Kenya off-grid power accelerator program Innovation Lab ......Dec 06, 2016 · 8 Summary findings from off-grid diagnostic Over 300M USD has been raised (not Kenya-specific), largely

Kenya off-grid power accelerator program

Innovation Lab – Summary

NAIROBI, KENYA, 5-6 DECEMBER 2016

DRAFT – PROPRIETARY AND PRE-DECISIONALAny use of this material without specific permission is strictly prohibited

This report is made possible by the support of the American People through the United States Agency for International Development (USAID). The contents of this study are the sole responsibility of McKinsey & Company, Inc. Washington D.C. and do not necessarily reflect the views of USAID or the United States Government.

1

Contents

• Off-Grid Innovation Lab overview

• Summarized findings from Solar Home System Diagnostic

• Recommendations and next steps from Lab

• Recommendation detail

2

Off-Grid Accelerator Lab – Agenda

Day 1 – December 5 Day 2 – December 6

8:00 - 8:30 Introductory remarks

8:30 - 9:30 Findings from off-grid diagnostic

1:00 - 2:00 Lunch

2:00 – 4:30 How do we increase access in remote

counties?

9:30 - 1:00 How do we improve affordability for

consumers?

4:30 – 5:00 Day 2 preview and closing

Time Content

5:00 – 7:00 Cocktail event

7:00 - 8:00 Registration

Time

8:00 - 8:30 Recap of day 1 and overview of day 2

agenda

Content

1:00 - 2:00 Lunch

9:00 - 11:00 How do we improve financing for the

SHS sector?

2:00- 3:00 Synthesis session

3:00 - 3:30 Summary of final recommendations

3:30 - 4:00 Day 2 closing

11:30 -1:00 Product design-to-value

11:00 – 11:30 Tea and coffee break

3

The Off-Grid Innovation Lab was attended by 40+ people

Participants

GOVERNMENT / UTILITIES

MoEP

• Eng. Isaac Kiva

• Jacob Chepkwony

REA

• Edward Gakunju

Kenya Power

• Onesmus Maina

USAID

• Mark Carrato

• William Madara

PATRP

• Carolina Barreto

• Pepin Tchouate

US DEPT OF COMMERCE

• Tamarind Murrieta

DONORS/DFI

AFD

• Guillame Laurioz

• Mavin Kneib

GIZ

• Venice Makori

Swedish Embassy

• Lena Berglow

SHS PROVIDERS

d.light

• Rohit Jain

SHS PROVIDERS (cont’d)

Greenlight Planet

• Radhika Thakkar

• Oscar Njuguna

• Patrick Muriuki

M-KOPA

• Pauline Githugu

• Kevin Reider

BBOXX

• Anshul Patel

• Andrew Kent

Barefoot Power

• Jackson Machuhi

• Rose Maket

Mobisol

• Henrik Axelsson

Azuri Technologies

• Snehar Shah

• Simon Bransfield-Garth

Pawame

• Majd Chaaya

• Ronald Okumu

BANKS

Coop Bank

• Chris Chege

Stanbic Bank

• Stephen Lovell

• Evelyn Ngatia

FINANCIERS

Acumen Fund

• Lawrence Riungu

Energy Access Ventures

• Ravi Sikand

FSD Africa

• Evans Osano

Energy4Impact

• Shashank Verma

MFX Solutions

• Luz Leyva

TECHNOLOGY PROVIDERS

Angaza Design

• Rasmus Hansen

Grafica

• Yoann Berno

INDUSTRY ASSOCIATION

GOGLA

• Charlie Miller

OTHER INDUSTRY PLAYERS

Open Capital Advisors

• David Loew

• Irene Hu

Formerly with Barclay’s

• Raj Shah

4

Context and objectives for the off-grid innovation lab

The innovation lab

will focus exclusively

on solar home

systems

Outcome

• Prioritized set of solutions (including how to serve

remote counties) that will serve as input into the

Kenya National Electrification Strategy and sector

initiatives

• High-level action plan for the next 2-3 years

5

How do we get to 2 million off-grid connections to

support Kenya’s goal of universal energy access by

2020?

Our innovation lab “problem statement”

6

Contents





7

For our SHS diagnostic, we interviewed over 50 stakeholders active in the

SHS space and leveraged recent sector reports

9

50

22

12

7

50 stakeholder interviews have been completed to date …… supplemented by various recent reports

Example recent reports

• ECA (2016): Consultancy services for

development of regulations, revenue

arrangements, and technical

requirements for private sector

renewable energy mini-grids

• Energy Africa (2016): Compact and

plan of action

• SE4All (2016): Kenya Action Agenda

• ESMAP (2016): Current Activities and

Challenges to Scaling Up Mini-Grids in

Kenya

• IFC / ERC (2015): Kenya Market

Assessment for Off-Grid Electrification

• ECA (2014): Project Design Study on

the Renewable Energy Development

for Off-Grid Power Supply in Rural

Regions of Kenya

• RECP: Rural Electrification with

Renewable Energies in East Africa

• Bloomberg New Energy Finance

report (2016)

