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PAYGo’s Commercial Sustainability



What emerging markets have in common is the need for various basic goods and services like access to energy and financial solutions while having a large percentage of the population unable to afford the very goods and services at the conventional rates that one would find in those markets.


It makes perfect business sense to address these needs, though businesses should tailor their offering to suit the market as it often comes consumers with lower amounts of disposable income per individual.


Enter PAYGo solar model – providing off-grid solar solutions to a now USD 1.75 billion market serving 420 million users in Africa. With close to 850 million people worldwide without access to electricity and over a billion connected to an unreliable grid, there is significant room for growth. Off-Grid Solar Market Trends report 2020




The basic gist of this model is that clients can purchase off-grid solar products on an asset finance scheme which gives them life-changing access to assets that they could not otherwise afford. Payments from customers under this arrangement typically include an initial down-payment followed by monthly or even weekly repayments. Ownership of the asset is the goal for customers and the regular repayments to the providers include an amortisation of the product cost.


While all this is fantastic news for consumers, the story doesn’t always bode well in the long term for the goods or service providers. The reality is that on the supply side of things, there’s still a lot of figuring out to do on various issues. Reducing credit risk to the business or how to bring the operational model on a more financially stable footing and thus attractive for investment are all considerations.


Let’s talk through a few of those issues.


First up is the credit risk.



Generally speaking, more customers is good for business and that holds true for businesses using the PAYGo model as well but there are some caveats. Unless PAYGo businesses are operating with an asset finance partner like a micro lender or bank who have established credit risk mitigation structures and procedures in place, the onus will fall on the business to provide those loans to their customers. In an established financial market, this might be no big deal but emerging markets tend to have much less information, particularly so for the target market of the PAYGo products.


Quality vs quantity of customers is a balancing act every company looking to provide PAYGo products will need to master. Credit information about the target market is vital for the business to make sound decisions and also allows more companies with similar offerings to venture into the market. As the information asymmetry reduces, risk-adjusted prices will have more workable room which may benefit the customer. This also works in favour of providers looking for investment as well. The more information available, the less skittish investors will be to have that all-important coffee meeting you’ve been waiting for.


Moral hazard



In addition to financial behaviour of the customers, being aware of the moral hazard risks is critical. A customer has the ability to simply not pay for the asset. Now I wouldn’t suggest that they would uproot their lives and run away for the sake of a home solar system but this kind of disinterest in repayments calls into question the real equity value of the asset to consumers. More information on consumer archetypes, priorities and behaviour could help businesses navigate such issues.

In various PAYGo solar models, we see that companies don’t simply provide the solar solutions then trust and hope all will work out fine. The asset itself is the collateral in these transactions and the ability to remotely turn off the systems during a default event comes in handy to reinforce payment discipline. However, even that does not eliminate the costs associated with delinquency and repossessions where necessary.


Moral hazard issues affecting the solar providers don’t only crop up on the consumer side. Companies need to keep abreast of internal risks arising within their agent networks. To ensure that onboarded customers are of that all-important quality, agents need to be well-trained and beyond that, incentivised to enforce the repayment culture from the customers.


Now let’s talk a bit about financial exposure.

Source: XE Currency


I have seen quite a few PAYGo solar providers, across various markets, offering their customers solar products on short- to mid-term tenures. After all, that is the appeal of PAYGo so that’s not shocking at all. The crux of the matter lies in the market fluctuations and this goes for both business and consumer.

At the end of 2019, in Zambia the exchange rate was 14 USD/ZMW. End of March 2020 (Q1) through to the end of June 2020 (Q2) the rate hovered around 18 USD/ZMW and as of the end of September 2020 (Q3), the exchange rate has moved up to 20 USD/ZMW.


For PAYGo products like solar systems that are predominantly imported from China, paid for in USD and have mid-term tenures, that will most definitely leave an indelible mark on a local provider. While it is possible and indeed rational to pass on costs to the consumer through price adjustment, let’s remember that the customer will now have competing financial obligations of their own exacerbated by the very conditions necessitating that price adjustment.


Last point I want to touch on is who is this product for?


The PAYGo solar market is an interesting one because it provides a necessary and thus valuable product to a wide consumer base at an affordable price, broken down over a forgiving period. And then there’s all the aforementioned points, so what kind of investors are we looking at for this?


The existential need for a good credit rating system as well as an operational need for working capital makes this ripe for the banking and payment system providers. The needs-based nature of the product offering fits well with the NGO orientation. The growth potential it offers and market size could work well with venture capitalists.


Weirdly enough, in order to access suitable and well-priced finance options from commercial financiers, PAYGo solar providers will need to grow and do so rapidly, or at least show that they will. To do that, they will to need to scale up their operations and customer base which NGOs are often willing to push through to achieve SDG or impact targets. However, quality signups from creditworthy clients are the key to survival for the business. Acquiring these gems of clients and building strong relationships with them is neither a quick nor easy task, especially for an SME sized provider.


Early stage growth can be fostered with grants and risk capital, but to propel business in this sector and make growth sustainable, innovative financing models will be needed to address their working capital needs. Investors will also need to adopt reasonable expectations that balance their appetite for rapid growth against the risks associated with such growth in this sector.


Notwithstanding all the above, the market value has not gone unnoticed. Large international players like French energy company ENGIE are making significant inroads to the African market through acquisitions of some large PAYGo providers like Fenix in 2017 who have a portfolio of about 500,000 solar systems provided in Uganda, Zambia, Nigeria, Benin, Côte d’Ivoire and Mozambique and Mobisol in 2019 with their 750,000 solar systems provider in, Tanzania, Rwanda and Kenya.


Sustainability of the PAYGo solar model will require a great deal of finessing from the providers on credit risk issues, managing their exposure and finding the right partner at the right stage of growth. My experience with providers has found that they are far from fainthearted. Their characteristics of resilience and adaptability will hold them in good stead for the market demands it.

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