NIGERIA POWER SECTOR PROGRAM (NPSP)STRATEGIES FOR OFF-GRID EXPANSIONMAY 2019

DATE

12/15/2019 2

Market

Research

Production &

Assembly

Sales &

Distribution

Payments &

Collections

Consumer

Finance

After Sales

SupportSource: NPSP research (2018) including primary research of 25 off-grid company interviews and secondary research

SHS COMPANIES ARE FACED WITH VARIOUS BUSINESS MODEL OPTIONS FOR GROWTH AND EXPANSION

Dow

nstr

ea

mU

pstr

ea

m

SHS Value

Chain

2

Upstream Models

Vertical Integration or

In-House production

Downstream focus

Direct sales / Outright

purchase

Consumer Finance Models

Power-as-as-service

Credit Sales

- Lease-to-own

- End-user credit

Distribution Models

Partnerships with local

distributors

(B2B)

Community agent

network

(B2C)

In-House sales force

(B2B)

Outsourcing through

partnerships

12/15/2019 3

LONG-TERM GROWTH WILL LARGELY DEPEND ON OPTIMIZING CASHFLOW STABILITY, OPERATIONAL FEASIBILITY AND VALUE TO END-USER

3

Consumer Finance Model

Operational

Feasibility

Dis

trib

uti

on

Mo

del

Upfront Payment Lease-to-Own Power-as-a-service

In-House

Sales Force

(B2C)

Partnership

with Local

Distributors

(B2B)

Community

Agent

Network

(B2B)

Cashflow stability

Customer value proposition &

gross margin

PAYG

“sweet

spot”

Higher default risk where products are leased

Highest profit, strong customer service

and greater user affordability with in-

house sales team and consumer

finance options

Greater

overhead to

maintain in-

house sales

team in remote

areas

Source: I-DEV International (2017), Lighting the Way Low High

12/15/2019 4

ACHIEVING THE PAYG ‘SWEET SPOT’ FOR GROWTH IS DRIVEN BY THREE KEY PRINCIPLES AND INFLUENCED BY THE ENABLING ENVIRONMENT

4

Prioritizing

customer

engagement and

human

relationships

Maximizing reach

through a suitable

mix of distribution

partnerships

Digitizing

payments and

collections using

mobile money

partners

1 2 3

4 5 Access to suitable and

affordable financing for

developers & distributors

Favorable regulatory

policies on import

duties & mobile money

SHS PAYG ’sweet spot’Sustainable and long-term growth with

operational feasibility, stable cashflows and customer satisfaction

Overall business

objective for SHS

companies

Operational strategies

driven by SHS

companies

• Distribution (1) and

customer engagement

(2) strategies are the

focus of this

presentation

• Payments (3)

addressed in a

separate presentation

Enabling environment

driven by external

actors

• Ongoing discussions

among stakeholders

12/15/2019 5

1. STRATEGIES FOR DISTRIBUTION PARTNERS

5

12/15/2019 6

TWO MAIN TYPES OF DISTRIBUTION PARTNERSHIPS

6

Internal industry

partnerships with SHS

counterparts

External partnerships

with distributors in other

industries

12/15/2019 7

SHS COMPANIES CAN FORM PARTNERSHIPS TO LEVERAGE COMPETITIVE ADVANTAGE OF INDUSTRY COUNTERPARTS

7

Emerging

Household

Names

Energy

Access

PioneersInternational

Independents

Local

Start-Ups

ExpansionGrowthStart-UpSeed

Loca

lIn

tern

atio

na

l

Business Life Cycle

Stage

Orig

in

1

2

3

4

Landscape of off-grid companies in Nigeria

Local

Start-

Ups

International

Independent

s

Emerging

Household

Names

Energy

Access

Pioneer

s

Access to affordable

finance

Adequate technical

experience

Local market knowledge

Technological advantage

Competitive advantages of off-grid company archetypes in Nigeria

Arrows indicate potential partnerships between players

12/15/2019 8 8

THE INTERNATIONAL FINANCE CORPORATE, IFC, HAS IDENTIFIED ~8000 RETAIL AGENTS FOR ELECTRONIC PRODUCTS AND GROCERIES ACROSS SEVEN STATES AS POTENTIAL SHS DISTRIBUTORS

