In a new whitepaper, SNV, Sun Funder and IKEA Foundation highlight the importance of including local companies in Results-Based Financing (RBF) and investment-readiness support initiatives.
This will lead to local embedding, buy-in at a national level and ultimately - systems change ensuring long-term sustainability.
Results-Based Financing (RBF) is seen as a useful instrument to de-risk commercial investment and stimulate private sector engagement for the delivery of results in challenging markets. Successfully tested and fine-tuned in the distributed renewable energy (DRE) sector since 2014 in several countries, RBF mechanisms are now ready for replication and further scaling. To ensure efficiencies in implementing larger RBF initiatives, remote management of multi-country initiatives is tempting. However, this might lead to the exclusion of local players and potentially distorting local market dynamics.
'When designed well, RBF can overcome market barriers constraining the private sector delivery of modern energy services to underserved communities. However, if RBF only rewards well-established commercial players for business activities they would have done anyway, it loses its purpose. RBF should stimulate new initiatives while crowding in additional capital for activities that otherwise would not have happened. To achieve universal energy access, we need more businesses – particularly local companies – delivering those services. And we need more companies that are product-agnostic and can adjust their business offerings to local needs.'
Martijn Veen, Global Head of Energy at SNV
SNV and SunFunder developed a close collaboration in the EnDev off-grid solar RBF facility in Tanzania where the RBF incentives provided to solar companies acted as a contingent source of repayment. This enabled SunFunder to include local companies in their loan portfolio, expanding their activities and, ultimately, increasing the number of people who gained improved energy access. Backed by RBF contracts, local solar companies managed to access commercial loans for the first time. Today, the collaboration between SNV, SunFunder continues in the World Bank-funded Kenya Off-Grid Solar Access Project (KOSAP).
'Local companies have a hard time accessing investment for their sustained growth. They often require both smaller loans and accompanying investment-readiness support. This results in higher transaction costs, which make them unviable for commercial lenders. But capacity building for local companies requires local presence in those markets, and investors themselves can be best positioned to identify gaps and provide targeted support. It also takes time, which invites a specific need for more patient capital.'
Audrey Desiderato, Co-Founder and COO at SunFunder
Paired with RBF grants to de-risk commercial investment, providing investment-readiness support to local companies will contribute to inclusive growth and the scaling needed to achieve universal energy access. Technical assistance and capacity building for local companies requires a physical presence in those markets, and investors with that local presence can be best positioned to provide targeted hands-on support. Encouraging the participation of local companies also requires an adaptive approach from fund managers, in which they tailor the fund design, eligibility criteria, financing conditions, tools and templates to be used, to meet these companies’ unique needs. Working alongside companies to develop their capacities – e.g., in financial management and business planning – will contribute to pipeline development and risk reduction for investors.
For a broader overview on why local embedding of market support mechanisms like RBF and investment-readiness support is so important, with some examples of practical application, check out the full white paper.
You can also read an overview of the whitepaper in an article published this week in Next Billion. To see more, visit this webpage.