by the Minister of Power, Works and Housing at a conference sub-themed, ‘The Interplay of Technology, Economics and Law,’ to make electricity available to all Nigerians, efforts must be concentrated to develop renewable energy along with conventional power plants to maintain a balanced energy in the short, medium and long-term. Renewable energies are the fastest power plants that can be deployed as the technologies required are compatible with what he described as the nation’s decentralised, stand-alone ideal for local, rural communities.
At its heart, providing energy is a financial, not a technical problem and cash-strapped governments have been unable to invest the huge quantities of cash needed to simply roll out the grid continent – wide. So why is it so hard and how are the private financial and service sectors bringing a dramatically different solution?
When we think of electricity, we think of a large power station and the grid to bring the power to households. But in rural Africa, with huge land masses and relatively low population densities, the cost of simply wiring up households is much higher than in cities. Couple this with modest household incomes from rural pursuits such as agriculture or small traders and the math simply does not add up. The cost of connecting the customer outweighs the future revenues from that customer and that makes financing conventional grid extension very difficult.
Added to this, is the customer dimension – a power socket is only useful if you have the money to pay for the electricity you use and the devices you want to power (like a TV and lights). So, the problem is not just financing the electrification but also at a consumer level, financing the capital of the items that will use that electricity.
Fortunately, there is a quiet revolution underway that will solve this problem. It started in 2011, with the introduction of pay-as-you-go (PayGo) solar powered devices. Here, instead of requiring a grid connection, consumers are able to get their own micro power station in the form of a solar panel and battery storage, coupled with the devices it will drive such as lights, radio, TV and in the future fridges, hair clippers, irons and so on. The key to PayGo is, the customer is not required to find up-front capital but instead can get a system that is paid for as it is used and after a period of time, typically 1-3 years, the system is unlocked and the future power is free.
PayGo solar power has unlocked over two million households in Africa in the last 5 years. But that still leaves 118 million households without power. In part, that is an execution problem but it’s also a finance problem. A PayGo company is deploying an asset in the hands of the householder and expecting to be paid back over a period of years. But PayGo companies are not banks and cannot easily raise the massive finance needed to tackle the wider problem.
Enter Receivables Financing…
As PayGo companies have become more successful, a number have been able to demonstrate strong customer repayment histories, often better than those achieved by the microfinance industry. Leading PayGo companies such as Azuri Technologies have now been able to use this track record to create Receivables Financing investments. Receivables financing is essentially like a mortgage: institutions provide debt finance secured against the asset, in this case not the PayGo solar products themselves but the expected future customer revenues. Just like a mortgage, it is now possible to cover the cost of providing solar power using commercial debt finance that is secured on the future customer revenues from those solar power systems. In effect it is indefinitely scalable – the more households you deploy power to the more households you can finance.
Although the idea of Receivables Financing has been around for many years, it is only recently that leading PayGo companies have been able to demonstrate the required track record to attract commercial investors. An example is Azuri Technologies, who announced an industry-leading $20 million receivables financing facility in January 2018.
While it is still early days, Receivables Financing has the potential to revolutionise the off-grid power sector. It benefits from a virtuous circle: the more finance, the more track record, the more finance. And unlike finance for grid extension, Receivables Financing would enable PayGo solutions and that includes not just the power but also the devices it enables. For example, Azuri’s AzuriTV offering delivers a 24” TV with Startimes satellite subscription, offering 33 channels of content, plus lights, radio and other appliances coupled with all the solar power and storage needed to drive them. From the customer perspective, it is a complete end-to-end solution, not just an enabling technology.
It does seem that this approach to service provision is the way forwards. Prospering a new generation of knowledge-savvy households, where householders pay for the services they get rather than the items that make up that service. In this way, the complexity and risk of creating your own solutions is transferred from the end customer to the service provider, driving unparalleled levels of customer service (because if the service does not work, the customer does not pay).
And this revolution in customer service, is driving the very revolution in payment track record that enables Receivables Financing.At last a good news story for the finance industry, on how a mix of technology, finance innovation and hard work is transforming life for millions of households.
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