Sub-Saharan Africa suffers from a lack of energy infrastructure. Increasingly, those without access to the energy grid are relying on solar power for lighting. As part of her MSc in Sustainability and Social Innovation at HEC Paris, Mónica Moncayo Escobar wrote a dissertation on how these Pay-As-You-Go energy solutions are being financed through impact investments.
Today, 1.2 billion people in the world do not have access to a reliable electricity supply. More than 53% of these individuals live in Sub-Saharan Africa. Mónica Moncayo Escobar reports that the majority rely on expensive, hazardous and environmentally unfriendly kerosene as a fuel to support their off-grid lives. She cites lack of paved roads as a significant factor in preventing construction of power lines, even in urban areas. With 52-117% higher solar irradiation in Sub-Saharan Africa than in central Europe, Moncayo investigates how photovoltaic systems are becoming the alternative providers of decentralised energy across the region.
Pay-As-You-Go solar power
In her thesis, Moncayo notes that harnessing solar energy and converting it to off-grid battery power is not a new idea in Africa. She reports that the United Nations Environment Program claims that off-grid lighting solutions are “a multi-billion-dollar market”. At present, reliable and cost-effective Solar Home Systems (SHS) with 20-50 W solar panels that can power LED bulbs and charge a battery are widely available in the region. How are these affordable to the poor Sub-Saharan African population? Moncayo notes that off-grid energy enterprises have adapted their business models to suit their customers. These include Pay-As-You-Go (PAYG) or rent-to-own schemes that allow flexible access to solar energy for as little as 50 US cents per day. Moncayo reports that one of the best-known providers is BBOXX, a start-up founded in 2010 that has now sold over 85,000 systems, reaching 425,000 people, in over 35 countries. Such access to Solar Home Systems has been welcomed as they enable the poorest to save both time and money. Moncayo states in her paper that before they had access to these systems, the typical customer had to spend more money on kerosene for less lighting quality and travel nearly twice a week to charge their phone.
Lack of initial finance
The problem with the schemes currently in place is that they need initial finance. Moncayo reports payback periods of about 18 months for each system. For a company to achieve financial stability, they need to sell fast and grow fast. However, even when they are able to expand quickly, they have difficulties to pay back short-term loans with their business proceeds. According to Moncayo, philanthropy, public financing, banks, private equity and venture capital have proven unable or unwilling to match Sub-Saharan Africa’s demands to finance off-grid energy. She investigates how impact investments are stepping up to contribute to fill the gap and help to get off-grid power to the masses.
Impact investing is making headway
Impact investments are investments made in companies, organizations or funds that intend to create positive social and/or environmental impacts, while also attaining a financial return. Moncayo reports that in 2015, from the $16.1 billion supplied by impact investors in West and East Africa, $4.2 billion were dedicated to energy. She notes that most of these did not invest in off-grid options, but those that did are largely multilateral development banks, Development Financial Institutions (DFIs), impact investing funds and corporate impact investors. The support offered by these actors is now also getting ordinary investors interested in off-grid opportunities.
Impact investments are more than finance
Moncayo is also keen to highlight the main non-monetary contributions of impact investors. The first is their obvious contribution to the development and availability of off-grid energy systems. They attract new investors and connect them with providers, including those that are social-neutral. As impact investing is a cooperative, rather than a competitive sector, capital can be aggregated for co-investment, cutting transaction costs. In addition, impact investors can provide off-grid companies with technical assistance and help them grow their networks. Investors get involved in the governance of companies to help preserve their social objectives. Through the impact assessment of their investments, they have the information at hand to further improve the value proposition of enterprises. Overall, the introduction of impact investor capital and management practices strengthens and endorses the entire off-grid sector.
Energy for all by 2030
To attain access to clean energy for all, globally, by 2030, the OECD and the EIA stated that $48 billion needs to be invested each year. Moncayo notes that, if Sub-Saharan Africa requires 80% of all off-grid electrification, it would need investments of $5.6 billion a year. Based on figures supplied by Bloomberg New Energy Finance, Moncayo estimated that $188 million in impact investments were made in the Sub-Saharan African off-grid energy sector in 2015. This is just 3.3% of that required by the OECD Energy for All Case for that year. Based on projections for the increase in impact investments in the coming years, she predicts that by 2030, the impact investments dedicated to the off-grid energy sector in Sub-Saharan Africa will have the potential to finance 44% of the OECD Energy For All Case annual budget.
