Results-based financing to spur solar company growth
Bringing solar products to those who need them most requires a dedicated network of sales people, installers, technicians, and customer service agents. Often referred to as “last-mile distribution networks”, these channels are neither easy nor cheap to build, and small-medium enterprises catering to the economic “base of the pyramid” often lack investment funds to build a strong last-mile presence.
Recognising the important role the local private sector plays in connecting rural households to cleaner and better sources of energy, the French Development Agency (AFD) with funding from the European Union (EU), in partnership with SNV Netherlands Development Organisation have set up a dedicated private sector development fund that rewards local solar enterprises financially for investments made and risks taken in the expansion of their last-mile distribution networks.
As part of the AFD/EU funded Solar Microfinance Program, local solar enterprises can earn a so-called “post-financing” incentive for each solar product they install in connection with a dedicated solar microloan from a partner MFI of the program. The cash incentive can be claimed after the sale of a solar product has been verified by the program.
Such ‘Output-based’ or ‘Results-based Financing (RBF)’ schemes are an increasingly popular way to support market-based development interventions, as they allow the private sector flexibility to innovate most appropriate business and distribution models, and the incentives offer much needed capital for re-investment in continued business growth.
SNV is among the first organisations worldwide piloting Results-based Financing (RBF) in the energy sector, aimed to overcome market failures constraining private sector delivery of modern energy services to isolated communities. Building on lessons learned from SNV’s results-based financing scheme for PicoPV Lighting Applications in Tanzania, SNV now employs the mechanism for the first time in the solar sector in Cambodia.
December 2015 saw the first disbursement of a cash incentive advance from the Solar Microfinance Program’s private sector development fund to local solar enterprises. Understanding these businesses’ dire need for working capital to support the growth of their operations, the program makes a 50% advance available, the remainder of which is transferred once solar installations in households have been verified.
The cash incentive advance is expected to have a direct, tangible impact on the solar companies’ ability to expand their rural last-mile operations – with new rural branch offices expected to open, additional staff to be recruited and trained, and additional marketing and sales activities to be launched. The Results-based financing scheme also plays a crucial role for solar companies to leverage additional commercial loans and/or investment financing from other financial actors for further scaling of their business operations.
The Solar Microfinance Program is funded by the French Development Agency AFD and the European Union.