Can Social Enterprise Power Africa?

The headline “Africa Rising” graced the covers of both Time and the Economist during a 15-year period of strong growth that began in 2000; both magazines saw a continent on the verge of breaking out.

Stumbles in recent years have dropped sub-Saharan Africa’s economic growth rate to just 1.4% in 2016. Factors limiting growth include falling commodity prices and the political quagmire in South Africa.

But Tony Elumelu, a Nigerian banker and philanthropist, describes the lack of electrical power as the “single biggest obstacle” to Africa’s development.

USAID estimates that two thirds of the people in sub-Saharan Africa lack access to reliable power.

Writing in the New Yorker, Bill McKibben said, “Until recently, most people assumed that the continent would electrify in the same manner as the rest of the globe”—through centralized electrical plants and grids. But recently the growth of solar micro-grids that serve entire communities and home-based systems has led some to wonder whether Africa can bypass centralized power entirely and make distributed, renewable energy the conventional source of power for the continent. There are already more off-the-grid solar homes in Africa than the U.S., McKibben notes, but population growth means “the absolute number of Africans without power remains steady.”

Nate Heller ’09 is a co-founder of PEGAfrica, a pay-as-you-go financing firm that aims to bring solar home systems and related products to 500,000 households in West Africa by 2020. Yale Insights talked to Heller about the innovations that the social enterprise has introduced.

Q: Can you explain what PEGAfrica does?

We’re an asset-financing company. Our primary product is a solar home system for underserved, off-grid households in West Africa that we sell on a pay-as-you-go basis. Notice that I didn’t say we’re a solar company. The business model is similar to the company that is selling you a television or a washing machine on installment credit. We’re not selling energy. We’re basically selling a home appliance that happens to be a solar system. Just as your washing machine replaces your need to wash your clothes by hand; this replaces your energy needs. People buy this product because it makes life easier, and we’re selling it in a way that makes it affordable.

Q: How does daily life change when households get these solar systems?

The system is really small-scale. It’s got three lights, a radio, a flashlight, a mobile phone charger, a solar panel, and a battery. But it has a huge impact.

Currently these households are buying kerosene; they’re buying batteries; they’re walking two hours into town to pay to charge their mobile phones. I lived in a village for two years when I was in the Peace Corps. I know that kerosene or battery-powered lamps give you enough light to move around the room, but you can’t do things that require focus. They are too dim to read with, so a family will have one flashlight. One child can use it to study until mom has to use it so she can cook dinner. Our product makes the entire room bright enough for multiple people to do what they want to do.

People have told us, “My shop used to close when it got dark at 6 p.m. Now we can stay open until 10 p.m.” Or “I have a sewing business and I couldn’t work after dark; now it’s bright enough that I can.” Being able to charge your mobile phone at home and do it for free once you’ve got the device means people communicate a lot more. They have much more access.

In addition, over the lifetime of the product it ends up saving them quite a lot of money. Generally, what we charge them is about the same as what they were already spending on kerosene on a weekly basis. The lifetime of the system is five years. They pay it off after a year, so they save four years’ worth of energy spending, which is $800 to $1,000.

Q: Why hasn’t this been done before?

For our customers, up-front cost is the major issue. Nobody has a couple of hundred dollars to spend on a solar home system or, if they do, they don’t trust it enough to make that kind of an investment. Selling the system on credit lets them pay for it over time with the money they would otherwise spend on kerosene and batteries.

From a business perspective, it’s very hard to assess their credit risk—there’s no data on credit history; they don’t have any collateral. On top of that, because the customers live out in the middle of nowhere, trying to collect tiny payments from thousands of people scattered all over the place is very expensive.

Pay-as-you-go using mobile money evolved in response. They pay with their phone, so we don’t have to collect cash. And we’re protected because there’s a meter in the solar system, so if they stop paying, it stops working. That lets us sell it on credit more safely. These innovations make it possible to do something that wasn’t possible before. It makes these households into viable customers.

Q: Mobile money was really launched and took off in East Africa. How’s it doing in West Africa?

There’s a chicken-and-egg issue with mobile money. You won’t learn how to use it and carry a balance until everybody else has it and you can buy things with it in your everyday life. In Kenya, mobile money is huge—it’s not quite like us having an email address, but it’s pretty close. You can expect to be able to buy a Coke at a shop with mobile money. It’s not yet like that in West Africa.

It is growing really fast; the transaction values in West Africa for the first quarter of 2017 were comparable to all of 2015, but we’re still at a point where people don’t necessarily have enough reason to carry a balance. For about 70% of our customers, it’s the first time they’ve really used a mobile money account. Maybe they had paid a mobile money agent to send money to someone, but we’re the first time that they actually get their own account.

