GVEP International Introduction and Market Overview

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Contents

Introduction to GVEP International

Challenges Experienced and Addressed by SMEs

Market Trends and Investor Feedback

GVEP International Overview

› Mission: Working with local businesses in developing countries to accelerate access to modern energy.

› Value Proposition: Sustainable businesses are longer lasting than the effects of direct donations.

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› Impact: Over the past 5 years, GVEP has provided more than 4 million people with access to clean energy, created 3,000 local jobs, saved 2.7m tonnes of CO2 and leveraged US$38m in support of energy enterprises.

› Background: Launched in 2002 as a World Bank initiative; registered as a UK charity in 2006. Current headcount of 80.

› Locations: HQ in London (UK), field offices in Barbados, Senegal and East Africa (Kenya, Tanzania, Uganda, Rwanda).

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Funding Partners Program Partners

GVEP International Collaborating with Broad Network of Partners

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Micro-Enterprise Support: Business skills capacity building and mentorship; technology training; market building activities; enterprise development support to increase productive use of energy; access to micro-finance.

SME Advisory: strategic planning, investment advisory, operations/logistics support, financial planning and analysis, marketing and sales support, M&E advisory/impact assessment, project development support.

Market Research: research conducted and published related to cookstoves and briquettes, solar-enabled mobile phone charging, solar product demand.

Access to Finance

› Investment readiness and capital raising strategy.

› Introductions to providers of grants, debt and equity.

› Lending facilitated through credit enhancement in the form of loan guarantees (both at micro-finance level with MFIs and SME level with commercial banks).

› Training of financial institutions, both MFIs and commercial banks.

› Direct grant support

GVEP International Activities

Peter George

Head of Advisory Services

Energy financial advisory, investment

Merrill Lynch, ArcLight Capital

Davinia Cogan

SME Advisor

Impact investing, inv. funds, micro-finance

Kiva, ING, Social Stock Exchange

Gregory Miller

SME Advisor

RE analysis, energy/impact investment

Big Society Cap., SNV, E+Co, New Energy Finance

Belinda Mills

Project Dev. Specialist

RE project dev/mgmt, wind, biomass

Windlab, Envitech Solutions

Samantha Carter

Engineering Fellow

Wind and biogas projects

Fichtner Consulting Engineers, EWB

Wakar Kalhoro

Financial Access Manager

International law and finance

StanChart, Hogan Lovells, Allen & Overy

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Advisory Services

Team Profile

Katrina Gordon

Intern

Financial management, micro-finance

Boeing, Kiva

Lindsay Van Landeghem

SME Advisor

Mgmt consulting, M&E

BTS USA, Innovations for Poverty Action

• As of May 2014, in our first year of operations, the Advisory Team has completed 69 engagements with 53 clients, and has 32 engagements currently in progress with 31 clients

Advisory Services Portfolio of Engagements

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48%

10%

16%

18%

8%

By Country

Kenya

Rwanda

Tanzania

Uganda

Other/Non-Specific

39%

5%

2%

5%

4%

14%

20%

6% 5%

By Engagement Type

Capital Raise Support

Financial Planning and Analysis

Human Resources

Marketing and Distribution

Operations and Supply Chain

Project Development

Strategic Advisory

Technical Advisory

Other

› Specialized in East Africa: ~50% of our projects

are in Kenya, reflecting the deeper market there.

›Access to Capital is Key: ~40% directly related to capital

access, reflecting the needs of companies in the sector.

