Can the Bangladesh IDCOL model be used to finance solar home systems in Africa?

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Can the Bangladesh IDCOL model be used to finance solar home systems in Africa?

27/05/2021

The Covid-19 pandemic has affected the entire world and changed life as we had known it before. It is a defining moment for Africa, and we need to make good use of this opportunity especially in terms of increasing electricity access for rural communities and those living in remote areas. The pandemic has revealed how vital it is for every person in the world to have access to electricity[i]. In these unprecedented times, priority has been given to electricity access for health facilities. But we also need to think about electricity access so that citizens can have direct access to preventive information from recognised authorities (governments and the World Health Organisation), through mobile phones and radio. When more people know what preventative measures they ought to take and follow them, there will be less people contracting Covid-19, and a reduction in the number of people seeking treatment. Yet, an estimated 575 million people do not have access to electricity in sub-Saharan Africa. There are several reasons for this, but key among them is access to finance, and more specifically appropriate financing mechanisms for technologies that are easy to deploy in rural and remote areas like solar home systems (SHS).

This is an opportune time for governments, development partners, investors and private sector to work together to accelerate electrification through SHS. These can be considered tier 1 electricity access[ii] providing lighting, mobile phone charging and radio to rural communities. With time, consumers can move on to larger systems. The good thing is we do not have to develop the appropriate financing mechanism to deliver SHS from scratch. The Infrastructure Development Company Limited (IDCOL) in Bangladesh already did it. Between 2003 – 2004, the IDCOL SHS program in Bangladesh delivered 50,000 systems to consumers in rural areas, three years ahead of schedule and USD 2 million below the estimated cost. By January 2019, 4.13 million SHS had been installed, reaching 12% of the entire population in Bangladesh[iii]. Now let us have a look at IDCOL and how they were able to achieve this.

In an interview, Dr Fouzul Khan, the Founder CEO of IDCOL and professor of finance and economics for over 12 years, answered two questions on what we need to know when starting such a programme.

What do we need to know when starting?

Establish or identify a pivot institution: IDCOL is a public-private partnership financial institution that was created by the government of Bangladesh. It is a special purpose vehicle set up to finance large infrastructure projects. IDCOL is funded by the Government and other multi-lateral agencies like the World Bank, Asia Development Bank, DFID, JICA, KfW, Global Environmental Facility, USAID and GPOBA. The company is managed by a Board of Directors drawn from senior government officials, prominent entrepreneurs and/or professionals from the private sector. To achieve the kind of results seen in Bangladesh, this institution needs a high degree of autonomy so that management and the Board of Directors can make decisions and implement them.

Build a respectable institution: For the SHS progamme, IDCOL initially received funding from the World Bank and would on-lead the money to qualifying microfinance institutions. Since this is an institution that is handling large sums of money, it must be credible and be of good standing in society. To be of good standing, the institution must demonstrate competence, be flexible – learn and listen to others, be respectful to other stakeholders and be above reproach on corruption.

Get a leader with good negotiation skills: because not every proposal or idea presented to the financing institution will work in the local/national context even though it has worked elsewhere. Being able to evaluate the idea, how it will affect the SHS programme and making the right decision is a key ingredient of success. The leader of the institution should be prepared to say no to ideas that will not work. Communicating the ‘no’ decision and continue to attract funding for the programme requires tact. The leader of the institution should also have a good understanding of how bureaucracy in the specific country can affect the operations of the institution and take measures accordingly.

There will be roadblocks: so the leader needs to stay updated on other things that are happening that could affect the SHS program either positively or negatively. Again, here, negotiation is key. The question we should be prepared to answer is, ‘How do you keep the financing program on track when roadblocks arise?’

Can the IDCOL model be replicated in Africa?

No, the model cannot be replicated, but is can be adapted. We borrowed the model from Sri Lanka. If we had not tweaked some things to suit our context, we would not have achieved what we did. The key word here is to adapt the model to the unique context in each country on the continent.