Other:

SHS

Providers

and

Distributors

Donor /

DFI:

AS OF NOV 16

Financiers:

Raju Shanga

Mobisol

Azuri Technologies

Energy 4 Impact

Renewable world

DFID

Energy Access

Ventures

Bloomberg New

Energy Finance

Greenlight Planet

Solar Now

SunFunder

Oikocredit

Stanbic

Standard Chartered

M-KOPA

d.light

BBOXX

Barefoot Power

Strauss EnergyOpen Capital AdvisorsMeru County IDC

World Bank

AFD

GIZ

Camco Energy

Acumen

KawiSafi Fund

Co-Op Bank

Shell Foundation

Actis

ResponsAbility

Mibawa

SIDA

Sollatek

Equity Bank

CDC

Commercial Bank of

Africa

GOGLA

Pawame

Lendable

Angaza Designs

IFC

Safricom SACCO

Mercy Corps

FSD Africa

CGAP

TALA

Safal Group

KCB

Family Bank

Deutsche Bank

8

Summary findings from off-grid diagnostic

Over 300M USD has been raised (not Kenya-specific), largely equity;

to deliver an additional 1.5M units in Kenya, industry cost would be 260 -

280M USD

~710,000 solar home systems have been delivered to-date,

concentrated within a few large players and in central and western Kenya2.

1. Off-grid solutions are most economically viable for ~2 million households

3.

9

Experience from other African countries suggest that 20-30% of the popula-tion (or 1.5 – 2

mn households) could best be served by off-grid solutions

South Africa showed that connection cost increased 1.5x past 75%

electrification rate

1.5x

6,025

>75%

8,920

Up to 75%

Average cost per connection in South Africa as electrification scaled

Rand per connection

A similar trend in Kenya

would suggest 20-30%

of the population (~1.5 –

2 million households)

would best be served

through an off-grid

solution

Source: Department of Energy; Stats SA; Eskom; INEP; Team analysis

1.

10

To date, off-grid solutions in Kenya have delivered energy to

~710,000 households

SOURCE: Team analysis

711,300

710,000

1,300

Total off-grid

Solar Home Systems1

Mini-grids2

Focus today

1 Include multiple light points and cell phone charging, >5W capacity

2 All those delivered by private sector; excludes KPLC mini-grids (already counted in national electrification rate) and captive power (including those for tea estates)

Total off-grid connections delivered

Thousand connections, 2011-2016

2.

11

Kenya has one of the most vibrant and successful solar home system

industries in the world

Comparison of Bangladesh and Kenya’s SHS delivery

• Bangladesh considered to have most

successful SHS market

• Bangladesh delivered SHS through

the IDCOL program (including

subsidies and incentives)

• Kenya has achieved a similar

penetration rate of solar home

systems (SHS) in a shorter time

period as compared to Bangladesh.

Kenya’s private off-grid sector has

had tremendous success

2 900

680

KenyaBangladesh

161 44Population

(millions)

~9% ~7%Households

with a SHS2

4 3

Years to

deliver 80% of

the SHS3

Source: World Bank, IDCOL, Kenya SHS companies

Number of SHS sold1

Thousands

1 Represents units delivered between 2003 - March 2014 in Bangladesh and 2011 - 2016F in Kenya

2 8M households in Kenya, assuming 20% of SHS units were to households already with a grid connection

3 The IDCOL program had a slow ramp up (20% of the units took 7 years to be delivered). To equalize, the last 80% were taken to compare timeframes

2.

12

~710k total SHS connections will be delivered in Kenya by 2016,

based on SHS players’ historical sales and end-of-year projections

2016F2015

301

2014

147

2012

11

205

49

2013

712

Total

Source: Power Africa Analysis; Interviews with SHS companies

Cumulative off-grid

Electrification rate1xx

<1% <1% 2% 4% ~7%

95% CAGR

1 Based on 8 million households 2 Assumes 20% of customers currently have grid connections

2 Other includes Greenlight Planet, Sun Transfer, Sollatek, etc.

Annual SHS sales volume per company

Thousand connections, 2012-2016

M-KOPA

and d.light

have 80%

of the

volume

delivered

to-date

2.

13

Nyanza, Rift Valley & Western provinces contain >65% of SHS connections,

with companies targeting middle-class and low-income customers

Geographic distribution of SHS

connections

Vihiga Nandi

KakamegaBus ia

Trans-Nzoia

BungomaElgeyo-Marakwet

BaringoUas in

GishuLa ikipia

Meru

Is iolo

Samburu

Turkana

West

Pokot

Marsabit

Mandera

Lamu

Tana River

MachakosNairobi

Kiambu

Murang’aEmbu

Kirinyaga

Tharaka

NyeriNyandarua

Karicho

KisumuSiaya

Homa Bay

Nyamira

Kis ii

Migori

Narok

Bomet

MakueniKajiado

Kitui

Ta i ta Taveta

KwaleMombasa

Ki l i fi

Waji r

GarissaNakuru

Counties with >5000 existing SHS

SHS connections by Kenya

provincesShare of cumulative units sold, %, 2016

10

20

25

10

Coast <5

Eastern

Nairobi

<5

North

<5Central

East

100Total

Rift

Valley

Nyanza 25

Western

Source: Power Africa Analysis; Interviews with SHS companies

~80% of households (HHs) with

SHS connections are located

within 5-10km of the grid

Underserved counties

Underpenetrated counties

2.

