By Jesper Hornberg, Associate Director, KPMG
Today, more than 600 million people in sub-Saharan Africa are living without access to electricity, most of them in rural areas. This is due largely to the high cost of expanding grid infrastructure to poor and remote locations. Access to sustainable off-grid energy in Africa has drawn an enormous amount of attention from donors, activists and private investors. The off-grid solar lighting industry, in particular, has grown quickly in recent years thanks to advances in technology and falling costs. However, many poor consumers still struggle to afford the up-front costs of solar products.
A promising new business model has emerged to address this challenge: it is called pay-as-you-go technology or PAYGO. It functions by distributing solar products to rural homes and businesses, and charging customers in affordable incremental payments. Payment collection is done through existing mobile money infrastructure, making it relatively cheap and effective to track customers and enforce payment. In addition, the solar cells can be remotely turned off if a customer does not pay and tracked down using GPS coordinates. The result is that businesses can provide rural Africans with power at the same or lower costs than kerosene.
KPMG’s International Development Advisory Services Africa manages The Africa Enterprise Challenge Fund (AECF), which in the last two years has funded nine PAYGO companies in East Africa. These companies provided clean and affordable energy to about 1,2 million people, as of yearend 2014, a number that has grown in the multiples since.
PAYGO companies provide a range of products and services, from utility-based payments to small systems capable of powering lights, mobile phones and small radios for individual consumers, and large systems that can power TVs and fridges for small businesses.
Although growing quickly, the industry is quite young, and companies are still working through the complexities of their business models. Last mile distribution is one major challenge. For AECF’s PAYGO portfolio companies, various things are driving success: access to a lot of working capital; a strong management information system; effective and hands on sales and distribution; and an experienced management team.
The AECF provides grant funding to PAYGO start-ups. This has been critical to the success of the companies for two reasons. First the grant money has been used to fund initial product development, distribution systems and management information systems (MIS) necessary to start operation. Second and even more important, has been the lowering of the company’s risk profile. Investing in Africa is seen as particularly risky by investors. Support by the AECF assures investors, and has led to the fund’s contributions being leveraged five to 20 times over.
For more information on pay-as-you-go technology, read the KPMG IDAS impact paper, written by Jesper Hornberg, an associate director at KPMG specializing in renewable energy, technology and investment.
The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of any KPMG firm.
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