STAND-ALONE SOLAR

STAND-ALONE SOLAR I N V E S T M E N T M A P

Nigeria

F e b r u a r y 2 0 2 1

i i Investment market map - nIGerIa

Disclaimer

This report is provided on the basis that it is for the use of the Foreign, Commonwealth and Development Office (FCDO) only. Tetra Tech International Development Ltd will not be bound to discuss, explain or reply to queries raised by any agency other than the intended recipients of this report. Tetra Tech International Development Ltd disclaims all liability to any third party who may place reliance on this report and therefore does not assume responsibility for any loss or damage suffered by any such third party in reliance thereon.

Foreign, Commonwealth and Development Office (FCDO) Africa Clean Energy Technical Assistance Facility

© February 2021

Tetra Tech International Development

This report was co-authored by the Africa Clean Energy Technical Assistance Facility and Open Capital Advisors.

Prosperity House, Westlands Road,P.O. Box 4320, 00100, Nairobi, Kenya.Tel: +254 (0)20 271 0485

Cover page: photo courtesy: Russell Watkins/Department for International Development

Investment market map - nIGerIa i i i

C O N T E N T SAbbreviations iv

Executive summary v

I. Introduction 1

2. Investments overview 2

2.1 Investor types 4

2.2 Investment per type of SAS company 5

2.3 Investments in women-led businesses 6

2.4 Impact of Covid-19 pandemic 7

2.5 SASsectorfinancingneed 8

3. Barriers to investment 9

3.1 Supply-side barriers to investment 9

3.2 Demand-side barriers to investment 10

3.3 Regulatory/policybarrierstoinvestment 10

4. Existing initiatives to encourage investment 11

5. Recommendations to accelerate investment 14

6. Conclusion 18

Appendix 19

List of Figures

FigureES1:SourcesofinvestmentintotheNigerianSASsector(2015-2020)(USD,millions) v

Figure1: SourcesofinvestmentintotheNigerianSASsector(2015-2020)(USD,millions) 2

Figure3: ValueofinvestmentsinSAScompaniesfrom2015-2020(USD,millions) 5

Figure2: NumberofinvestmentdealsinSAScompaniesfrom2015-2020 5

Figure4: SASfinancingneedatdifferentstagesofgrowthandoperatingmodels 8

Figure5: EstimatedfinancinggapintheSASsector(USD,millions) 8

List of Case Boxes

Casebox1:GreenfinancingdrivingincreaseduptakeofsolarPVtechnologies 4

Casebox2:RaisingcapitalasaPUEcompany 6

Casebox3:Genderequalityandsocialinclusioninoff-gridenergyinvestments 7

Casebox4:AState-levelviewofinvestmentforoff-gridinNigeria 13

Casebox5:Receivablessecuritizationstructureoverviewinoff-gridsolar 15

Casebox6:Strategiestoimproveinvestmentreadiness 16

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Abbreviation DefinitionAFC Africa Finance Corporation

AFDB AfricanDevelopmentBank

BoI BankofIndustry

CBN CentralBankofNigeria

CTIAF CleanTechIncubationandAccelerationFoundation

DFC Development Finance Corporation

DFI Development Finance Institution

EEP EnergizingEducationProgram

EU EuropeanUnion

FCDO ForeignCommonwealthandDevelopmentOffice(formerlyDFID)