14

SHS companies have raised over ~300 USD mn in funding over the

last 5 years, though not all funds were directly invested in Kenya

Source: Press Search; World Resources Institute; New Ventures; CTI Private Financing Advisory Network; Unitus Capital

PRELIMINARY

89

205

TotalGrantEquity Debt

306

15

Insights

• SHS companies have

experienced a marked

increase in equity

investments since 2014

• Raising commercial debt

finance has been a

challenge (~2x more equity

raised than debt)

Funding raised (non-Kenya specific)

USD million, 2011-2016

3.

15

SHS providers are required to finance 5 main capital requirements –

with main funding requirements in inventory and credit receivables

Capital

requirements

InventoryExpansion

capex

Customer

receivables

Other

working capital

Overheads

Overheads

• To fund day-to-day cost of operations (e.g. SG&A, IT and finance systems,

etc.) that are necessary for running the business as usual

• Includes commercial and process costs

Other working capital

• To level out company cash flows as needed to cover unfavorable supplier

terms, delayed receivables and incidentals – especially unexpected FX

that has not been hedged

Inventory

• To finance down payments to order stock from suppliers, typically paid in

hard currencies

• Recouped within 6-9 months and comprises 30-50% of final retail selling

price to consumers

• Typically low risk capital as products are insured and quality guaranteed

by suppliers, but remains a challenge

Customer receivables

• To extend credit to customers to bridge gap in ability to pay retail selling

price in cash – perceived as high risk due to lack of visibility into customer

creditworthiness

• Debt capital is recouped over 12-24 months, depending on PAYG plan

and products

Expansion capex

• To enable SHS providers to grow operations, drive customer acquisition

and improve capabilities (e.g. financial planning, analytics, pricing, etc.)

Source: Power Africa analysis; Stakeholder interviews

3.

16

To deliver an additional ~1.5M connections, SHS companies have capital

requirements of 260-280 mn USD

SOURCE: Power Africa Analysis

PRELIMINARY

TBD

Capital

requirements

260-280

Expansion

funding (subsidy,

results-based

financing, etc)

Inventory and

receivables

financing gap

140-160

Customer

payments (deposit

and monthly fee)

120-130

Financial requirements and funding waterfall

USD million• Total industry cost of

260-280 USD mn,

mitigated by ~120M

USD mn in deposits and

repayments, resulting

in 140-160 USD mn in

funding requirements

with current payment

structure

• However, financing gap

could increase

depending on:

– Changes to

payment structure

to facilitate

affordability (which

may require

guarantees)

– Expansion funding

or subsidy to go to

remote counties

3.

17Source: Power Africa analysis; Stakeholder interviews

• Over 80% of consumers surveyed1 state that they cannot afford the deposit fee of a mid-range SHS

• Approximately 45% of consumers surveyed1 have periodic income streams, which may limit ability to

make monthly payments

• 15% of consumers surveyed1 said that the major barrier to purchasing an SHS was lack of availability

• Weak enforcement of quality standards leading to >20% defective rate and poor quality perception

• Lack of policy on off-grid in national electrification plans, undermining legitimacy of SHS companies

Barriers to SHS expansion

Consumer

affordability

and

awareness

Regulatory

framework

Themes

• Inventory financing: deficit in large-ticket commercial debt (without significant guarantees) to cover

inventory working capital required to scale rapidly:

– challenge in collateralizing SHS units

– perceived lack of clarity surrounding business models (e.g. unpredictable cash flows, debt-equity

gearing, etc.)

• Accounts receivables financing: deficit in debt to cover receivables working capital required to bridge

customer payment period of ~2 years.

– Perceived risk to lend against SHS providers’ cash flows without transparency into consumer

profiles (i.e. income streams and credit worthiness)

– Perceived lack of clarity in delinquency controls set up (e.g. non-performing loan (NPL) predictive

systems, creditworthiness assessments, etc.)

