Articles

Is PAYGO a good business model for local solar SMEs?

@Stiftung Solarenergie

Africa’s PAYGO sector is dominated by non-African companies, some of which compete heavily with each other through their investors. They have adjusted to the multiple risks and side effects of the PAYGO model, including a shift in the main customer group from remote to peri-urban customers.

In doing so, they also prove that PAYGO is definitely not a panacea for providing remote areas with solar energy. It is a double-edged sword that can bring not only great benefits, but also much misery for customers and affected companies.

Ultimately, when using the PAYGO model, it is always necessary to take into account,

  • when and for which customer groups which PAYGO model is suitable (individual or community-based lending) and
  • for which customer groups which type of investment funds should be used for this purpose.

For poor households in remote areas in particular, purely commercially driven PAYGO loans quickly achieve the opposite of what they set out to do.

 

A PAYGO business for local SMEs?

But what does this mean for local solar SMEs, those many small African companies with a majority domestic shareholder structure that are often active in selected regions? These solar SMEs are usually driven by a strong social motivation: they want to bring a reliable and clean power supply to rural off-grid regions. Many founders grew up with kerosene lamps themselves, and they are driven by a sincere desire to improve the lives of remote people.

Because a lot of noise continues to be made about PAYGO internationally, they easily fall prey to the fallacy that a lot of noise means good business. In the deceptive hope that commercially operated PAYGO actually combines economic profitability and energy access for remote areas, they eagerly launch their PAYGO careers – and all too often end up disillusioned and in debt.

This is because end-customer loans are a complex financial product whose special costs and risks are usually not sufficiently considered by solar SMEs: from the costs of collecting the – often delayed – installments, dealing with loan defaults, the costs of the investment capital raised, up to high currency risks. The expense and risks of PAYGO require the establishment of a professional credit department – which is not worthwhile given the small number of products that a local solar SME typically turns over.

One way out, of course, could be for several SMEs to join forces and establish a joint PAYGO administration. In this way, local SMEs could also pool their market power and obtain better purchasing conditions from manufacturers. However, such a more cooperative model for PAYGO has not yet been implemented anywhere in Africa.

 

Sales partner of an international PAYGO corporation?

Often, solar SMEs are presented with another option: one day, an offer from an international PAYGO group flutters into the house with what at first glance appears to be a tempting offer to become a distribution partner. At first, it seems like a win-win situation: the international group takes over the supply of products as well as their pre-financing, the SME takes over installation and the collection of credit installments as a service.

For the international corporations, the model is quite interesting: Not only do they outsource some risks, but they can claim to the outside world that they create local jobs with their distribution policy.

But for the solar SME, these contracts – despite all the differences in detail – are usually of little interest: the potential profit for the solar SME remains marginal, but some risks of the PAYGO business are transferred to the solar SME.

Even more: it is not uncommon for the Solar-SME to be used in such a sales “partnership” only for the international corporation’s own market entry. If there is good demand in a region and the corporation’s own products have been introduced thanks to the Solar-SME, it may well happen that the international PAYGO company opens its own branch exactly there and then squeezes the Solar-SME out of the local market with more favorable prices.

In most cases, solar SMEs are therefore well advised to review the initially tempting offer very critically and negotiate subsequent improvements: reduce their own risk, increase profit, and include protective clauses against being squeezed out by the international company.

 

PAYGO for Solar-SME

Given the obvious problems and risks involved in the PAYGO business, solar SMEs should not look to it as their main business activity. The economic risks are too great, and the competition from international PAYGO companies is simply overwhelming.

Nevertheless, the social concern of solar SMEs to bring energy to poor households in remote areas need not be completely abandoned. Even as a local solar SME, one is able to serve this group of customers if two conditions are met:

  • there are sufficient (repayable) grants available for co-financing/subsidization

or

  • the risks and expenses of lending are taken over by a SACCO / MFI experienced in this field.

 

Five recommendations for local SMEs

  1. Do not underestimate the cost and effort of setting up your own PAYGO credit department. These are usually simply too high for a locally operating SME.
  2. Do not underestimate the aggressive market power of the international PAYGO corporations. They are under immense pressure from their commercial investors and can hardly consider the interests of local market players in their strategy.
  3. Be suspicious of offers from international corporations for distribution partnerships: Do they really offer an economically interesting win-win situation, or do all the advantages lie with the PAYGO corporation?
  4. Don’t try to become just a scaled-down copy of the big PAYGO corporations. Instead, look for your own profile with a profitable core business where you can play to your own advantages as a solar SME. Your advantage is greater product flexibility and personalized customer service.
  5. But don’t give up the social ambition of bringing solar energy to remote areas! This can still be a subordinate project business. But plan wisely and with caution what risks you can take for this as a business enterprise. Because you also have a social responsibility for your employees and the protection of their jobs.

 

 

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