Guest Articles

Thursday
December 10
2020

Kevin Johnstone

Where’s the Capital for Home-Grown Companies? Why Energy Access Investments in Kenya Need to Go Local

So far this year, 75% of global investment commitments in off-grid solar technology have gone to just three companies according to GOGLA’s latest report — a troubling trend since 2012. Kenya is a useful example of this trend, since it has seen remarkable growth in the market for decentralised energy systems – particularly in the solar home system (SHS) sector – during this period. But despite this growth, companies that are owned and managed by Kenyans have struggled to capture a significant share of the market.

Investments can be secretive and difficult to track, but Wood Mackenzie’s 2019 report on energy access investment also revealed that investors have favoured just a handful of companies in the SHS sector. Of the 10 SHS companies that had received 84% of total global energy access investments between 2010 and the end of 2018, six operate in Kenya (among other countries): Greenlight Planet, d.light, M-KOPA, azuri, Mobisol and BBOXX, all of whose founders are citizens or dual-citizens of North American or European countries. The same report also highlights that financiers invested US $986 million in East Africa, including Kenya – most of which did not go to wholly-run Kenyan companies.  

These large companies have benefited Kenya’s economy by jumpstarting its SHS market and enabling thousands of jobs to be created along their value chains. But questions remain about where the overall value and profit are retained. Unless these big companies share more information, such as investment flows and job numbers, it is difficult to establish the exact value split. Businesses founded, managed and run by Kenyans would ostensibly capture and retain more value within the local economy and support Kenyan ideas and innovation. That is why more needs to be done to align investors and capital markets with Kenyan investment opportunities.  

 

What are the obstacles to investing in Kenyan-owned companies?

There are numerous barriers blocking Kenyan companies from securing grants, early-stage equity and affordable debt financing. On the demand side, some of these obstacles include limited capacity, weak finance and management structures, and few connections to investor networks.

An often-cited Village Capital report highlights the fact that most of the early-stage investors who are investing in East Africa are foreigners. Many use unconscious “patterns of potential,” e.g.: they invest in companies that other investors favour, or that have founders who attended prestigious universities, reinforcing their bias toward investing in companies whose owners have similar backgrounds to their own.

Another barrier involves the preferences of Kenyan entrepreneurs themselves. According to one prominent financier operating in the country, interviewed as part of Hivos, ENERGIA and the International Institute for Environment and Development’s (IIED) Green and Inclusive Energy programme, many Kenyan entrepreneurs are unwilling to give up equity in their company, and they seek grants when they should be pitching for equity. “Most people I see around are ‘grant-repreneurs’ not entrepreneurs,” they said. 

Another obstacle emerged from interviews we carried out with different Kenyan off-grid companies and financiers: These conversations revealed that typical due diligence processes do not reflect the realities of running a business in Kenya. One experienced company said that investors expect a certain amount of money to be reflected on a company’s balance sheets, bank statements and turnover before it can be considered eligible for loans—which is something many Kenyan business accounts do not reflect. 

Additionally, though some banks, like Equity Bank, are offering more debt financing to off-grid companies that have been their customers, many remain sceptical of newer energy business models like PAYGO that require assessing receivables. These banks prefer to stay in their comfort zone with conventional fixed asset loans. As a result, many Kenyan companies must rely on cash sales of solar products and reinvested internal financing. And a recent World Resources Institute blog highlights the difficulties facing Kenyan companies in accessing local currency debt, as dollar-denominated loans open them to currency risk.

During this summer’s Energy Access COVID-19 Relief Summit, Mansoor Hamayun, the CEO of BBOXX, argued that “local companies are not sophisticated enough” to manage the extensive and complex value chains in more nascent energy access markets (pointing towards Angola and parts of West Africa). But he also acknowledged that it was important to support domestic companies and initiatives. 

Many local energy enterprises are already running sophisticated operations across Sub-Saharan Africa, including in Kenya, whose energy access market is comparatively more mature. Kenya’s market holds an opportunity for wholly-owned Kenyan companies to specialise (“de-verticalisation”). But competition remains fierce, and the question remains: How can these domestic enterprises attract critical financing?

A handful of well-capitalised companies are unlikely to be able to absorb the projected US $1.5 billion needed to accelerate and deploy the SHS systems necessary to achieve sustainable energy for all (as SDG 7 calls for) in Kenya. The Shell Foundation and Catalyst Off-Grid Advisors’ model from 2018 showed that at least 17 SHS companies operating at scale are needed, and likely many more. Currently, only the previously noted six dominant companies are operating at any scale in this market. Below are some observations the industry can leverage to move forward together, focusing on Kenyan-owned companies to achieve energy access for all.