• Local currency debt: Borrowing in hard foreign currency leaves SHS developers exposed to depreciation

of Kenyan Shilling

Company

access to

finance

• Customer acquisition costs in remote counties can be very high due to low population density and

demand

• Reliance on direct customer interaction in business models makes it challenging to combine customer

acquisition and distribution channels

Remote

county

expansion

We identified several barriers to SHS expansion in Kenya that

need to be addressed

1 Based on October 2016 mobile consumer survey (n=1245)

18

Contents





19

Outcomes – 5 recommendations and 6 ideas to test further to connect 2

million households with solar home systems in 3 years (1/2)

Source: Power Africa analysis

Themes Proposed solutions discussed in Off-Grid Lab Outcomes of discussions

Scale

financing

through

platform• Financing arm – SPV backed by equity from participating

investors and SHS companies that specializes in

financing customer loans (accounts receivables)

• Centralized investment fund – pooling multiple

investors into a single fund that purchases and

securitizes loan book of SHS providers

6

5

• Cash transfer – subsidy or voucher covering cost of

regular instalments and/or deposit fee, supported by a

customer affordability assessment mechanism

• Extended repayment program – loan product covering

SHS deposit fee that is repaid by customer through

longer repayment tenor

Yes – need to explore how

risks are to be allocated

1

2

Expand

customer

access to

finance

Optimize

cost to

serve

• Results-based financing:

– social impact bond with incentive (grant or lower

debt price) for achieving targets

– subsidy auction and incentive to set level of subsidy

in remote areas

• Shared customer acquisition and care utility – co-

resourcing marketing and after-sale services in remote

to capture scale economies

Incentivize

SHS

providers

3

4

Partial – targeted in remote

counties through broad-

based program

Yes – coordinated public

awareness

Partial – joint operations in

installation and repairs

Yes – details to defined

Yes – details to be defined

(e.g., tranches, moral hazard

approach & fund manager)

No – would require SHS

providers to relinquish

customer management

control

Increase

company

access to

finance

Improve

customer

affordab-

ility

Expand

customer

acquisition

in remote

counties

20

Outcomes – 5 recommendations and 6 ideas to test further to connect 2

million households with solar home systems in 3 years (2/2)


Increase

leverage

Partial – supplier/ExIm

conversation

No – already happening

Partial – for early-stage

companies

Partial – one company to

volunteer

• Manufacturer financing – contract negotiations with

suppliers to extend better payment terms on inventory

• “Pay now” discounts – offering customer reduced retail

price for faster repayment to reduce receivables

• Convertible debt – convert to equity within certain

performance bands to improve upside for debt-

providers and to provide cash injection opportunity

• Corporate bond – bond sold to institutional investors to

access additional debt at potentially lower interest rates;

investors attracted by greater liquidity of the bond

7

8

9

10

Optimize

SHS

production

cost• Joint purchasing of components – contract negotiations

for cost of standard components of SHS units, based on

economies of scale

12 Partial – to be explored

further

• Design-to-value – optimizing product design,

specification and materials to minimize production costs

11 Yes – to be done indepen-

dently by SHS providers

• Value brand under different label – launching lower cost

product optimized for production costs and quality

standards

13 No – already happening

Improve

working

capital

burden

Themes Proposed solutions discussed in Off-Grid Lab Outcomes of discussions

Streamline

upstream

supply

chain

Increase

company

access to

finance

(continued)

21

How we will take this forward

Next steps

Input into Kenya

National

Electrification

Strategy (NES)

Shape programs

and funds

Drive imple-

mentation

Share with CS

Energy and Kenya

Power Sector

Finance SteerCo

• National Electrification Strategy private sector

convening targeted for January 2017, including

presenting outcome of this lab

• In advance, coordinate industry position

• Propose to reconvene this Steering Group every

quarter to check-in on implementation

• Provide input into upcoming programs (e.g. World

Bank and AfDB) and investment funds (e.g. Actis

and CDC)

• Recommendations from this lab will be shared in

December 15 meeting with Kenya Finance

Steering Committee (including CS, Energy and

CEOs/leaders of major utilities, banks, and donors)

• Progress the “Yes”

outcomes at pace

and with conviction

• Test “Partial”

further and decide

Yes/No

• Define

implementation

plan for each “Yes”

for next 2 years

22

Contents





23

13 possible solutions to connect 2 million households with solar home

systems in 3-4 years (1/2)


FOR DISCUSSION

Themes Proposed solutions

Examples from other

industries / sectors

Scale

financing

through

platform• General Motors

Financing

(United States)

• A scaled up

BBOXX-Oikocredit

(Uganda)

• Financing arm – SPV backed by equity from participating

investors and SHS companies that specializes in financing

customer loans (accounts receivables)

• Centralized investment fund – pooling multiple investors into a

single fund that purchases and securitizes loan book of SHS

providers

6

5Increase

company

access to

finance

• Cash transfer – subsidy or voucher covering cost of regular

instalments and/or deposit fee, supported by a customer

affordability assessment mechanism

• Fertilizer credit

voucher (Ethiopia)

• Extended repayment program – loan product covering SHS

deposit fee that is repaid by customer through longer repayment

tenor

• College student

loans

(United States)

1

2

Expand

customer

access to

finance

Improve

customer

affordab-

ility

Optimize

cost to

serve

• Results-based financing:

– social impact bond with incentive (grant or lower debt price)

for achieving targets

– subsidy auction and incentive to set level of subsidy in

remote areas

• Esoko (Kenya)

• Best Buy Geek

Squad

(United States)

• Shared customer acquisition and care utility – co-resourcing

marketing and after-sale services in remote to capture scale

economies (e.g., co-funding campaigns, shared call center, etc.)

