nigeria power sector program (npsp) strategies for …
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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
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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
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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
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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
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1. STRATEGIES FOR DISTRIBUTION PARTNERS
5
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TWO MAIN TYPES OF DISTRIBUTION PARTNERSHIPS
6
Internal industry
partnerships with SHS
counterparts
External partnerships
with distributors in other
industries
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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
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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
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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
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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
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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)
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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
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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)
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2. STRATEGIES FOR CUSTOMER ENGAGEMENT
16
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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