Moncayo concludes that this is likely to be less than 1% of the estimated multi trillion-dollar impact investments predicted for 2025 by the Global Impact Investing Network. However, she notes that her analysis highlights the power of impact investors, who are emerging as engine for the global economy and key players in tackling the challenges that the world faces today.
With a current population of more than a billion people and a growth rate of about two and a half percent per annum, Africa is going to experience tremendous booms over the coming decades. By 2050, there will be 2.5 billion people living on the continent, and after 50 more years it will go up to 4.4 billion. So, by 2050 about 26% of the world’s population will reside in Africa and by the year 2100 it will contain 39% of the total.
To help cope with this tremendous increase, the countries of Africa need to form alliances with each other to start putting in futuristic infrastructure throughout the continent. They need more schools to train local citizens, thereby better empowering them to succeed. Like any other place in the world, independent innovation is going to be the key to modernizing Africa. This means local governments need to be restructured on better electoral systems. So, Africans need to have zero tolerance for improper governance. They need grassroots efforts to guarantee human rights.
Africa contains huge percentages of the global reserves of precious metals like magnesium and platinum, but so many people live in extreme poverty. This vast repository should transfer into the health and wealth of the people, but it doesn’t. Furthermore, farmland is becoming an increasingly rarer global commodity, but more than a quarter of all the fertile soil in the world is found in Africa. In reality, the continent has so much arable land that it should be exporting tons of food, however many areas are unused so countries end up needing to import vast quantities of edible goods, instead. This is a terrible waste of resources.
Foreign invested large-scale farming could help deal with this, but it’s not really the best solution. Although this would provide jobs to natives and allow for roads to be built and electricity to be harnessed, the problem is that it would make local populations dependent on foreign capital. Plus, vast mono-crop plantations cause tremendous harm to the planet, and the profits from things like palm oil don’t even really benefit local populations.
Food insecure countries don’t need overseas companies coming in and taking things over in vicious land grabs. There is a tremendously high demand for locally produced food that needs to be met. Plus, there are a number of exportable products throughout Africa — like cocoa, as well as sheep and goats. Everything is just being mismanaged, so very few people gain anything from all of this.
Granted, Africa’s food challenges are highly complex. They’re also very different from one country to the next. Nigeria, Ethiopia, Somalia, and all of the other African nations each need locally tailored solutions to their own locally specific problems. Although, the continents relentless growth means that it also needs to foster shared prosperity in order to flourish. This is quite a dilemma.
Inadequate infrastructure, erratic border policies, and weak input markets make it nearly impossible for the vast majority of countries in Africa to successfully modernize. They need enhanced irrigation and diverse crop varieties, but have no way of acquiring these things. This is terribly unfortunate because something like poor grain quality impacts every facet of daily life. So, the overall goal is to get lower production and transport costs on higher yields throughout the continent.
In addition to this, rampant deforestation is negatively impacting the lives of native hunter-gatherers more and more. So, to offset this, urban jungles need to be built to house these displaced communities. Strong public and private partnerships need to be made in order for this to occur. Simply put, there needs to be massive investment in the agribusiness sector to make more food locally available and to boost exports.
To make matters worse, along with widespread malnutrition, the growing threat of climate change will also negatively affect more and more people in Africa as time goes on. So, urban planning in the underdeveloped continent needs to move away from the concept of coastal living to prepare for the coming climate change inundations by setting up inland megacities. There needs to be massive investments in basic amenities like providing water to everyone by installing more plumbing.
By having better means of irrigation as well as access to electricity through renewable sources, Africans will experience quality of life increases unlike anything they have ever known before. Of course, this is going to require a great deal of commitment from the UN and the World Bank, as well as a number of other groups. Luckily, Africa’s workforce is developing faster than any other continent, so they will also be able to pull themselves up by their own bootstraps, in many ways. If all goes well, by the turn of the century Africa will be completely new, with the fastest growing economies and the strongest middle class on the planet. That’s why we can’t afford to get this wrong. Africa simply has to modernize. The fate of the world depends on it.
Advice for foreign companies willing to invest in Africa:
- Do not come with solutions but ready to engage with others to find solutions: reengage the minds of the African population to solve their problems.
- You need local partnerships: coming from the outside, you’ll find a few things that will challenge your business model.
- You can’t have a short-term goal: you need patience for the investment to mature or for the industry to settle – in fact, you may need to help shape the industry.
- Know the values of where you are: if you want to build for the long term, you can’t just focus on the economic factor – you also need to facilitate social engagement.
To create economic value, create value for the people, and then they will support you.