• RBF clean cook

stoves (Uganda)

• Starbucks

sustainability bond

(United States)

Incentivize

SHS

providers

3

4

Expand

customer

acquisition

in remote

counties

24

13 possible solutions to connect 2 million households with solar

home systems in 3-4 years (2/2)


Increase

leverage

• Amazon

• Avis car rentals

• Employees for-

going salary for

stock options

• Britam corporate

bond (Kenya)

• Manufacturer financing – contract negotiations with suppliers

to extend better payment terms on inventory to SHS companies

• “Pay now” discounts – offering customer reduced retail price for

faster repayment to reduce accounts receivables for companies

• Convertible debt – convert to equity within certain performance

bands to improve upside for debt-providers and to provide cash

injection opportunity to SHS providers

• Corporate bond – bold sold to institutional investors to access

additional debt at potentially lower interest rates; investors

attracted by greater liquidity of the bond

7

8

9

10

Streamline

upstream

supply

chain

Optimize

SHS

production

cost• Joint purchasing of components – contract negotiations for cost

of standard components of SHS units, based on economies of

scale

12 • Contract drug

manufacturers

(India)

• Design-to-value – optimizing product design, specification and

materials to minimize production costs

11 • Toyota

(Japan)

• Value brand under different label – launching lower cost

product optimized for production costs and quality standards

13 • Aspen Pharma

(South Africa)

Themes Proposed solutions

Examples from other

industries / sectors

Improve

working

capital

burden

Increase

company

access to

finance

(continued)

FOR DISCUSSION

25

Extended repayment program – patient loan covering SHS deposit

fee that is repaid by customer through longer repayment tenor


IMPROVE CUSTOMER AFFORDABILITY: EXTENDED REPAYMENT PROGRAM

1

FOR DISCUSSION

Extend payment program mechanism

Potential

customer

SHS

provider

Financier of patient

loan

(e.g., Development

finance institution)

1

2

3

45 Mobile money platform

1 Customer approved for

extend repayment program

(e.g., 18 months instead of 12)

following creditworthiness

assessment verifying inability

to pay deposit

2 Financier disburses loan equal

to value of deposit to SHS

provider

3 SHS provider installs product

at customers house

4 First 12 months of instalments

paid to SHS provider

5 Next 12 months of

instalments paid to financier

Main points

Key features

• Mitigates perception by customer that they are getting product at a cheaper price

• Mitigates cash flow challenges for SHS provider

• Requires robust customer affordability assessment, risk sharing agreement and/or loan guarantee

26

Cash transfer— voucher covering cost of deposit fee and monthly

instalments, supported by a customer affordability mechanism

Source: Power Africa analysis; expert interviews

IMPROVE CUSTOMER AFFORDABILITY: CASH TRANSFER

Main points

Uncondi

tional

voucher

1 Customer approved for voucher

program following credit-worthiness

assessment verifying inability to pay

deposit and/or monthly fee

2 Financier provides customer with

voucher to cover cost of SHS cost

3 SHS provider installs product1

4 Payments for ~12 months to SHS

company if only deposit was

subsidized

Additional points

Conditi

onal

voucher

Customer

SHS

providerDonor

1

32

1 Upon voucher redemption

A Payments based on reduced

kerosene spend for ~12 months to

financier if both deposit and

monthly instalments were

subsidized

Customer

SHS

providerDonor

A

2

FOR DISCUSSION

27

Shared customer acquisition & management utility – joint marketing

and after-sale services in remote counties to minimize cost-to-serve

Market development

Field support

& training Customer care

Customer delinquency

management

Potential shared activities and services

• Market entry

feasibility studies

• Customer awareness

campaigns

• Product trials and

usage trainings

• Stakeholder

engagement and

management (e.g.,

community leaders,

etc.)

• Trainings (e.g.,

agents, product

installers, etc.)

• Sales and service

management (e.g.,

milestone

planning, KPI

measuring, etc.)

• Customized

hotline for each

SHS provider

• Tracking

inbound calls in

local languages,

etc.)

• Specialized

support services

targeted at rural

communities

• Credit scoring

database

• Repayment

interventions

• NPL predictive tools

• Product recovery


Key features

• SHS providers align on non-competing elements of business models

• Managed through a neutral third party or through separation of powers

EXPAND CUSTOMER ACQUISITION IN REMOTE COUNTIES: SHARED CUSTOMER ACQUISITION UTILITY

3

FOR DISCUSSION

28

Identified 3 potential options through which to establish a

shared customer acquisition utility

Description Implications

• SHS providers mutually contract an

existing agency to stimulate

demand

• SHS providers would need to jointly

decide on under-served areas to

enter and the sequence

• Advantages from economies of scale

• Requires some transparency

between SHS providers about

future plans

• Unable to compete on certain

elements of business model (e.g.,

geographic presence, etc.)

