Financing Productive Use Technologies

In 2020, the Nigerian Off-Grid Market Acceleration Program (NoMAP) proposed a pilot to test the prospect of financing of Productive Use Equipment through Microfinance Banks in a bid to attract private sector financing for the acquisition of these assets in newly electrified communities.

NoMAP signed MoUs with four Mini-Grid developers in Nigeria and secured the interest of Grooming Microfinance Bank, one of the leading microfinance banks, for a pilot scheduled for Q4 2020. Unfortunately, the proposed green financing product terms proposed by the Microfinance institution were not acceptable to the Solar Mini-Grid Developers (SMG) as they indicated that the proposed 2.25% monthly interest rate (27% per annum) was too high for the intended obligors of the loan. The Microfinance Bank was also unable to lend at the preferred rate of the SMG (15% or below) due to their high cost of funds.

Based of subsequent feedback from all participating stakeholders in January 2021, NoMAP decided to pivot the pilot to: provide funding directly to mini-grid companies for on-lending to productive users at concessionary rates and to see the impact of the financing on electricity consumption, revenue generation, job creation, and livelihood improvement. The pilot is expected to reach more than 500 small businesses across 20 mini-grids locations

Pilot of Productive Use On-Lending Fund

NoMAP’s initial study indicates that the financing options for productive use equipment is limited and comes at a high cost to end-users. Although, there are a few interventions offering grants, these funding opportunities are time-bound and cannot commensurably scale to meet the fast-growing demand of newly electrified communities for both households and productive appliances. Thus, NoMAP is proposing a pilot to test the viability of a finance vehicle specifically for financing productive use equipment at selected mini-grid sites at terms that are “friendlier” than prevailing market rates offered by microfinance institutions and other commercial lenders. During the pilot, NoMAP will work with two mini-grid developers across multiple sites to test out a financing model for productive use asset. The choice of two mini-grid developers is informed by the fund size, need to limit exposure to multiple obligors and the need to deliver an expedited pilot.

The primary objectives of the pilot include:

  • Test that a market exists for debt financing of productive use assets outside of the existing options offered by microfinance and commercial banks

  • Stimulate demand for electricity in communities powered by mini-grid using productive assets and improve the viability of mini-grids.

  • Increase the income-generating capacity of newly electrified communities.

  • Attract debt financing for productive asset procurement.

Pilot of Productive Use On-Lending Fund

NoMAP is earmarking the sum of USD 200,000 to $250,000 for on-lending to the SMG developers (PU Fund) specifically for the purchase of productive use equipment at concessionary rates. The equipment will be purchased from the SMG by the end-users under a lease-to-own arrangement at not more than 15%

The PU fund will not be registered as a separate legal entity due to time constraints of the pilot. The source of funds is the Grant from Shell Foundation/USAID and FCDO. NoMAP will oversee the day-to-day running of the fund, disbursements to portfolio companies (shortlisted SMG companies) and monitoring of loan repayments by PU customers.

Each Portfolio SMG Developer is entitled to a loan equal in value to 50 % of the total fund amount. The loans will be disbursed in local currency to portfolio companies. The SMG must agree to make repayments along with interest to the PU fund on a quarterly basis. The fund will be loaned to the developer at 8 percent.

For the pilot, the PU Fund will only support two mini-grid developers, to ensure funds are adequate and reduce its risk exposure. It should be noted that SMG companies may have multiple sites. The companies are allowed to select more than one site to participate in the pilot.

NoMAP will extend fund to SMG developers on the premise that:

  • The tenure for each loan tranche to SMG will be 12 months.

  • Interest rate extended to SMG developers will be set at 8%

  • Repayment periods for end users should not extend 12 months.

  • Interest rate extended to end users is set at 15%

  • SMG Developers agrees to share data on loans disbursed, repayments, loan defaults, PU customers monthly energy consumption.

  • Repayments from end users must be made through payment methods that can be tracked digitally such as cash deposits at banks, agent networks or recharge top-up

  • SMG must make repayments to the PU Fund on a quarterly- basis

Criteria for Eligible Mini-Grid Companies

  • Mini-Grid company has been in existence for more than three years, with a minimum of three active mini-grid site.

  • Has identified verified equipment suppliers and logistics companies for value chains in the mini grid communities.

  • Automated payment collection system in place via Agent networks, USSD and Online Banking

  • Once funds are disbursed, agree to a bi-annual audit by a 3rd party accounting firm on the use of funds.

  • Interest rate spread on the fund will go towards operational and management costs relating to the

    facility.

  • SMG Developers are encouraged to work in tandem with cooperatives in the community to select

    potential obligors of the fund. Where no cooperative exists a community leader such as the chief, Imam or Pastor will vouch for the obligors.

Role of NoMAP

The NoMAP team will be tasked with management of the fund, data collection, business development support to end-users, monitoring and evaluation exercises.

NoMAP will not directly lend to the end users but will provide:

  • Customer selection support: ensuring the development of strong methodology to shortlist eligible customers, as well as facilitate business development sessions for customers.
  • Cash flow and project management: Monitor default rates, repayment behaviours, impact on women led SMEs, installation of equipment and monitoring and evaluation activities

NoMAP will gather data and develop an end of pilot learning report to be shared with potential funders for the development of a larger impact fund for productive use across all mini-grid sites. The learning report will detail challenges, learnings, successes of the pilot and detailing areas identified as key success factors for the increased participation of private capital to funding productive use equipment.

Role of Solar Mini-Grid Developers.

