We all know about the dire power situation in Africa. That of Nigeria is even more so. Businesses and homes practically have to provide their own power solutions. Power generator manufacturers and maintenance companies are having a field day. In solving this problem, many startups (Technology-based companies I mean) are focusing on off-grid customers. By this, I mean rural dwellers with little or no access to power from the National grid (Transmission and Distribution Infrastructure).
A few of these startups provide “alternative” power for more urban areas. This means that these products are not sold to replace existing power infrastructure, but to complement it. The other set of solutions I have seen is targeted at commercial buildings powered by solar energy.
The most prominent, in terms of media coverage, is the off-grid power solution companies. This is popular for a few reasons, the major being the impact story spun around it. While I won’t underplay the impact and potential impact of off-grid solar solutions to the neglected, the purpose of this write-up is to instill some caution into the system and to ensure that the providers of these solar solutions are efficient enough in their operations to ensure the long term sustainability of their businesses. In essence, I mean that these businesses should not operate to their own detriment.
Impact in the City
When talking about impact in Africa, a lot of people are focused on people living at the Bottom of the Pyramid (“BoP”). While it is good to target the BoP directly, it might be much more impactful to get to the BoP indirectly.
Let me explain this using a completely unrelated example. In the United States of America, there was this debate about proposed tax reforms by the republican party. The Democrats argued, among other things, that the tax cut would only benefit the already wealthy Americans, while abandoning the BoPs. However, the Republicans argued that cutting corporate taxes would mean renewed investment by these corporates in America. It means that these corporates could employ more people, pay them higher salaries, as well as healthcare benefits amongst others.
While the Democrats want to target the BoPs directly, the Republicans want to reach them indirectly. The Republicans were able to push through with the regulation, leveraging their majority in the parliament. We will however wait to see if their (Republicans) position on the issue is validated by the market.
Coming back to our off-grid solar solution story, I believe that there can be a lot of impact story to providing alternative power solution to the middle class or even the wealthy. There are impact stories on clean energy sources in a polluted city. There are issues about noise pollution and generator fumes. Giving a city dweller an affordable and alternative clean power source can potentially free up some cash to assist his dependents and other BoPs.
Clean power sources can prevent fire hazards especially from storing highly flammable fuels at home. Additionally, with more constant power supply, city dwellers can be a lot more productive, thus potentially moving them gradually up the social strata.
In addition, the reason I love the Urban Impact story is simply because you might have more people who are willing and able to pay for the cost of installing the solar system in their homes or office complex, with a lot less management and operational hassle. In short, there are impact stories everywhere; you just need to look well!
It’s not just about the impact
From the surface, the current model of off-grid solar players might not be sustainable. Though the impact story is getting louder, the financial health of the businesses themselves needs to be put in perspective. I looked at a few popular off-grid solar players and discovered that most of them allow their customers pay for the devices (Solar panels and the Indoor Unit) for up to 5 years.
This creates a working capital management issue. This is because the Original Equipment Manufacturers (i.e the manufacturers of the devices) will not give the off-grid solar companies 5 years to pay for the product sold to them, but these solar companies might not be able to collect the full cash for the devices until after 3 – 5 years. This creates a cash flow mismatch.
In working capital management, companies should endeavor to owe their suppliers money longer than it takes them to collect money from their own customers. This means that if you sell bottled water in traffic, your best working capital management plan will mean that you collect the bottled water from your suppliers today, sell the water and collect cash instantly from your own customers, then you pay your supplier the following day, and collect another carton of water. This invariably means that the bottled water supplier is financing the stock of the retail seller.
Now, let’s flip the scenario around. The supplier collects his cash upfront, this means that the seller will have to look for the money to buy the product. Imagine that the seller now sells on credit to the buyers, meaning that he has paid for the goods, but he is not receiving cash immediately. The seller is out of pocket in 2 ways, the initial cash for buying the product and the credit sale to his own customers. For the seller to replenish his stock, he has to look for additional money from somewhere else (maybe borrow) to by another carton of the water.
This second scenario best describes most off-grid solar companies. Like in that scenario, if the solar company is unable to raise additional capital (debt or equity), they will eventually run out of business, especially if there is huge default on the existing credit sale to their own customers.
So, it is a Financing play
Most off-grid solar companies should see that they might be in a financing business, not solar. Their goal should be to reduce the time to collection (Days of Sales Outstanding) from their customers and/or matching collection to payment of suppliers. If you cannot match days for days, you should at the minimum try to extend the days of payment outstanding.
With this, you will potentially have a more sustainable business.