• Joint marketing effort between

multiple SHS providers to jointly

promote all products

• Stretching marketing and

advertising budget

• Opportunity for additional

revenues from providing marketing

services to other industries

• SHS providers collectively partner

with an NGO or SACCOs to operating

within remote

• Mutual benefit to NGO programs by

addressing lighting and energy needs

of remote populations

• Access to broader social capital and

area coverage

• Leverage trust and credibility of

partners to sell products

• Savings from less need for “feet-on-

the-ground”

Contract service

Joint venture

NGO or SACCO

partnerships


EXPAND CUSTOMER ACQUISITION IN REMOTE COUNTIES: SHARED CUSTOMER ACQUISITION UTILITY

3

FOR DISCUSSION

29

A results-based subsidy could be structured as an “auction”Payment Repayment Auction process

▪ Requires fair understanding of market size in each county to set

fair “minimum lot”

▪ Encourage coverage and competition in all 14 counties

▪ Allows “price discovery” for level of subsidy

▪ Rewards lower subsidy bids with financing for startup costs

▪ Incentives results, including price reductions to drive volume

▪ Subsidy funded by development partner or GoK

Key dimensions

Set lots1

Bid

2

Select

winning bid

3

Lump sum

payout

4

Repayment

of debt

6

Per unit

payment

5

Starting auction “lot” (minimum number of

households set per county or group of counties

to simplify)

1

Companies bid on level of subsidy per unit

required to serve that number of households

2

Lowest or second lowest bid selected as level of

subsidy in that county

3

Winning company (based on bid and other

dimensions) gets a start-up tranche of funding:

• Debt that converts to grant upon

achievement of minimum target

• If target not achieved, then company repays

debt at market rate

4

All companies receive auction payment per unit

delivered in remote county

5

Companies repay first tranche debt if do not

meet minimum target6

To incentivize performance, achieving certain

targets above the minimum receives an

incentive payment

7

Base incentive

Subsidy fund

Auction lots (by county or by groups of counties)

SHS companies

Consumers

Incentive

payment

7

EXPAND CUSTOMER ACQUISITION IN REMOTE COUNTIES: RESULTS BASED FINANCING

4

FOR DISCUSSION

30

Illustrative investment and cash flow for SIB (social impact bond)

Development

partner or GoK

Social Impact

investment

SIB Fund

Customer

Investment Repayment

SHS company

2

3

1

5

1 Impact and equity investors provide patient capital (low cost

debt) linked to targets number of households served in

remote countries

2 SIB Fund allocates debt financing at preferential terms to

companies who drive implementation

4 Option: Companies receive results-based reward:

• Reduced debt price, with different price bands set for

different targets (including serving remote counties); or

• Conversion of debt to grant, with different percent

conversion based on target achieved. Development

partner or GOK could fund this

3 Company repays SIB fund after covering all projects costs and

margin

5 SIB fund repays investors after subtracting a management fee.

If targets not met, management fee would decline accordingly

(to incentivize SIB fund to manage funds well)

4b

6 Option: Development partner or GoK could guarantee

repayment based on outcomes

6

Social impact bond will be primarily focus on investment from

Social Impact Investors to finance projects for solar home systems


4a

4A

4B

EXPAND CUSTOMER ACQUISITION IN REMOTE COUNTIES: RESULTS BASED FINANCING FOR DISCUSSION

4

31Source: Power Africa analysis

Centralized Investment Fund – structure to include 3 components:

investor syndication, centralized investment fund and packaged loans

SCALE FINANCING THROUGH PLATFORM – CENTRALIZED INVESTMENT FUND

Components Proposed structure

How it meets capital

requirements

• Risk attractive: investor

syndicated across multiple

players and securitized

into multiple tranches;

escrow fund reduces bad

loans

• Scalable: syndication of

multiple investors allows

scalability

• Draw-down access:

Revolver used to finance

working capital of

centralized investment

fund

• Able to be refinanced:

New securities able to be

created as more loans

purchased

• Able to be liquidated:

securitization allows

trading of invested

securities

Investor

syndication

• Term loan used to cover receivables financing and revolver

for working capital

• Loans raised in shilling and USD from both domestic and

international institutions covering banks, insurance funds,

asset managers and pension funds

• Guarantee from concessional financier and FX hedge from

a bank

Centralized

facility

• Loans securitized into 3 tranches and collateralized by

receivables

• Securitization is time-based, after which it will shift to

credit-based once credit scoring facility put in place

• Credit scoring facility evaluates credit of customers using

historical default rates

Packaged

loans

• Customer receivables are sold off to centralized

investment fund at a discount from face value for instant

liquidity

• Escrow fund will hold margin from purchases beyond

inventory cost until default rate proven to be in line with

historical rates

FOR DISCUSSION

5

32

Centralized investment fund aggregates investor funds and

purchases packaged loans from providers, facilitating access to credit

Lending Purchases Guarantee Hedge


Centralized facility

Guarantee

(or equity)