IFC list of retail agents in excel including contact details

12/15/2019 9

NPSP IS BUILDING ON THIS WORK BY DEVELOPING A NATIONAL DISTRIBUTOR MAP TO MATCH DISTRIBUTORS TO CUSTOMERS

9

Location

GranularityLocal Government Area Level

Tiers

(Transaction

Volumes)

Tier 1

Tier 2

Tier 3

Sectors

Agriculture

FMCG

Electronic

White Goods

MFIs

Features of distributor list include

indicative location, transaction

volumes and sectors

Illustrative distributor network mapping

12/15/2019 10

MAINTAINING A SUITABLE MIX OF DISTRIBUTORS WILL ALSO ALLOW DEVELOPERS TO OPTIMIZE CUSTOMER REACH AND MARGIN

10

Tier 1

Tier 2

Tier 3

• Large companies and subsidiaries of

multinationals with a strong financial base

Some access to local financing and foreign

exchange

• Telcos, FMCGs, Commercial Banks

• Lighting Global certified products required

• Good fit for Energy Access Pioneers (EAP)

• Micro & small businesses, individual

entrepreneurs and start ups

• Limited technical capabilities

• No access to local financing

• Local retailers, trade associations and

groups

• Important channel for all developers

• Medium sized, financially robust

distributors with technical capabilities

• Some access to local bank financing

• C&F agents for FMCGs, MFIs

• Good fit for EAP, Int’l Independents &

Emerging Household Names

• Lighting Global certified products req.

MARKET TRADERS

SHOP/KIOSK

OWNER

Transaction volumes

12/15/2019 11

TIER 3: LEVERAGING LOCAL THRIFT SAVINGS NETWORKS LIKE ESUSU AS COMMUNITY AGENTS AND CONSUMER FINANCE INSTITUTIONS

11

Spotlight on Tier 3 distributors

• Thrift savings schemes

or ‘Esusu’ is the third

most used credit

facility among the

underserved

population

• Esusu groups can

serve as sales and

distribution channels

• The Esusu credit

structure can may also

be leveraged to

finance solar home

systems or structure

monthly repayment

options for members

Volume of credit in underserved population 2016 (N bn)

188

122

40

EmployerOther MFIs

3

MFBs

4

BanksTotal Microcredit

MoneylenderGroup

5

1

Family/Friends

85

Esusu/Ajo

14.8m 12.2m 1.6m 0.4m 0.2m 0.1m 0.07m 0.05m 0.06m

Source: EFInA Access to Finance Survey (2016)

Underserved

Population

size

12

I tried for several months to get a

bank loan. They asked me to provide

land as collateral, which I do not

have. I joined an Esusu group with

ten members and we contribute

N10,000 every month. This has

really helped my business as when it

was my turn last month I received

N100,000. I would never have been

able to save that amount to invest in

my business. If someone runs away

with all our money, we all know each

other so I will just go to her house

Alhaja Banjoko, Distributor

“

”Source: MMWN Consulting (2016)

12/15/2019 13

TIER 2: COMPANIES CAN MAXIMIZE REACH WHILE TRANSFERRING COUNTERPARTY CREDIT RISK BY PARTNERING WITH MFBS

13

Spotlight on Tier 2 distributors

Grid connectionVery FarFarMediumCloseVery Close

Schematic diagram of MFB density in Nigeria

Source: FSP Maps (2016) , CBN (2018)Sample off-grid location with high MFB density

Opportunity exists to leverage distribution network of

over 4,000 MFBs branches nation wide… … but interest rates due to perceived risk are still too

