Manuel Bueno

The Codensa Case: Electricity and Related Services for the BOP in Colombia

LightCodensa is a very successful utility company that serves 2.2 million customers in Colombia. It is controlled by Endesa, the largest electric utility company in Spain, which in 1997 took control of Codensa and Emgesa (this second company accounts for 21% of the generated electric capacity in Colombia).

Its return over equity (that is, the rate of return over shareholders? investments) has grown from 4% in 2003 to nearly 12% in 2006. This is a measure of the current company’s profitability.

Furthermore, last July, Codensa’s debt offer was oversubscribed three times, despite being in Colombian pesos rather than a more stable international currency and despite the jittery markets at the time (they still are). This was a bet the market made in favor of Codensa’s future stability and profitability.

Codensa caters to the Colombian BOP. According to their 2006 Annual Report (in Spanish), more than 88% of their customers were households of which more than 80% belong to the socioeconomic population strata 1, 2 and 3. In value terms, households represent nearly 60% of total sales out of which 74% belong to the above mentioned strata. In both these cases, strata 2 and 3 represent the lion’s share in volume and value terms.

Customer growth has averaged around 3% since 2000 with the increase in the value of energy sales rising from 1% in 2003 to 5.77% percent in 2006.

How does Codensa do it?

Codensa Slide

First, it is run very efficiently. When Endesa bought Codensa, loss of energy was nearly one quarter of its total energy output. Now it is less than 9%. Loss of energy can be due to many reasons, ranging from theft to poor infrastructure management. To be able to reduce energy losses requires a constant, well-coordinated and interdepartmental effort. Only well-run firms can accomplish this for several consecutive years.

Codensa realized that even its success in the energy market would not bring long term growth. As current Colombian legislation sets market concentration limits of 25% on companies in energy distribution, this would be a ceiling on growth for Codensa, which in 2006 had 21.4% of the market. To keep growing regardless, Codensa decided to try something new in 2000 (four years before the publication of C.K. Prahalad?s book).

Codensa’s management noticed that it had a critical mass of customers whom it knew relatively well. At the same time, it noticed that most of its customers did not own electrical appliances. By offering credits to stimulate ownership, the firm’s revenues would increase. When no bank stepped forward at this opportunity, Codensa decided to go solo. They offered loans to customers to enable them to purchase electric appliances while allowing them to pay back the loans through their utility bills. The loan rate was fixed at the average rate in Colombia. Codensa also signed agreements with retailers to offer appliances targeted to their customers.

It was a runaway success. Today, up to 18 retailers have joined into agreements with Codensa, offering up to 90 different brands of electronics to their customers. These are some telling figures:

  • 74% of the customers who ask for a loan are successful in obtaining it.
  • 95% of its borrowers belong to the population strata 1, 2 and 3. Out of this percentage 32% have never had any relationship with the banking sector (not a surprise in a country where 60% of the non-banked population does not even know where to find a banking branch).
  • Only 5% of their borrowers default, even though Codensa is not allowed to cut electricity on those customers who do not pay back their loans (and this is written in every bill).

Codensa now sells approximately 30% of all legally sold electric appliances in Bogot?. Notice that, by selling electric appliances to its customers, it increases revenues in two ways: 1) through the purchase of equipment, and 2) through increased electrical expenditure when using the acquired products. Energy consumption has increased by 4.7% in every household with outstanding loans. Thus there has been an increase in energy usage per customer, thanks to non-energy services. All this means that, according to the slide shown above, the correct answer is mostly a).

But it has not stopped here. After issuing payment cards (often used as credit cards because they enable customers to purchase appliances deferring payment) it has started offering insurance services and expanded the scope of the electric appliances program to include household improvements of all sorts–including building refurbishments.

A new pre-paid utility card for paying electricity bills in advance will probably be launched in 2008. This service wants to encourage more efficient energy use and raise awareness of energy costs in the lower population strata. Moreover, Codensa shares customer information with other credit institutions, and hence allows the building of a credit history for its customers. Service diversification is increasing with offers ranging from funeral arrangements to the direct debit sale of magazines.

You might think that Codensa is putting too much on its plate and losing focus. In 2005, its operational income fell by 4% in non-energy services, while operational income for energy services rose by 4.2%.

In 2006, it was a different story–operational income from energy services increased by 7.1%. Operational income for non-energy services (such as financial services) increased by 7.5% in the same period.

In 2006, non-energy services represented nearly 9% of the total operating income. In 2007, they are expected to reach 12% of the total operating income. It seems that there is no going back.

(I could not find unaggregated profit and loss statements for non-energy services, but if someone from Codensa wants to collaborate, it would be a great Christmas present.)

Where might Codensa head now? This is only a guess, but considering its penetration into their customer base and the loyalty they have built, it would not surprise me if they made inroads in the Small and Medium Enterprise Sector as an energy associate.

[NB: The classification the Colombian government uses to measure the degree of poverty of its population is based on what is termed “socioeconomic strata”. Income or expenditure measurements are not deemed sufficient poverty indicators on their own, because a big part of the Colombian economy is submerged. Therefore, it takes into account housing characteristics and household location. Annual household expenditure in these three strata is estimated to range between US$250 and US$450. All receive various degrees of subsidies, including energy. For more information, I found this study in Spanish.]

Editor’s Note: For more on the Colombian energy market, see Chapter 7 of The Next 4 Billion: Market Size and Business Strategy at the Base of the Pyramid. For more on Codensa, see Value at the Bottom of the Pyramid by Juan Luis Martinez and Maria Carbonell and read the Codensa case study in the October issue of Compromiso Empresarial.