Revolver

provider

Revolver for

other working

capital

SHS

provider 1

SHS

provider 2

SHS

provider 3

SHS

provider 4

Customer loan

sold

Payment to

SHS provider

Term-loan

provider

Guarantee

provider

FX hedge

facility

Term loan (able

to be refinanced)

Derivative to

hedge

currency

changes

Inv

est

or

syn

dic

ati

on

Pla

tfo

rmLo

an

pu

rch

ase

s

Investors

Customers

Centralized facility

plays role of

intermediator• Syndicates financing

from investor

syndication and puts in

place appropriate

currency hedges

• Aggregates funds from

investor syndication

(which may be different

currencies or different

type of lenders)

• Purchases packaged

loans to provide

liquidity to SHS

providers, evaluating

credit risk of SHS

providers

• Can also eventually

“service” the loans

(e.g., collect payments

from customers),

though this role would

be given to SHS provider

initially

SCALE FINANCING THROUGH PLATFORM – CENTRALIZED INVESTMENT FUND FOR DISCUSSION

5

33

Central Investment Fund – Combination of 3 key components

enables centralized investment fund to resolve 5 investor risks


Core comp-

onents

Risks

Currency Liquidity RegulatoryCredit Prepayment

Investor

syndication

• Reduced as loans

are syndicated from

number of investors

who provide less

capital individually,

and provision of

guarantee by

concessional

financier

• Mitigated by hedge

facility

• Reduced as non-

bank shilling and

USD financing also

raised

Centralized

facility

• Reduced through

over-

collateralization and

provision of credit

scoring system,

which reduces

amount of bad

loans

• Reduced through

securitization of

receivables and

provision of varied

investors

• Reduced through

prepayment

tranche which will

absorb early

repayments

Packaged

loans

• Reduced through

escrow fund, which

mitigates incentive

to sell to bad

customers

SCALE FINANCING THROUGH PLATFORM – CENTRALIZED INVESTMENT FUND FOR DISCUSSION

5

34Source: Power Africa analysis

Financing utility – structure to include equity investors, specialist

financing arm, converting SHS providers into inventory sellers

Comp-

onents

Specialist

financing

arm

• Credit scoring facility evaluates credit of customers

using historical default rates

• Funds given to customer passed directly to SHS

providers

• Financing fee taken and given to SHS providers

Inventory

reseller

• SHS providers compete on inventory business only,

purchasing inventory and selling to customers

• All customer receivables financing transferred to the

specialist financing arm

Proposed structure

Equity

share-

holders and

investors

• Term loan used to cover portion of receivables

financing and revolver for working capital, with FX

hedge facility

• Toehold equity raised from concessional financier,

and equity stakes invested by SHS providers

How it meets capital

requirements

• Risk attractive: credit

scoring specialist improves

customer defaults

• Scalable: multiple investors

provide equity and possibly

debt, which allows

scalability

• Draw-down access:

Revolver used to finance

working capital of financing

utility

• Able to be refinanced:

New equity or debt can be

invested on a rolling basis

• Able to be liquidated:

liquidation must occur

through selling of equity

stakes to other players

SCALE FINANCING THROUGH PLATFORM – FINANCING UTILITY FOR DISCUSSION

6

35

Financing utility uses a SPV specializing in end customer financing

backed by equity from participating investors & SHS providers


Inventory

purchase and

financing de-

coupled from

customer

receivables

SHS

provider 1

SHS

provider 3

SHS

provider 2

Customer

financing

specialist

Concessional

financiers

Equity

Equity

InvestorsAll SHS companies would

transition to an inventory

only arm

• They would sell invent-

tory at cost + margin

All customer financing

would be done through a

created customer

financing specialist

• This customer financing

specialist would be

created through a JV

with other providers

and concessional

financiers

• Control of the customer

financing specialist

could still be achieved

by using dual-class

shares

DebtSHS Providers

Customers

SCALE FINANCING THROUGH PLATFORM – FINANCING UTILITY FOR DISCUSSION

6

36

Financing Utility – This structure resolves risks through its

individual components


SCALE FINANCING THROUGH PLATFORM – FINANCING UTILITY

Core comp-

onents

Risks

Currency Liquidity RegulatoryCredit Prepayment

Equity

share-

holders

and

investors

• Reduced as loans

are syndicated from

number of investors

who provide less

capital individually,

and through equity

stakes by

concessional

financier

• Mitigated by hedge

facility

• Reduced as non-

bank shilling and

USD financing also

raised

Specialist

financing

arm

• Reduced through

over-

collateralization and

provision of credit

scoring system,

which reduces

amount of bad

loans

• Reduced through

possible

securitization of

debt that may be

raised, and selling

of equity stakes to

other investors

• Reduced through

prepayment

tranche which will

absorb early

repayments

Inventory

reseller

• Reduced through

offshoring

screening of

customers to

specialist, and lack

of incentive to sell

bad loans

• Reduced specialist

screening of

customers, and lack

of incentive to sell

bad loans

• Reduced as

inventory is

effectively sold for

cash, with

remaining capital

requirements being

expansionary capex

FOR DISCUSSION

6

37

Key features

• Manufacturer finances inventory (instead of SHS company having to take on financing)