 

Link energy access to existing MSME efforts

The Dutch Good Growth Fund is supporting the financing of local small and medium enterprises—including in Kenya—by investing in local intermediary funds. And Agence Française de Développement’s Choose Africa initiative brings together a promising mix of financing (equity, credit facilities, guarantees) and other important elements to support micro, small and medium enterprises (MSMEs) in Africa, including technical assistance for domestic companies generally at different points in their development. But these programmes need to be linked into the energy access space, providing much-needed financing for Kenyan companies. Donors, governments and investors should coordinate their support for MSMEs and energy access to amplify their impacts in these overlapping sectors.

 

Redefine ‘impact’ and incentivise impact investing for energy access

Impact investors have been crucial to the off-grid sector’s growth so far. But the “impacts” for solar off-grid investments have been formulaic, based on unit sales or connections. The sector must broaden the definition of impact to include value chain impacts like supporting Kenyan-owned companies. A recent International Finance Corporation report highlights the evolving “Operating Principles for Impact Management,” which aim to make this type of investment more transparent and accountable, and to put local impact at the heart of impact investing. In other words, these principles aim to keep more value at the local level—including local ownership. Aceli Africa is going further, using subsidies to target and incentivise specific impacts in agriculture, developing a model for how to incentivise local ownership impacts for energy access. Building the pipeline of investable companies is critical to strengthening and accelerating access to energy. And redefining impacts in this way will help funnel financing to develop and strengthen domestic companies. 

 

Establish, align or refocus intermediaries

IIED’s “Moving More Money” and “Accelerating Energy Access With Aggregation” reports discuss how aggregation can reduce transaction costs and mitigate risks in the off-grid sector, while attracting bigger investments and bundling in the important non-financial functions, such as market-building activities, standards and technical support. Aggregation platforms, programmes or intermediaries can help support Kenyan-owned companies at different stages of development, while accelerating the deployment of off-grid systems.

For example, the World Bank is providing the Kenyan government with loans worth US $150 million for the Kenya Off-Grid Solar Access Project. This gives the government a strong mandate to support local enterprises. Its supply-side subsidies application process originally did not consider the different needs of Kenyan-owned off-grid enterprises. But recognising the problem, it recently adjusted the programme’s design and requirements to ensure that more Kenyan companies could apply. Without compromising on the goal of energy access, future aggregation efforts should be designed to benefit Kenyan companies from the start. 

 

Build joint ventures

As the sector moves away from vertically integrated off-grid companies, market space and demand are increasingly creating an environment that will help Kenyan companies thrive. This should pave the way for joint ventures in Kenya (and in other more mature markets) to retain more value and control at the local level. Aneri Pradhan, the founder of EnVenture Enterprises in Uganda, suggests that setting up joint ventures is a way to avoid the unequal and racist extractive model that has too often been dominant

Due to COVID-19 travel restrictions, some companies are being pushed to hire more domestic consultants, as happened in Malawi. These restrictions could open more space for Kenyan companies to show their potential and provide an alternative model to the status quo. This raises an interesting question: Could efforts to contain COVID-19 force donors and investors to rethink their investment models?

While large companies have paved the way for off-grid renewable energy markets, their dominance as targets of investment capital increases the risk that SDG 7 will remain out of reach – and parallels the troubling power dynamics of colonial history. The off-grid space has many technologies, business models and approaches that will require hundreds more domestic businesses, and a rapid pace of innovation throughout their value chains. Donors, investors, companies, governments and others must do more to align incentives, and to funnel their time and resources to support Kenyan and other domestic companies throughout the region. If they do, they can play a key role in building greater shared value, while enabling energy access for all.

 

Kevin Johnstone is a researcher on energy at the International Institute for Environment and Development (IIED) and working under the Green and Inclusive Energy Program in partnership with Hivos.

 

Image caption: Ruth, a sales executive with Kenyan off-grid company Econome, demonstrating SHS technology to a group of women in Malava, Kenya. Copyright Econome.

 


 

 

Categories
Energy, Entrepreneurship, Investing
Tags
energy access, entrepreneurs, impact investing, Off Grid Energy, SDGs, solar, sustainability, technology