African and non-African off-grid entrepreneurs have long struggled to find ways for (social) investors to finance their business strategy. African companies still have little chance today: too low return expectations and too little “scale-up” potential are two of the standard responses from mostly European and US investors.
Non-African companies, on the other hand, now have access to capital: The companies are outdoing each other in reports of collected capital in the double-digit million range. There is every reason to see this as an investment bubble that is heating up.
And the price to be paid by international companies for capital is high! It is precisely the lack of return and scale-up expectations among African start-ups that means that the originally socially oriented business model has to change more and more in order to meet the high expectations of investors:
- In order to generate sales quickly, business activities are therefore mainly focused on low-hanging fruits, i.e. on the off-grid regions with a better-earning population, usually in the vicinity of places with grid connection. This avoids high logistics and transport costs for customers who are further away, which worsen the balance sheet. The original idea of bringing electricity to completely remote households (“bottom of the pyramid”) is not abandoned, but nevertheless marginalized.
- At the same time, the credit requirements for end customers in terms of down payments, interest rates and loan terms are reduced to such an extent that almost anyone can become a customer. This is the only way to achieve the rapid scale-up required by investors. However, this aggressive pricing policy not only marginalises local competitors, it also significantly increases the economic risk for the company itself.
It will certainly not be surprising that the first international PAYG company with this risky strategy will soon get into major difficulties and may only be able to survive through a takeover by one of the really large energy companies in the off-grid market (EDF, Schneider, Engie, Total).
But what changes would be necessary to lead the off-grid industry into a healthier economic future? I see three starting points:
1. Create equal conditions: If traditional energy suppliers (grid electricity, coal, oil, kerosene) do not consider the last-mile distribution to distant regions despite high subsidies, why should off-grid entrepreneurs? And then with the absurd claim of being able to achieve this without comparably high subsidies and additionally with high return requirements from foreign investors?
It is necessary to finally subsidise the African off-grid industry as much as traditional energy suppliers. If no new capital is available for this, a large part of the grid electricity and oil subsidies will have to be redirected. A number of proposals have already been made, most recently in a study by TERI.
However, in contrast to what is often the case in the off-grid sector today, these subsidies must benefit all market participants on equal terms. Whoever grants only to selected international companies, ultimately remains stuck in colonial thought and action patterns.
2. Avoidance of colonial thought patterns: missionaries, colonial officials and today’s international off-grid industry have a frightening commonality: non-Africans show Africans how they should build their country, with financial gains predominantly being made outside Africa.*
Of course, all international companies in the region employ mainly African personnel and thus believe they can justify a social claim. But this was also the case with all colonial companies of earlier centuries. That alone makes no difference in thinking and acting.
We must therefore honestly state that we also run the risk in the off-grid sector of continuing and further strengthening an unfavorable colonial tradition in a new guise. This would not be the case only if an African startup had the same chances as an international one. But that is not the case. On the contrary, when an African establishes an off-grid startup, the financial instruments currently offered are not suitable because they are not intended for African companies.
But who actually has to adapt to whom? If we pretend to work for Africa, why do we not develop financing offers that in particular African companies can use? Instead of continuing to insist on models that are unsuitable for African companies and only fit for non-African companies? A real “social investor” would start his work right here.
3. Reject harmful investors: Off-grid entrepreneurs who want to remain true to their goal of supplying electricity to customers that the highly subsidised traditional energy industry cannot reach, must stay away from investors who expect a rapid scale-up. This is because these investors bring capital for the price of the loss of corporate identity: their capital requires that own business strategy must be primarily geared to external return interests. You shouldn’t put that loop around your own neck.
As an entrepreneur, you have to choose exactly the product and sales strategy that ensures the serious growth of your own company and the satisfaction of the target group of customers. This also means staying away from certain investors and perhaps growing more slowly but more healthily. And without risking economic existence if a heated investment bubble bursts.
* I expressly include some of my African activities over the last 15 years in this criticism.
Harald Schützeichel is editor of Sun-Connect News and Director of Stiftung Solarenergie – Solar Energy Foundation. He was founding president of GOGLA (Global Off-Grid Lighting Association) and runs a program to promote local solar companies: SENDEA.