By Anouk Verheijen and Faith Chege, EEP Africa Portfolio Coordinators for Southern and East Africa.
The global economy is dealing with an unprecedented set of challenges due to the COVID-19 pandemic. Like many other sectors, early-stage clean energy companies are heavily affected by the current crisis and the response of governments to it.
Travel restrictions are hindering sales, distribution and repair of products. Prohibitions on large gatherings are limiting grassroots marketing efforts. Customers are struggling to pay energy bills and commission-based employees are unable to earn a living wage. New renewable energy projects are also stalled due to slower licencing and permit processes as governments focus on the acute health and economic crises in their country.
The EEP Africa portfolio encompasses a diverse set of early-stage clean energy companies operating in Southern and East Africa. Our team has been reaching out to these companies to assess what impact the current crisis is having on their work and how EEP Africa can help mitigate some of the challenges they are currently facing. Based on our early observations, here are the key challenges we see and some of the innovative solutions early-stage companies in the sector are adopting to deal with them.
Challenge 1: How to keep your best staff on board?
Most of our portfolio companies are trying to keep their staff on board during this period of upheaval. Several companies have implemented measures to reduce staff costs through progressive salary cuts across the board or by asking management to defer some or all of their pay. Some portfolio companies registered in EU countries are receiving government relief payments to cover part of their staff salaries, while several African countries such as Kenya and South Africa are offering employees tax relief and delay of employee tax liability.
Other companies have increased short-term staff costs in the short run by taking commission-based agents onto their regular payroll. The goal is to retain trained agents, so the company is ready to re-launch sales efforts as soon as travel restrictions ease. This is manageable in the short-term but is likely to change with a prolonged crisis. Investors can support these efforts by making patient capital available.
Companies are also utilising this time of reduced operational activities to upskill their staff through online training programmes, ensuring their staff is even better equipped than they already are when business picks up again. The EEP Africa team is supporting this with a series of webinars for our portfolio companies covering various topics such as financial management, scenario planning and e-waste management.
Challenge 2: How to service debt when revenues are constrained?
A concerted effort is being made by financial players in the clean energy sector to establish a COVID-19 relief fund. While this will provide support to companies facing financial challenges, it is not readily available yet and many companies are facing acute cash flow challenges now. This is especially the case for companies operating in countries that have opted for a stringent lockdown, such as Lesotho, Namibia, South Africa and Uganda. Companies that rely heavily on customers affected by the temporary closings, such as schools and restaurants, are also hard hit.
As early stage clean energy companies often receive funding from various providers to grow their businesses, this provides an opportunity for investors and donors to work together and come up with creative solutions. In our portfolio, we are working together with other debt and grant providers to restructure payments in such a way that outstanding debts do not restrict/prohibit company operations from continuing. The EEP Africa team is mobilising technical assistance in this area to help companies with credit management, financial scenario planning, and budgeting to ensure they have a robust financial plan in place to weather the rest of the storm.
Challenge 3: How to keep the lights on?
Many of our portfolio companies operate mini-grids or sell PAYG solar home systems that provide electricity to communities. Their customers are starting to struggle to meet payments. To dampen the effects of the COVID-19 crisis on the most vulnerable communities, some portfolio companies are responding positively by providing payment relief to business customers and healthcare facilities for a defined period. Others are donating solar systems and staff time to electrify and stock health centres with medical necessities. In the long run, this might further accelerate decentralised electrification of rural health centres. Some companies have introduced the 1% pledge concept, making a percentage of the company’s revenue available for payment relief, while encouraging clients to honour their monthly repayment obligations.
However, there is a risk that short term payment relief undermines long term gains toward bankability for both companies and customers. This is a valid concern. The private sector has demonstrated how to bring energy access to the poorest, the most remote and the unbanked, often at substantial risk. Asking those same companies to absorb a period of non-payments will cause many to collapse and reverse the substantial progress we have seen toward SDG7 and energy access for all. Some developed countries have introduced cash transfers to support individuals and households through the crisis. It is time to be asking all the partners if something similar may be needed in our region and in our sector.
Challenge 4: How to minimise delays in procurement?
Many of the products sold by clean energy companies are manufactured in China. While Chinese production capacity is starting to ramp up again, the shipment and clearance of goods into Africa is likely to delay orders. Moving goods across borders within Africa is another challenge; landlocked countries such as Uganda and Rwanda rely on truckers to transport goods from ports in neighbouring Kenya and Tanzania. Due to fears about truck drivers transmitting COVID-19 across the region, countries are setting up restrictive measures that may cause further logistics delays in the region.
We also see that procurement is delayed by a rush on forex in many African countries, including Malawi, Zimbabwe and South Africa. As governments prioritise forex for importing medical equipment, companies are not able to settle payments to their suppliers and their orders are delayed. As a grant financier, EEP Africa has been assisting our portfolio companies by making advance payment into their forex accounts to ensure orders can be placed and paid on time.
An innovative solution that has come up to mitigate procurement delays has been shipping semi-finished products and finalising the products in-country. This development could have a long-term impact and potentially boost local assembly in the post COVID-19 era.
Challenge 5: How to future proof your business?
As we talk through the challenges on a daily basis with our portfolio companies, we are often reminded of that old adage, what doesn’t kill you makes you stronger.
Many early-stage clean energy companies are using this time to reassess their business model to ensure their business is strong when the current restrictive measures are eased. Some companies are carrying out a detailed analysis of customer data based on existing information or are developing surveys that can be carried out by call centre staff. Others are fast-tracking R&D on new products so that these are ready to be launched later in the year. Many companies are also reassessing the cost structure of their business and how to make substantial savings, for instance, by relocating their headquarters from the capital to a regional factory, localising their O&M support or narrowing their product range.
EEP Africa has designed a COVID-19 rapid response BDS offering for its portfolio companies. This support helps companies reassess their operations through a 3-day initial business analysis, followed up with more in-depth BDS support if required. In addition, EEP Africa is part of the Covid Energy Access Action Network, which coordinates and mobilises TA for the sector more broadly. TA providers and funders in this group are exploring plug-and-play and open access digital tools that can help firms to improve their analytical and decision-making capabilities. The network is also looking into simpler, scalable engagements that can provide firms with curricula and tools that they need, without over-reliance on 1:1 interaction.
While challenging and unpredictable times are still ahead of us, all of us on the EEP Africa team are truly inspired by the creativity released by the current crisis and the resilience demonstrated by our portfolio companies so far. In the coming months, EEP Africa will continue to be a flexible funding partner to help the early-stage clean energy sector expand and continue to positively impact the lives of the people they serve.