FIRS Federal Inland Revenue Services

GESI GenderandSocialInclusion

GIZ DeutscheGesellschaftfürInternationaleZusammenarbeit

GSMA GlobalSystemforMobileCommunicationsAssociation

IFC International Finance Corporation

MDA Ministries,Departments,andAgencies

NASENI NationalAgencyforScienceandEngineeringInfrastructure

NCIC NigeriaClimateInnovationCenter

NED NigerianEnergyDatabase

NEP NigeriaElectrificationProject

NESP NigerianEnergySupportProgramme

NIPC NigerianInvestmentPromotionCommission

OBF Output-Based Fund

OCA Open Capital Advisors

PAYG Pay-As-You-Go

PUE Productiveuseofenergy

PSB PaymentServiceBank

REA RuralElectrificationAgency

REAN RenewableEnergyAssociationofNigeria

REF RuralElectrificationFund

RMI RockyMountainInstitute

SAS Stand-alone solar

SHS Solarhomesystems

USADF UnitedStatesAfricanDevelopmentFoundation

USAID UnitedStatesAgencyforInternationalDevelopment

VAT ValueAddedTax

WHT WithholdingTax

A B B R E V I AT I O N S

Investment market map - nIGerIa v

E X E C U T I V E S U M M A R Y

1. Lighting Global (2020), Off-Grid Solar Market Trends Report. World Bank (2019), Off-Grid Solar Market Assessment and Private Sector Support Facility Design

2. hereare57SAScompaniesthatareREANmembersand4additional.Additionalcompaniesidentifiedthroughprimaryandsecondary research.

3. REA(2019),OpportunitiesintheOff-GridSectorinNigeria:FocusontheNigeriaElectrificationProject(NEP)4. USAID Power Africa (2020),

The standalone solar (SAS) sector in Nigeria has grown significantly, with increasing private sector traction. As of 2019, ~1.8MSASproducts—includingsolarhomesystem,

pico solar, and productive use products poweredby standalone solar—were currently in use in themarket. Further, it is estimated that over 23 millionhouseholdsinNigeriawillbesuitableforSASsolutionstomeetelectrificationneedsby2023.1 At least 61 SAS companies have set up operations in the country toaddress the demand for energy solutions, includinginternationalcompaniesthathaveongoingoperationsinotherpartsofthecontinentandmanylocalcompanieswithsubstantialmarketknowledge.2 Thoughcurrentlyin its infancy, thesectoroverall hasaUSD1.2billionannual revenue potential.3

To meet the significant market need, the sector has attracted ~USD 227 million from a wide rangeof investors.Currently,about20millionhouseholds inNigeria lack access to power, and many householdswithaconnectionalsorelyondieselandgasolineback-up given poor power quality of the grid.4As a result,theSASsectorsteppedintoclosethegap,withstronginvestor backing. Development Finance Institutions(DFIs), development partners, and governmentsprogramscontributedmostinvestment,upto54percentofthetotalinvestmentinflows.Early-stageimpactfirms,specializeddebtinvestors,andstrategiccorporatesalsoinvestedheavily,largelyininternationalSAScompanieswithproventraction.Commercialbankinvestment

Figure ES 1: Sources of investment into the Nigerian SAS sector (2015 -2020) (USD, millions)

Source: OCA consultations, press releases, company websites, and other secondary sources; Sustainable Energy for All (2020), State of the global mini-grids market report.

Debt 123

Equity47

Mixed42

Grant15

DFIs and Government

122

Later-StageInvestors

42

Specialized debt Providers 24

Strategic Corporates 10

Crowd Funding 2Commercial Banks 1

Early-Stage Investors 26

https://www.usaid.gov/powerafrica/nigeria

vi Investment market map - nIGerIa

remains elusive because many companies are still small andunabletoservicecommercialratefinancing.Hardcurrencydominatesinvestment,ascompaniesstruggletoaccessaffordablelocalcurrencyfinancing.5

International SAS companies captured 93 percent of the investment inflows from 2015-2020, demonstrating the imbalance in capital flows to these companies compared to local businesses. International companies have more substantialtraction, proven operating models, and capital raiseexperiencecomparedtotheircounterparts,dueinpartto previous investor backing asmany of them scaledinothermarketswithpatientcapital.ThoughlocalSAScompaniesstronglyunderstand the localcontext, theystruggle to raise capital as many have not achievedcomparative levels of traction.