high when considering consumer finance opportunity

• In addition to other organizations such as IFC’s

Lighting Nigeria Program and the Climate and Clean

Energy Coalition, NPSP is working with MFBs to

provide technical support to help them effectively lend

in the sector

Lower end interest

rate per month

2%Upper end interest

rate per month

5%

Range of MFB interest rates in Nigeria

12/15/2019 14

TIER 1: DESPITE POTENTIALLY LOWER RETAIL MARGINS, SEVERAL OPPORTUNITIES EXIST TO LEVERAGE SUPPLY CHAIN OF MNCS

14

Spotlight on Tier 1 distributors

Engaging multinationals

corporations (MNCs) with

CSR focus to find

synergies in mission and

leverage established

supply chain

Leveraging payment

and agent network

infrastructure of Telcos

for payment and

distribution partnerships

Payment and distribution

partnerships with

commercial banks take

advantage of agent

network and potential for

consumer finance

Example

15

One Degree Solar found an unlikely partner in the

multinational, Coca-Cola, when they wanted to expand

the company’s solar operations in Kenya

Coca-Cola entered into a partnership with One Degree

Solar, where Coca-Cola would market One Degree’s

solar power kits to kiosk owners

As part of the partnership, Coca-Cola held workshops

throughout rural Kenya with kiosk owners, where they

were introduced to One Degree’s Brightbox product.

Coca-Cola held a pilot in 2012 using 100 Brightbox solar

kits that were distributed free of charge to Nairobi kiosk

owners

On average, the kiosk owners in the pilot were able to

stay open four extra hours a day as a result of the light

provided

Participating businesses also raised their earnings by

15% on average and saved 90% on energy spending–

primarily by not purchasing kerosene lamps, flashlight

batteries, or candles

Source: Coca Cola (2013)

12/15/2019 16

2. STRATEGIES FOR CUSTOMER ENGAGEMENT

16

12/15/2019 17

THREE MAIN STRATEGIES FOR CUSTOMER ENGAGEMENT

17

Adequate control

mechanisms to manage

customer default risk

Operational flexibility

for effective customer

service

Community buy-in to

build trust and sustain

expansion

COMMUNITY BUY-IN AND TRUST ARE CRUCIAL TO SUSTAIN EXPANSION

Partnering with a Community Leader• Communities in the Nigeria are close-knit with strong

governance structures

• Usually difficult for external parties to enter community

without buy-in from local leaders

• Church leaders, imams and traditional market leaders

(‘Iyaloja’ and ‘Babaloja’), local pharmacists and chemists

play a key role in gaining community buy-in

Betting on Early Adopters• Offering discounts at product demonstration to spark early

purchases

• Pioneer customers became model homes in their

communities, triggering a “spillover” effect with neighbors

who often place follow-on orders

Source: I-DEV International (2017), Lighting the Way

Trust is a key factor in a customer’s willingness to purchase SHS

due the high upfront cost or deposit required. The following

methods of community engagement alleviates this trust issue:

12/15/2019 19 19

To mitigate customer default

risk, control mechanisms need

to be put in place such as

working closely with community

peers and leaders to ensure

regular payments and

incentives to tier 3 distributors

to consistently collect monthly

customer payments

Incentivize Payment

Collection

Customer Rewards

Peer to Peer

Solidarity

1

2

3

• Distributors receive commissions for each

customer’s installment

• Ensures that distributors are consistently

following through with collecting payments

until the product is paid for in full

• Top customers are rewarded for punctual

payments

• Viable strategy if the cost of the reward to

customers is lower than potential loss

from default

• Customers purchase products as group

and pay installments together

• Similar to group lending schemes, where

one person’s default penalizes the rest of

the group

Three sample methods of mitigating customer default risk

Source: I-DEV International (2017), Lighting the Way

ADEQUATE CONTROL MECHANISMS REQUIRED TO MANAGE CUSTOMER DEFAULT RISK

12/15/2019 20 20

SHS companies operating in

Nigeria need to adapt a lean

management approach to

support operational flexibility

and enable quick, incremental

improvements to the product

offering, organizational

processes and customer

service, as well as adapt to

unexpected circumstances

Offering flexible

repayment terms

Product testing and

incremental

improvements

1

2

• Flexible payment options such as

repayment plans over 12, 15, 18 or 24

months give customers the comfort to buy

the product within their financial capability

• This also increases trust and loyalty from

customers, who feel they have a choice.

• Testing products with the community and

introducing go-to-market trial products in

existing conditions are important and

require SHS companies to adapt to user

feedback in real time

• Research showed that by revising the

entry level lighting SHS system and

introducing a cooling element like a

standing fan demand among increased

existing SHS customers by 50%

Examples of strategies to maintain operational flexibility

Source: I-DEV International (2017), Lighting the Way

OPERATIONAL FLEXIBILITY IS REQUIRED FOR EFFECTIVE CUSTOMER SERVICE