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Contents

Introduction to GVEP International

Challenges Experienced and Addressed by SMEs

Market Trends and Investor Feedback

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Challenges SMEs Experience in the Field

Working Capital

End-User Financing Distribution

Access to Market Data

Seed Capital

After-Sales Service

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Challenges Seed Capital Complication Situation

› Require access to capital to prove out business concept

Resolution

› Investors and creditors are not comfortable releasing capital until a proof of concept has been established

› The pilots and feasibility studies that are necessary to prove out a business model are often expensive

› Access capital via friends, family, and angel investors that the company is familiar with to launch product pilots

› Access grant capital to develop product pilots and feasibility studies

› Utilize crowd-funding sites to source capital for innovative initiatives

› Utilize pro-bono service providers to provide technical support for pilots and feasibility studies

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› Access to international and local debt facilities

› Increasing number of international actors seeking to provide working capital to energy SMEs (e.g. responsAbility Working Capital Facility, Deutsche Bank Global Climate Partnership Fund, AlphaMundi Bastion Fund, SunFunder)

› Offset risk perceived by local banks through education and increased communication with financial institutions, credit enhancement such as loan guarantee facilities, currency risk insurance, etc.

› International debt facilities typically target larger loans than are required by SMEs in East Africa

› Local financial institutions are risk averse and have high cost of capital

› Renewables are perceived as high risk sector, and banks are unfamiliar with innovative repayment models

Challenges Access to Working Capital Complication Situation Resolution

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Challenges End-User Financing

› Facilitating the purchase of energy products given limited purchasing power

› Lack of access to working capital in order to finance in-house consumer finance facilities; payment track record and scale of customer base is key

› Lack of adequate data pertaining to the credit profile and repayment rates of end-users

› Third-party consumer finance through local MFIs is challenging; lack of capacity, incentives to market energy products

› Access sufficient capital to develop in-house credit facility for distributors and/or end-users (via mechanisms denoted in previous slide related to WC)

› Create payment models, tech which facilitate gradual repayment (PAYG, hire-purchase, modularity)

› Develop end-user credit profiles using proxy data from local telecoms, and other collection methods (i.e. remote monitoring, customer surveys, data collection via sales agents)

Complication Situation Resolution

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› Distribute products to hard-to-reach areas with limited transport infrastructure

› Developing the infrastructure to transport goods through in-house methods can be prohibitively expensive, given vehicle, fuel, and staffing costs

› However, utilization of couriers is expensive, especially when limited numbers of products are distributed

› Utilize local transport to distribute goods to local agent network

› Co-distribute goods with other small product companies via public or private means

› Partner with companies that already have established distribution networks (MNOs, Coca-Cola, Unilever)

› Develop challenge funds to incentivize accelerated distribution (e.g. SNV results-based financing initiative)

Challenges Distribution Complication Situation Resolution

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› Provide effective after-sales service to remote customers, especially to build confidence in renewable energy products and companies

› Returning faulty products to a central hub can be more costly that distributing products, as returns are infrequently transported in bulk

› Limited number of high-capacity, trained individuals to address issues on the ground

› Store additional stock with agents in remote areas, and replace units as needed; return units to central hub for repair and redeployment

› Develop simple products that local talent can easily repair

› Provide training to local talent, and provide access to training manuals in hard-copy or via smart phones

› Utilize call center to source customer complaints, and coach end-users through repairing simple issues

Challenges After-Sales Service Complication Situation Resolution

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› Facilitate access to data about the market, competitors, and consumers

› Investors and creditors require a proof of demand/competitive advantage to finance start-ups

› Companies must be able to construct credible financial projections

› Develop internal infrastructure to track consumer data (i.e. remote monitoring systems, M&E surveys, data collection via sales agents)

› Encourage local REAs to act on established mandates pertaining to data aggregation and sharing

› Promote market knowledge-sharing via workshops and on online forums

› Solicit market data/feasibility studies from consulting firms providing relevant services

› Data around consumer preferences and product demand that exists in more sophisticated markets is largely unavailable for BoP consumers in East Africa

› Given that the nascent state of the market, few companies are public; data that would allow companies to project or benchmark performance does not exist or is not public

