Between 2021 and 2024, the Ugandan OGS sector will need an estimated annual investment of USD 95 million to achieve universal energy access by 2030. Grant funding will remain an important vehicle to incentivize companies to invest in new technologies, expand to remote off-grid regions, and cultivate the next generation of OGS companies to accelerate energy access. Equity financing will enable early-stage businesses to refine innovative business models, fund ongoing operational activities and growth, and facilitate access to debt. Debt financing will play an important role to meet working capital needs, particularly for capital-intensive PAYGO companies.
Uganda’s OGS sector, however, is projected to raise an annual investment between USD 9 million and USD 36 million in the next three years, representing only 9% to 38% of the required capital. Based on information available to UOMA, the Ugandan OGS market has absorbed an estimated investment of USD 15 million annually over the past three years. In addition, we performed a simulation based on the consumer financing, inventory, and other capital expenditures needed to support the expected growth of companies selling affiliate product sales until 2023, which suggests that the sector will raise between USD 9 million and USD 36 million. This estimate does not include capital needed by companies selling nonaffiliate products, given limited data, though they are not anticipated to require significant capital.
Covid-19 has further exacerbated the funding gap, particularly for companies without substantial backing from international investors. Covid-19 is threatening the survival of many OGS companies, with 85% of companies globally struggling to continue their operations as a result of customer defaults, decline in demand, supply chain disruptions, and currency volatility. In East Africa, OGS product sales fell by 11% in the first half of 2020 compared to the same period in 2019. Sales of entry-level products that target lowincome customers saw the most severe drop, which is particularly concerning given that almost 13% of Ugandan households were already unable to afford the USD 3.3 per month to buy a solar lantern with PAYGO financing prior to Covid-19. Small, local companies are particularly vulnerable, with 30% having paused or ceased operations globally; despite donors such as Power Africa providing grants to support OGS companies and electrify healthcare facilities, there is still a need for both short-term grant funding and longterm equity, debt, and concessional loans.
Large companies will continue to account for most of the total capital raised. Globally, external funding has been highly concentrated in large OGS companies with non-African founders, with the top 10 companies accounting for almost 80% of total capital invested in the sector between 2012 and 2019. This trend intensified with the impact of Covid-19, with the top three companies constituting 75% of global investments made between January and August 2020. Given that most large OGS players operate across Africa, Uganda generally reflects this industry trend, with an estimated 95% of debt investment raised by large companies. Large companies are expected to continue raising capital to fuel their growth, but even their projected raises fall significantly short of the capital required to reach universal access.
Small companies will continue to struggle to raise significant investment, restricting their growth. Globally, equity financing as a proportion of total funding has dropped, comprising only 16% of total funding between January and August 2020. As a result, early-stage companies, which often struggle to access debt funding, now also have less access to equity funding needed to scale, as noted by many companies during consultations. For example, one company had to resort to crowdfunding to finance their move towards PAYGO, while another company abandoned its PAYGO offering due to lack of working capital, worsened by the plunge in the customer repayment rate during Covid-19. The few small companies that were able to raise capital were led by non-local founders who leveraged their connections with investors in developed countries.
Disparities aside, both large and small companies need more investment to achieve universal energy access by 2030. Large companies will need to continue raising large sums of money through both established funding sources and increasingly complex transactions to scale throughout the country. At the same time, it is vital that small and local companies receive investment, as they often have leaner distribution models to reach the last mile more effectively. Given the significant funding gap, there is a major need for solutions tailored to the Ugandan market that can accelerate the sector’s access to capital.
Excerpt of: Demand-side barriers to financing for off-grid solar businesses in Uganda (UOMA, 2021)