• Relatively quick to implement and improves working capital measures

• Reduces financing cost, which could be passed on to consumer (e.g. if inventory is 30% of cost and payment is delayed 6 months, this could save 3-

4% of the finance cost)

• Requires negotiating favorable terms with manufacturers, which is dependent on relative supplier-to-buyer power and previous track record. To

facilitate, manufacturer may need a guarantee or still some payment to manage their own working capital

CASH FLOW

SHS unit supply

(USD)

Month 0 Month 2 Month 3 Month 6

Order Shipping Warehouse Installation

and deposit

It takes 6-9 months of regular

customer installments to recoup

inventory cost

Retail and

distribution

SHS provider makes down

payment to confirm order

SHS unit

Customer signs contract and

makes down payment to

install SHS unit

Month 7 Month 8 Month 30

Instalment

1

Instalment

2

Instalment

24

+1yr +1yr

Regular

installments

Manufacturer financing – illustrative asset conversion cycle

INCREASE COMPANY ACCESS TO FINANCE: IMPROVE WORKING CAPITAL BURDEN

CASH FLOW

SHS unit supply

(USD)



and deposit

Retail and

distribution

Manufacturer financing

provides favorable

payment conditions

(example shows full risk –

SHS company only pays

manufacturer on sale of

unit)

SHS company pays

manufacturer


Instalment

1

Instalment

2

Instalment

24

+1yr +1yr

Regular

installments

Average unit monthly cash flow over 30 months: -45.5

Assuming 100 USD unit

Average unit monthly cash flow over 30 months: -32.5

Assuming 100 USD unit

TYPICAL ASSET

CONVERSION CYCLE

WITH

MANUFACTURER

FINANCING

FOR DISCUSSION

7

38

Key features

• Relatively quick to implement and improves working capital measures

• May only work for a subset of customers that can afford to pay a larger upfront deposit

• Requires sales agents to educate customers on pricing options well as customers may not understand the benefits of “pay now”

CASH FLOW

SHS unit supply

(USD)



and deposit

It takes 6-9 months of regular

customer installments to recoup

inventory cost

Retail and

distribution

SHS provider makes down

payment to confirm order

SHS unit

Customer signs contract and

makes down payment to

install SHS unit


Instalment

1

Instalment

2

Instalment

24

+1yr +1yr

Regular

installments

“Pay now” discount – illustrative asset conversion cycle

INCREASE COMPANY ACCESS TO FINANCE: IMPROVE WORKING CAPITAL BURDEN

CASH FLOW

SHS unit supply

(USD)



and deposit

Retail and

distribution

Consumer pays deposit

equivalent to inventory and

some distribution costs


Instalment

1

Instalment

2

Instalment

20

+1yr +1yr

Regular

installments

TYPICAL ASSET

CONVERSION CYCLE

WITH “PAY NOW”

DISCOUNTConsumer pays fewer monthly

payments due to reduced

financing cost for company

FOR DISCUSSION

8

39

Illustrative approach

Investors

SHS company

Customers

Investment RepaymentService provision

1 2

1 SHS company issues bond, which is repaid by coupons and

face value

2 Investor (typically an institutional investor) purchases bond

Corporate bond


INCREASE COMPANY ACCESS TO FINANCE: INCREASE LEVERAGE

3 Institutional investor may be able to sell bond on secondary

market

3

Key features

• Generally, lower interest rate than loans (though dependent on credit-worthiness)

• Provides access to large number of possible investors

• Gives investors liquidity if able to be sold on secondary market

• Risk may deter investors who have mandate to invest in “investment-grade” bonds

Investors

FOR DISCUSSION

9

40

Illustrative approach

Investor

SHS company

Customer

Investment RepaymentService provision

2

1 1 Investor provides debt financing to SHS company, but with an

option to convert to equity at a conversion price, typically

within a specific timeframe

Option: conversion could be contingent on financial

performance and social impact (e.g. certain number of

households connected) with the conversion price changing

based on that social impact

2 SHS company “repays” debt in kind (instead of cash interest

payments, the amount of the principle grows)

Convertible debt


INCREASE COMPANY ACCESS TO FINANCE: INCREASE LEVERAGE

3

3 Option to convert exercised

1A

1A

Key features

• Attracts investors by giving senior claims at nascent phases of business that may be converted into

equity if business does well

• As cash flows are relatively fixed, investor upside needs to come in form of growth

• An impact investor might be willing to change conversion price based on impact to incentivize

expansion

FOR DISCUSSION

10

Documents

Kenya off-grid power accelerator program Innovation Lab ......Dec 06, 2016 · 8 Summary findings from off-grid diagnostic Over 300M USD has been raised (not Kenya-specific), largely