Historically, solar home system companies have received more investor focus compared to pico solar and productive use (PUE) companies. Investors observe thatpicosolarcompaniesareoften toosmallandunabletoyieldsatisfactoryinvestmentreturns.ThePUE sub-sector is new and yet to generate sufficienttraction to attract significant investment, thoughinvestorsareactivelylookingtoinvestinthesegment.Comparatively, the demand for SHS products is highand growing, resulting in expansion of internationalcompaniesintoNigeriaandincreasedopportunitiesforexistingSHSproviders.

Despite the traction and investment into the sector, the funding gap remains large and companies continue to cite limited access to financing as a major setback.TheestimatedfundinggapfortheSASsectorisUSD1.5billionoverthenextfiveyears.6GiventhesectorinNigeriaisnascentcomparedtoothercountrieson the continent, SAS companies—specifically localcompanies—need patient capital to prove commercial viability and achieve bankable operating traction sothat they can raise growth capital. The internationalcompanieswithsignificant localpresencealso requiregrowthcapitalintheformofdebttoscaleoperations.

This paper explores the barriers that have and continue to limit investment into the SAS sector. Complex business models, an unstable macro-economic environment, and limited understanding ofSAS company operations have stifled investment to

date by creating capital supply gaps.On the demandside, many SAS companies are not able to raise orabsorb external capital given their current scale ofoperations, their internal capabilities, and unattractivefinancingoptions.Lastly,limitedorpoorimplementationof supportive government policy has failed to providesectoractorswith theconfidenceneeded toenter themarket.

In recent years various interventions have targeted sector growth, but stakeholders need to redouble efforts. Development partners and government havebolstered the enabling environment through marketawarenessprograms,technicalassistancetofinanciersand SAS companies, policy reforms, and evensubsidiestoencouragemarketscale-up.Nonetheless,theSASsectorrequiresfurtherinvestmenttoscaleSASbusinesses tomeet the national electrification targetsinpursuitofuniversalelectrification.Thereareseveralroutes to improving capital flows to the SAS sector,including:

• Investors can adopt financing structures that are more suitable for SAS companies.LocalSAScompanies still need patient financing in the formof equity and concessionary capital to attain thenecessary internal capabilities and traction to deliver market rate returns for later stage investors. Theyalso need smaller tranches of financing given thecompanies’abilitytoabsorbfinancing;affordabledebtin small traches could help them develop a strongcredithistory.Ontheotherhand,largerinternationalSAScompaniesrequiremoredebtfinancingtoscaleupoperationsasopposedtoequityfinancing.

• Increasing sector data and technical assistance to local financiers can bridge the information gap to increase investor confidence in making investments. Some investors, particularly localinvestors, lack a proper understanding of the SASsector to make informed investment decisions.Databases and platforms such as REA’s NigerianEnergy Database, ACE TAF’s Energy AccessExplorer, and the RE Investment database by GIZNESPandNIPCcouldprovidemore informationonviable SAS market opportunities. Other platforms,suchasNithio,couldprovideinvestorswithrelevantcustomer information that can support financinginstruments such as receivables-backed financing.

5. OCA Consultation and analysis 6. ECREEE(2019),RegionalOff-GridElectrificationProject:Off-GridSolarMarketAssessmentandPrivateSectorSupportFacility

Design; NPC (2018), Nigeria Demographic and Health Survey 2018; OCA Consultation and Analysis

Investment market map - nIGerIa vi i

Further, technical assistance to financiers couldincrease knowledge of the risks and opportunitiesin the sector, while also identifying and structuringfacilitiestailoredtotheSASsector.

• Technical support to SAS companies can ensure that companies are capable of absorbing capital. MostinvestorsobservedthatmanySAScompanies,mainly local companies, are not investment ready.Technical assistance can help these companiesstreamline some of their core operations includingdistribution strategy, treasury management,financial management, financial evaluation, andriskmanagement. Further, third parties can providecompanieswithdirect investment readinesssupporttopreparebusinessestoraisecapital.Thoughad-hoctechnical assistance is needed, it is also necessarythat these companies build internal capacity anddevelopadequategovernancestructurestoraiseandmanageexternalfinancing.

