The off-grid industry is facing a huge funding gap. In fact, more and more organizations such as the World Bank, the IFC, the UN Foundation, ADB, AfDB, etc. are talking about the need of a sustainable energy supply for off-grid regions of the world. In the last years, the awareness about the importance of a reliable energy supply raised as well as the number of tested distribution models or end users financing. The off-grid technology is now available in a wide variety and – far beyond the narrow focus on small solar lamps – also able to provide a comprehensive energy supply. Last but not least, the customers are lining – but yet the energy products reach them only dribs and drabs.
The reason is the huge working capital gap for companies in the off-grid industry. And yet, capital is available in excess in the world. In many organizations there is a veritable "cash outflow pressure", i.e. too much capital faces too few investment opportunities. However, the off-grid industry is still significantly living from donation-oriented projects, state-subsidized tenders and grants from major international prizes. Not a really sustainable basis for building an industry.
Why is it not possible to bring the available capital to the companies? The reason is supposably simple: the companies in the off-grid industry are too small. They range between start-up and mid-size companies, thus below the $ 20 million threshold that many funds set before they even consider finding out more about a company. Normal banks avoid anyway the risk of a commitment in developing countries, microcredit organizations have not developed a concept for companies of this size, and even the relatively new funds focusing on impact or the CSR-funds are usually tied to rigid standards and have not reached the necessary scale yet. They could therefore not substantially help the industry on the short-term, although this actually is one of the industries within their core focus.
The sobering conclusion: the necessary financial instruments to finance small and medium companies in the off-grid industry are still lacking. There was some time ago a similar situation with the micro enterprises in Bangladesh, where banks would not give them loans because the bureaucratic burden on small loan amounts appeared too big. This was the appropriate ground for the now globally widespread microfinance idea, whose most prominent representative is Muhammad Yunus.
The off-grid industry needs today a similarly intelligent and creative solution as the microfinance institutions developed back then. Quasi "SME Finance Institute" for small and medium enterprises. The ingredients are aligned: tested products, successful distribution models, reliable end-customer financing, and a largely subsidy-independent market.
The question remains: where is the person, where is the creative group of entrepreneurial-minded investors, that will assume, in a wise and committed way, the succession of Muhammad Yunus and that will develop an innovative financing concept for the companies in the off-grid industry?
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Comment by Nikhil Jaisinghani on September 18, 2013
Sun connect team,
As the founder of an off-grid company, I respectfully disagree with the argument in this article. Working capital is required for products to get distributed but the larger opportunity is in services and utilities that serve the rural poor. Id like to refer you to the IFMR and WRI authored piece titled "Power to the People where they estimate that demand for products is only a few percent of the larger market. %ir services and utilities, companies need long term infrastructure financing not working capital. Working capital is relatively easy to secure but project financing for rural infrastructure is by nature more difficult.