Challenges Access to Market Data Complication Situation Resolution

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Contents

Introduction to GVEP International

Challenges Experienced and Addressed by SMEs

Market Trends and Investor Feedback

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Market Trends

› End-user financing mechanisms (PAYG, modularity, hire-purchase) permit BoP

access where several years ago upfront costs were prohibitive

› Increasing interest in local manufacturing, particularly in stoves market; limited

technical capacity, quality control, and higher costs than Asia are barriers

› Access to local debt highly inaccessible given risk perceptions/rates, collateral

requirements, short tenors, lack of capacity; USAID and DCA in Ke/Tz are, for

example, trying to overcome this barrier (GVEP-sponsored facility)

› Large capital raises by established players (i.e. M-KOPA, Off-Grid: Electric, d.light)

shows that all types of capital are available, though early-stage gap still exists

(CIC seed fund, AECF, donor initiatives, and impact funds trying to address)

› Increasing interest in mini-grids as a means to deliver scalable access amongst

donors, investors and SMEs; certain markets are esp attractive given the

conducive regulatory environment established with help from actors like WB, IFC

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Market Trends

Mini-Grids

Still defining scalable business models: Mini-grid sizes tested by our clients range from 1-2kW to >500kW with different pricing strategies; some use ABC model, others do not

Vague regulation: Regulatory frameworks for mini-grids are underdeveloped and grid-extension is priority over off-grid solutions; regulatory frameworks differ quite dramatically depending on country

Relatively little private sector involvement: Most significant dev. driven by gov’t, donors, NGOs and local communities; clearly this is beginning to change with increased private sector activity

Lack of financing

Similar returns to grid-connected generation, but higher perceived risks (no offtake insurance, etc.).

Therefore:

› Lack of project development funding

› Few local lenders offer long-tenor debt financing at feasible rates

› Few active international lenders, equity isn’t well matched (SME investors want tech co’s, project investors want grid-connected)

› grants introduce delays and uncertainties

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Investor Concerns

› Mini-grid Specific: Few developers with track records; Time to financial close long, given

permitting, insurance challenges; financing difficult to secure; challenges associated with

offtake (history of late payments by national utilities); remote nature of mini-grids poses

distribution and maintenance challenges

› Management Team: Perceptions of management team capabilities, including remotely-

based management, inexperience in East Africa or with successful previous start-ups, and in

some cases educational quality / limited skill sets

› Proof of Concept: Lack of proven concepts, due to very early-stage capital cap, where

companies have fully-demonstrated competitive advantage of their technology/business

model, a strong understanding of the market, and consumer demand

› Consumer Willingness-to-Pay: Investors find it difficult to differentiate and identify possible

„winners“ amongst product companies with high upfront costs and without a strong end-

user financing/distribution model

› Importance of Returns: Many investors seek market-rate returns, and energy companies

serving the BoP are relatively lower-return that other sectors; in other cases, open to lower

returns, but recognition that only companies that survive over long term (typically ~10% of

start-ups) will deliver even concessionary rates of return

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› SMEs continue to innovate to address some of the challenges inhibiting scale-up, including some of

which have been outlined in this presentation

› Regulators to improve policy, law and regulatory framework to enhance businesses’ ability to operate

effectively in the market and to unlock sources of commercial credit

› Donors engage with SMEs and fill gaps where private sector financiers will not participate; for projects

that are too small for institutional investors, aggregate capital via portfolio facilities (e.g. mini-grid dev.

facilities, working capital funds, etc.)

› Various parties continue to attract private capital by mitigating risks, such as credit risk (through

insurance, guarantees) and currency risk (through hedging/“de-dollarization“ of the energy sector)

› Continued creation and aggregation of data in order to promote best practices and to enhance

companies‘ ability to model and forecast with more precision

› Continued investment in incubation, business development, and advisory support in order to

promote the growth of businesses and facilitate the flow of capital

Way Forward

Thank you

We would be pleased to work with partners engaged throughout the renewable energy

sector.

Please contact Lindsay Van Landeghem for more information at:

lindsay.vanlandeghem@gvepinternational.org