• Further improvements to the enabling environment and more licensing for the Payment Service Banks (PSB) financing platform can increase the

attractiveness of Nigeria’s off-grid energy markets and encourage scaling of businesses. Removal of VAT on all solar components could reduce overallproductcostsandincreaseuptakeofSASproducts.Additionally, import duty exemptions, simplifiedimportation processes, and tax holidays could alsofosterthegrowthofinvestmentsanduptakeofSAS.Increasing payment service banks would make iteasier for customers to make payments to SAScompanies, and as a result increase distribution ofSASproductstoremotepopulations.Asaresult,SAScompanieswouldrealizeincreasedincomeandstablecash flows that will in turn improve the businesses’investment proposition.

Thescale-upandsuccessoftheSASsectoriscrucialtoachievingNigeria’s5MillionSolarConnectionsProjectby2023,andelectrificationgoalof100percentby2040.Coordinated stakeholder efforts compared to siloedinterventions are required to catalyze investmentsinto the sector to realize full market potential. Therecommendations in this report can help accelerateinvestments through tactful involvementofbothpublicandprivateinvestors,andtheecosystematlarge.

Photo credit: Power Africa

Investment market map - nIGerIa 1

TheNigeriangovernmentlookstoadd 5 million new solar connections throughsolarhomesystemsandmini-gridsby2023underthe2020EconomicSustainability Plan,reaching25 million people.

The government of Nigeria currently targets 100 percent electrification rate by 2040, and off-grid energy will play a vital role.Theelectrificationratecurrentlystandsat45percent,withhigheraccessinurbanareas(55percent)comparedtoruralareas(36percent).7Whilethecountryhasanenergygeneratingcapacity

of12,522MW,20millionhouseholdsremainwithoutenergyaccess.8Extendingon-gridconnectionswillcontinue,butitwillbetimelyandcostly,particularlyforruralandsparsepopulations. Off-grid energy, however, presents a viable alternative, and standalonesystemsareparticularlywellsuitedtoreachthehardesttoreachcustomers.

The SAS sector is nascent and fast-growing, and stakeholders have committed to its rapid expansion.TheNigeriangovernmentlookstoadd5millionnewsolarconnectionsthroughsolarhomesystemandmini-gridsby2023underthe2020EconomicSustainabilityPlan,reaching25millionpeople.9Thisbuildsonayoungandgrowingsector,comprisedof internationalcompanies thathaveestablished traction inothermarkets—forexampleBBOXX,Lumos,ZolaElectric,d.light,Azuri,andOolu—andoftensmallerbutestablishedlocalcompaniessuchasSosaiRenewables,Arnergy,BlueCamel,ConsistentEnergy,andColdHubs,amongothers.Combined,thesecompanieshaveanannualrevenuepotentialofUSD1.2billion,presentingopportunitiesforbothprivateandpublicinvestments.10

To achieve the government’s goals, stakeholders must execute a rapid roll-out and provide strategic support to existing SAS companies.Manycompaniesinthesectorareyettoachievesubstantialscale-upoftheirbusinesses,andmany—inparticularlocalcompanies—cite limitedaccess to the rightfinancingas theprimarysetback togrowth.Given the capital-intensive nature of this sector, companies will require substantialinvestment to prove commercial viability, scale operations, and support the country’selectrificationefforts.

