Streamlining Capital toward the Last-Mile in the Paygo Sector: Challenges & Perspectives
This is the introductory piece to a series of articles on the potential of receivables financing and why it can be a good fit for the PAYGO/SHS sector, including insights from experts in the industry.
The off-grid solar market is a fast-evolving ecosystem, carrying the promise to transform the lives of millions. As it remains highly capital-intensive, manufacturers and distributors have had to find innovative ways to provide credit along the value chain and to the last-mile customer, where systems are typically sold on credit in the form of Pay-as-you-Go (PAYGO).
Hopes placed in the model are as great as the problem it’s committed to solve. In 2020, 733 million people were still living without access to electricity. That’s one in ten people. But the world had just been hit by the COVID-19 pandemic, which would turn out taxing for the industry. Concern on the financial sustainability of the model rose - and have not been silenced since.
Was it all a pipe dream?
From rising incomes to better-quality distribution networks, numerous market drivers would suggest otherwise. The potential of the OGS solar in terms of impact and commercial opportunities is solid. Yet, the Paygo industry is still young and challenging. It is iterating and discovering what works, and what does not. Doing so while being confronted with an enduring chicken and egg financing problem is not easy. Distributors need to demonstrate growth and stability to appeal to investors, but they need external resources in the first place to reach volumes of activity sufficient enough to prove product-market fit and potential for profitability.
By 2030, the sector will be $15.5bn short in funding of what is needed to reach SDG 7.
Despite these hurdles, the world does not need less Paygo. It needs better Paygo That includes a more grounded approach to what the model really is: asset finance. From there, we can implement better-fitted financial and investment practices to reduce the cost of capital and streamline larger, healthier volumes of credit toward the last-mile.
Understanding the financing challenge
While the Paygo system is fairly straightforward, companies are complex to analyse. Their business models differ: some are vertically integrated and focused on one range of products, when others opt for partnership models and address various market needs. For investors, this fragmented landscape is made harder to navigate by the lack of harmonised best practices, despite recent attempts to create alignment behind common metrics (e.g.: GOGLA’s KPI framework). Only a handful of companies have reached scale and profitability, which leaves little benchmarks for investors against which to assess operating businesses.
On the other side of the financial deal, distributors have also had a hard time finding their finance fit. As Paygo is inherently flexible, companies often face volatile repayment rates from customers over long- contract duration. This results in limited working capital, preventing early iteration and scaling of activities. Costly due diligence and a perception of high-risk lead investors to offer unfitted financing solutions, including senior debt with fixed repayment schedules likely to further exacerbate cash-flow imbalances of businesses.
Shifting the paradigm
Like we previously wrote when introducing the pilot of our true receivables finance mechanism, one can see that talking about a shortage of funding in the OGS sector is only half of the story: the problem lies in the lack of alignment between investors and businesses. The outcome of this debt matching challenge is a strong concentration of investment towards larger established companies, which drives down incentives to direct new funds towards the industry.
From 2012 to 2021, $2bn were committed to the off-grid solar sector in Africa. Seven companies in scale-up phase catalyzed 72% of that amount.
Plea for additional funding will not bring in capital sustainably if the industry does not think of new ways to sustain and finance itself. For the Paygo sector, it starts with taking a fresh look at what the model fundamentally is: asset finance.
Streamlining capital toward the last-mile: how distributors can lead the way
A lot of Paygo businesses see themselves primarily as distributors and manufacturers - which they obviously are, considering the heavy focus of their daily activities on the commercialization of SHS. At the same time, though, their business models and strategic roadmaps are primarily rooted in providing finance at the BoP. To some extent, Paygo businesses are like microfinance institutions in disguise.
Finance should rhyme with risk like yin rhymes with yang. However, although Paygo companies are aware of the importance of maintaining healthy portfolios and low default rates, many can lack processes, resources and experience to sustainably mitigate and manage credit risk.
Unfortunately, customer default is not only costly for companies, but for the industry at large. With more customers and businesses at risk of insolvency, the cost of capital increases. As a result, companies have structural incentives to pass on that cost to customers through less affordable price points, driving out of the market lower-income borrowers who fundamentally needed those assets in the first place.
Credit assessment, credit scoring, product design, new sales incentives policies, to name a few, all have a role to play in establishing solid cultures of risk management for Paygo companies. This could strengthen businesses’ fundamentals and consolidate investors’ trust while benefiting customers and protecting them from over-indebtedness. A win-win-win situation, with lower capital costs and brighter growth perspectives for the sector.
Streamlining capital toward the last-mile: how investors can lead the way
Faced with complex industry fundamentals, but also a unique space for growth and impact, investors would benefit from embracing innovative financing approaches tailored to the industry to diversify their exposure and improve their expected returns.
One such approach could be the use of receivables financing, a way for businesses to raise money against the amounts due from customers. Investors can be confronted with an untapped asset class and data-driven investment opportunities where risk is transferred from the company to the asset level.
This is about investing differently - not less.
But let us discuss it in depth and illustrate for you how we can implement better-fitted financial and investment practices, such as receivables financing, to drive the Paygo sector forward, in our upcoming webinar, where you'll also discover our soon-to-be-launched Receivable Finance Platform, an open and interoperable financing platform created to deliver credit to the last-mile and the backbone of our Fintech initiatives to resolve the bottleneck in last-mile financing.
👉🏾 Register here to join Solaris Offgrid's CEO, Siten Mandalia, and PaygOps' Fintech Business Lead, Manon Dubois, on the 28th of March, at 11:00 (CET). See you there! 👋🏾
Stay tuned!⚠️ Coming soon, in our next article will explain in more detail what receivables financing is, and why it can be a good fit for our industry.
About Solaris Offgrid
Solaris Offgrid supports distributors and manufacturers across all industries in over 35 countries through SolarisLab Product Design Services and flexible IT solutions. Solaris Offgrid’s flagship PaygOps platform is an interoperable B2B SaaS which connects energy and utility appliances (solar devices, water-pumps, cookstoves, smart metres, e-bikes) and payment methods (Pay-as-you-go and Mobile Money) within a suite of enterprise applications or API services, to allow distributors to smoothly manage their operations and tackle their challenges at the last mile, thus enabling them to provide affordable essential products and services to millions of people at the Bottom-of-the-Pyramid.