Currently, there is significant goodwill from ecosystem players conducting surveys[iv],[v] to find out how off-grid companies (such as those distributing SHS) have been affected by the Covid-19 pandemic. In response, investors and development finance institutions have set up relief funds to address the immediate financial needs of companies[vi],[vii]. While many governments have not prioritised off-grid electricity access, there is a huge opportunity to leverage the efforts of ecosystem players to accelerate progress towards the attainment of SDG 7 in rural areas. Adapting the IDCOL model to finance the delivery of SHS will enable governments to reduce the electricity access gap and the impact will remain even after the pandemic has gone or the world has found ways of coping with it.

Let us take a step back to look at consumer financing in Africa’s SHS sector, in a simple way. The cost of purchasing a solar system is usually out of reach for many potential consumers, hence the need for financing. Consumer financing for SHS has mainly taken two models. The first model is the innovative pay-as-you-go model that enables companies to extend credit to consumers. Here consumers pay a minimal deposit then make weekly or monthly payments until the solar system has been fully paid up. In the second model, SHS companies partner with financial institutions who provide credit to the consumers. The second model enables companies to concentrate on other aspects of the business. This model is receiving more attention because pay-as-you-go companies have realised integrating consumer finance into the business makes it capital intensive and complex.

However, many financial institutions do not have enough information on SHS and are reluctant to lend to these SHS companies. Commercial banks argue that the companies are small, early stage and cannot provide security. They are also not sure of the quality of products being sold. The companies are reluctant to borrow from micro-finance institutions on the other hand which may charge high interest rates to make their business viable. The IDCOL model in Bangladesh addressed these challenges.

Remember in the last blog, we mentioned that IDCOL is a non-bank financial institution that finances infrastructure and renewable energy projects. For the SHS project, IDCOL provided local currency debt to partner organisations that would in turn provide consumer financing. The criteria used to identify partner organisations was; those that would provide consumer financing at an appropriate interest rate, had rural reach, were installing good quality solar products, could provide customer service, and collect payments.

For the first two years when the SHS Program started, Grameen Shakti was the only partner organisation. Grameen Shakti was established in 1996 as a non-profit with the aim of supplying renewable energy to households at affordable rates. To achieve this, Grameen Shakti trained local technicians and field staff on renewable energy. To date, the company has 1500 offices spread across rural areas in Bangladesh. Grameen Shakti works closely with women by training them as technicians so that they can install, repair and service SHS in their communities. By 2012, the partner organisations had increased to 40.

IDCOL would receive funding from development finance institutions like World Bank and advance the same to partner organisations like Grameen Shakti as debt. Grameen Shakti would then sell SHS to consumers on credit, and provide installation, maintenance and customer service. The loan to the partner organisation was advanced at 6% interest rate over a six-year period and was refinanced at 80%. Security for the debt was based on cash flow, and the balance sheet of the partner organisation was not considered. This ensured that more partner organisations could qualify for the debt facility. At the partner organisation level, the credit to customers was at 12% interest and repayable within three years.

What brought the success that was witnessed with this IDCOL model? Well, three things. One, was the 80% re-financing that ensured partner organisations shared in the risk, albeit to a lesser extent. Secondly, the interest rate paid by households was reasonable hence many households could afford to take the credit offered by the partner organisations. Thirdly, the partner organisations had an incentive to earn from increased sales.

Summarising what we shared last time and the content here, there are a few things that we can learn from the IDCOL model:

Governments need to be intentional about financing the uptake of SHS across the country.
Setting up an independent institution like IDCOL is a crucial step in the process. Remember, the IDCOL equivalent must have credibility among development finance institutions and partner organisations. The institution needs strong leadership.
The criteria for partner organisations should be able to accommodate a good number of organisations with rural reach.
The debt facility should be designed in such a way there is an incentive for partner organisations to participate.
Develop a suitable mechanism to address the challenges of security, which in many cases prevents local organisations from accessing the debt facility.
The partner organisations should commit to a pre-determined interest rate so that the SHS products are affordable to consumers.

With these first steps, governments will be well on their way to increasing the number of people accessing electricity for the first time. However, it is important to keep adapting the programme to emerging realities in each country and address any roadblocks as soon as they arise.