The need for more investment and the current lack of investment data created the impetus for this report. Throughout this work, the research team conducted acomprehensive literature review to gain a detailed understanding of the investmentlandscape, the key stakeholders, and the regulatory environment for stand-alone solarinNigeria.Theteamthenconductedinterviewswithover20seniorindustrystakeholderstovalidatethefindings,gatheradditionaldata,andalignonrecommendationsneededtoaccelerateinvestment.Throughouttheprocess,theresearchteamaimedtoanswerthefollowingquestions:1. What has been the nature of investment in SAS to date?2. What are the main barriers to investment into SAS to date?3. What are the highest potential interventions to accelerate SAS growth in Nigeria?

The report outlines the current investor landscape, barriers to investment, and interventions required to catalyze both public and private investment into the sector to accelerate market growth.Whiletheoff-gridsectoriscomprisedofbothmini-gridsandstandalonesolar(SAS)companies,thisreportwillonlyfocusontheSASsector,includingpicosolarproducts,solarhomesystems(SHS),smallstandaloneproductiveusesystems,and larger standalone systems that are not considered for commercial and industrialpurposes.The reportaims to inform investorsof the investmentopportunity forSAS inNigeria;companiesofpotential investors in themarket;andpolicymakers,developmentpartners,andsupportingorganizationsofinterventionsrequiredtocatalyzeinvestmentandmarketgrowthinthesector.

7. USAID Power Africa (2020), Nigeria Energy Sector Overview, 8. USAID Power Africa (2020), Nigeria Energy Sector Overview, 9. Government of Nigeria (2020), Nigeria Economic Sustainability Plan10. REA(2019),OpportunitiesintheOff-GridSectorinNigeria:FocusontheNigeriaElectrificationProject(NEP)

1. INTRODuCTION



2 Investment market map - nIGerIa

Debt 123

Equity47

Mixed42

Grant15

DFIs and Government

122

Later-StageInvestors

42

Specialized debt Providers 24

Strategic Corporates 10

Crowd Funding 2Commercial Banks 1

Early-Stage Investors 26

2. INVESTMENTS OVERVIEw

Investors deployed an estimated USD 227 million of investment into SAS companies from 2015-2020.11 Development partners and governmentprogramswerethemainfinanciers,contributing54

percent of investment within the period. Debt financewasthemaininstrument,accountingfor~54percentoftotalinflows,primarilytolargerinternationalcompanies.Itonlyaccountedfor18percentof thedealcountdueto larger ticket sizes such as Development FinanceCorporation’s USD 35M debt investment into Lumos

in2020.Ontheotherhand,grantfinancingcomprisesonly7percentof fundingbutaccounts for64percentof the known transactions by deal count due to smallticket sizes ranging mostly from USD 20K-520K.12 Mixed instrument investments,acombinationofeitherequity, grant, or debt comprised 19 percent. Figure 2belowprovidesanoverviewoftheSASinflows,andtheremainderofthissectionexplainsinmoredetail thesetrends.

2.1 Investor types

Figure 1: Sources of investment into the Nigerian SAS sector (2015 -2020) (USD, millions)

Source: OCA consultations, press releases, company websites, and other secondary sources; Sustainable Energy for All (2020), State of the global mini-grids market report

11. OCA Consultation and analysis. Based on data accessible online from investment databases such as crunch base, company websites, investor websites, and news publications.

12. d.light (2016), d.light Raises Over $22 Million to Expand PAYG Business into New Off-Grid Solar Markets


13. Afrik21 (2020) NIGERIA: REA grants Renewvia for mini-grids in rural areas14. OCA Consultation and analysis 15. Theselargeinternationalfirmswouldraiseattheparentcompanylevelandtrickledowntothecountry-levelsubsidiaries,makingit

difficulttoestimateamountsallocatedtoNigeria-specificoperations.16. Theselargeinternationalfirmswouldraiseattheparentcompanylevelandtrickledowntothecountry-levelsubsidiaries,makingit

difficulttoestimateamountsallocatedtoNigeria-specificoperations.17. Sterling Bank (2019), Funding Renewable Energy in Nigeria