We’ve done some studies with the World Bank that found we are a driver of mobile money adoption by our customers. It’s on the order of a 200% increase in how much they use it. But that doesn’t mean there aren’t challenges. If the mobile money guy is two hours away and you’re going there anyway in five days because it’s market day, you’ll just buy kerosene for five days, if you aren’t a regular mobile money user. It’s more convenient to wait to pay us until you’re going to town anyway, whereas in East Africa, you’ll carry a balance and pay because it is just as convenient as buying kerosene.

So we have worked to figure out incentives to get customers to pay on time beyond just having light when it’s convenient. One incentive is a program where we give free hospitalization insurance to anybody who’s on time with their payments through a partnership with a microinsurance company. For every month you are on time with your payments, you get one free month of hospitalization insurance. If you pay the system off on time, you get a free year of insurance.

Another incentive is the PEG Good Payers Club, where having a good credit rating with us qualifies customers for follow-on products. We sell mobile phones, solar TVs, and efficient cook stoves, on credit, using the original solar system as collateral. Offering tangible reasons to be on time has been useful.

Q: How is the business structured?

The basis of our business is licensing and distribution. We’re using other companies’ products in order to focus on building a big distribution network in West Africa. We sell through a network of commission-based sales reps. In Ghana, we have about 30 service centers. Since launching in Côte d’Ivoire at the beginning of this year we’ve opened 7 so far. Each service center has teams that go out and knock on doors in villages. They’re traveling through the bush; they’re wading through rivers. It takes a lot to reach the people living in these remote places.

Q: PEG is financed through a mix of private investment and grants. What does the hybrid funding tell us about the company?

Fundamentally, we see ourselves as a for-profit that’s financed by regular investment. We are primarily funded by equity and debt.

At the same time, our goal is to help people in a sustainable scalable way, and if somebody is just looking to make returns, there are of course safer options in a lot of different industries. Most of our investors are impact investors. They include energy-focused funds backed by the CSR programs of major French companies in the energy/electric space, like Engie and Schneider Electric. They also include multi-sector impact investors like the Acumen Fund and Blue Haven Initiative, and Africa-focused funds like I&P Conseil. As the companies in our sector get bigger, you do see some of them starting to get investment from more profit-driven funds.

Because of our social goals, we are eligible for some grants. We’ve used grants to work on specific technical problems that we think are interesting but would be difficult to justify with normal funding.

We’re selling a product on credit, so we have a lot of working capital needs. When you’re risky like us, you start with equity and gradually move to a point where debt investors are interested in you. We got to that point with a $1.5 million debt round in November 2016. It was an important step, and we are currently in the middle of raising another round.

Q: What drew you to this work?

I’ve been doing work in West Africa since 1999. First with the Peace Corps then with an NGO, and after getting a master’s in international development I worked for the UN. Eventually I got disillusioned by the inefficiencies of the normal development sector. But I got excited about social enterprise as a business model because of the scalability, because of the accountability—if people don’t want what you’re selling you’ll go out of business.

I decided to go to Yale SOM because of the focus on business and society—and the loan-forgiveness program—with the intention of doing basically something like what I’m doing now. I had studied economics, philosophy, and policy before. What I loved about the MBA is everything comes down to, not what would theoretically be nice, but what are you actually going to do? How do we solve this problem right here? That definitely helped prepare me for this experience.

My business partner had already started a precursor to our current company, which was doing financed solar but with microfinance banks. We started PEG in 2013 and we’ve been growing it ever since.

West Africa is a really good market. Mobile money is so big in East Africa that the lessons that they learned about how to do pay-as-you-go there are not really applicable anywhere else. West Africa is an open market with a lot of need. It’s a place where what we figure out could work in the rest of the world.

Q: What do you want PEG’s impact to be?

We’re a social enterprise, so we’re a for-profit company, but I see being a for-profit as a means to an end rather than the end in itself. If we can succeed in generating a return on capital by doing something that helps poor people in villages in Africa, that’s what’s going to attract the money that is going to result in scale. And that’s how you get these solutions to everybody.

When I think about two innovations in the past 20 years that have really made huge change in Africa, I think of cellphones and microfinance. Both reached scale, in large part, because they were able to return a profit.

We aim to expand through the region in the coming years, and we also want to keep working with our existing customers. Before we come to them they don’t have any collateral, they don’t have any credit history. A year later, they own the system which frees up income that they were spending previously on energy, and they have some form of a credit rating. That makes them more interesting customers for companies that were afraid to sell to them before. Each of these steps reduces the costs of interacting with these customers. Gradually, it brings them closer to financial inclusion. But it takes a lot of time. It’s not easy.