  • Identification and initial screening of potential end-users
  • Engagement with equipment manufacturers and negotiation of pricing of equipment, warranty, and after-sales support.
  • Collection of monthly repayment from end-customers
  • Collection of repayment data and sharing of data with NoMAP
  • Appoint a contact person to oversee the pilot and be the point of contact with NoMAP – Immediate Operations and Maintenance support to obligors when the need arises.

Operational Approach

Donor Funds Disbursed to Solar Mini-Grid Companies

NoMAP will shortlist Solar Mini Grid developers to access funds for procurement and distribution of Productive Use Equipment to MSMEs located in mini-grid communities.

The equipment will be made available to the customers at an interest rate of 15%. SMG may request collateral inform of a deposit from customers, this must not exceed 10% of the principal amount (cost of equipment) , with repayment tenures of 6 month – 12 months. For tenures longer than this SMG must receive approval from PU Fund managers. The SMG are incentivised to lend to credit-worthy customers as they stand to make a 7% spread on each loan disbursement and consistent repayment translate into regular consumption of electricity and potential increase in Average Revenue Per User (ARPU)

Beyond the pilot, it is believed the fund will be revolving, repayments by beneficiaries will ensure the facility is replenished for on-lending to customers in other mini-grid communities outside of the pilot.

Operations of Productive Use Funds

  • NoMAP will work with the the Solar Mini-Grid developers to develop a credit risk assessment methodology leveraging on the toolkit developed by the Cross Boundary Innovation Lab to identify potential customers that qualify for the facility. As an extra precaution for large loans, SMG will require the head of a cooperative or a community leader such as the chief, Imam or Pastor will vouch for the obligors
  • Equipment with be made available at an interest of 15%. An initial deposit of 10% of the equipment value is required from all beneficiaries. Equal monthly repayment will be agreed with beneficiaries. All beneficiaries will receive an initial moratorium period of 30 days.

  • Payments from cyclical value chains such as agriculture will ensure repayment falls into harvest months i.e., balloon payments or extended moratorium periods.

  • Mini-Grid developer will rely on peer pressure when working with cooperatives and community leaders. Stating clearly that default by any member will prevent other members from accessing the equipment.

  • Shortlisted Appliance Supplier must agree to provide warranty along with customer service support for a period of 12 months.

Stakeholder relations

NoMAP will engage will stakeholder in the Nigeria Off-grid sector to validate this concept note and obtain their input and review comments. NoMAP has had prior engagement swith the Rural Electrification Agency, NPSP and ACE TAF in 2020 on the first iteration of its productive use pilot. On the proposed pilot, NoMAP is currently engaging the following stakeholders:

  • FCDO Nigerian Climate change Advisor
  • Nigerian Power Sector Program (NPSP) /Power Africa
  • Nigerian Energy Support Program/GIZ
  • Rural Electrification Agency (REA)
  • African Clean Energy (ACE) Technical Assistance Facility.
  •  

Collaboration.

  • NOMAP will collaborate with NPSP in developing relevant thought leadership and knowledge product relating to the project. It will update the market research report undertaken by NPSP on the productive use technology and the agricultural value chains in some states in Nigeria. NPSP’s input and contribution during the propose convening on productive use technologies and the food value chain.

Cross Boundary Innovation Lab.

NOMAP will draw extensive lessons from CBIL’s previous pilots to develop a credit appraisal methodology for the pilot and in the overall execution of the pilot.

Key Data Points.

The pilot will collate key data points along the following lines:

Financial

  • Cost of appliances
  • ARPU for productive use obligors
  • Default rate
  • Non-performing Loans
  • Write-offs

Operational Data

  • Performance and usage of appliances: Number of operational hours
  • Number of down-time related to mechanical faults or breakdown.
  • Load consumption before and during the pilot

Livelihood

  • Number of businesses supported.
  • Number of new jobs created.

Gender

  • Number of women-led businesses supported.
  • Number of female jobs created

Miscellaneous

  • Demographic information of obligors

High-level Timeline

S/N

High Level Activities

Timeline

1

Short-List two SMG to conduct pilot with and sign addendum to MOU

August 2021

2

Site Visits to verify PU users and Appliance request

August 2021

3

Support SMG to Develop credit risk assessment tool and or adapt Cross Boundary Lab credit tool kit to select suitable consumers.

August 2021

4

Conduct business development training for obligors

September 2021

5

Deploy first tranche of funds to SMG for on-lending.

September 2021

6

Commence Data collection on loan repayment, energy consumption

December 2021

7

Convene event for stakeholders to discuss opportunities for financing productive assets 

July 2022

Key Risks and Mitigation

S/N

Risk

Description

Mitigation

1

Credit Default

Risk that the developers will default on the loans given to them owing from poor downstream credit risk or moral hazard

Binding agreement with developers with strong clauses to claw back funds in event of default, and sound credit risk assessment to screen eligible customers

2

HSSE risk

Inability to visit pilot locations due to incidents of conflict, farmer/herdsmen conflict

Regular review of security report from NPSP security team before selection of pilot locations

3

Fund diversion

Risk that the mini-grid developer will divert the funds meant for on-lending to other uses

Binding agreement with mini-grid developer with clauses prohibiting fund diversion

Next Steps

  • Amend MoU with Mini-Grid developers to reflect participation in on-lending fund.
  • Receive proposed distribution plans of loans/equipment from SMG developers.
  • Disbursal of funds in tranches to SMG developers upon receipt of approved customers
  • Monitoring and Evaluation
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