DFIs, development partners, and government programs are the primary contributors of funding to the SAS sector. DFIs include Development Finance Corporation(DFC),Swedfund,AfDB,andProparcowhiledevelopment partners include FCDO (formerly DFID),World Bank, GSMA, EU, USAID, Power Africa, andUSADF.ThegovernmentofNigeriahasdrivengrowthoftheSASsectorbyrollingoutdonor-backedinitiativessuch as the Rural Electrification Fund (REF) and theNigeria Electrification Project (NEP). The ~USD 60MOutputBasedFund(OBF)oftheNEPisfocusedsolelyontheprovisionofgrantstoSHSproviders,signingonsix providers in 2019, among them A4&T IntegratedServices Limited, ASOLAR Systems Nigeria Limited,Txtlight Power Solutions Limited (Lumos Nigeria),GreenlightPlanet,SmarterGridInternational,andSolarEnergybyd.lightLimited.13ThroughthesegovernmentprogramsanddevelopmentpartnerprogramssuchasFCDO’s Solar Nigeria, this category disbursed ~USD123MdirectlytoSAScompanies,comprising76percentdebt,12percentmixedfinancing,11percentgrants,and1percentequity.14

Early-stage investors have provided patient and catalytic capital to scale the sector. Early-stageinvestors, including impact funds such asAll On andGAIA Impact Fund have deployed ~USD 26M to thesector, deploying 55 percent in equity, 10 percent inquasi-equity, and the remainder in debt and grants,whilealsodeployingmuch-neededtechnicalassistanceto the sector. Through investments such as All On’s~USD1.5Mquasi-equityinvestmentintoAuxanoSolarto fund assembly plant expansion and BreakthroughEnergyVenture’s~USD9MSeriesAequityinvestmentinto Arnergy in 2019, these investors have bolsteredsectorgrowthbyfocusingonindigenouscompanies.

Strategic corporates and later stage investors have focused exclusively on international companies, recognizing the strategic and financial importance of these companies in their portfolios. Strategiccorporates have invested exclusively through equityin landmark deals such as the ~USD 50MMitsubishiCorporation-led equity investment in BBOXX in 2019,an example of the preference for larger ticket sizes

for many corporates.15 Later-stage investors havedeployed~USD42M,comprising51percentequityandtheremainderinquasiequity.ExamplesincludeHeliosInvestmentPartners’ total investmentof~USD65M inZolaElectricbetween2016and2018,aswellasAfricanInfrastructureInvestmentManagers’(AIIM)~USD31Mequity investment into BBOXX. Commercial investorsareattractedtocompanieswithprovenbusinessmodels,traction,andcommercialviabilitybeforeinvesting.16

Similarly, specialized debt providers have also focused almost exclusively on international companies. Investors such as SunFunder andresponsAbilityhavedeployedmainlydebt (81percentof investment), with the remainder deployed in quasiequity. For example, Sunfunder provided over ~USD20Mtod.lightbetween2016and2019withthelatter’s~USD18M2019investmentdeployedasquasiequity.

Given limited options, crowdfunding has offered an alternative avenue to finance local SAS company operations.CrowdfundingplatformssuchasBettervestandTRINE have provided ~USD 2M in debt, in hardcurrencies suchasEURandUSD respectively.SosaiRenewableEnergiesCompany,a localSAScompanyhas raised over ~USD 530K from Bettervest in twoequal tranches, to fund the purchase of 500 SHSsystems,200LEDlamps,500televisionsand500fans.Thecrowdfundinginvestorsofferedinterestratesof7.5-8.5percentoveratenureof4years,withhighinterestinthecompany’sprojectsdrivinginvestorfulfilmentofthefirst~EUR112Ktrancheinonly89days.

Local financial institutions and commercial banks have so far contributed little to financing the sector. Commercial banks have typically deployed debt ininternational firms exclusively, as seen with StandardCharteredBank’s~USD5MinvestmentinAzuriin2017.Local financial institutions have cited a high sectorrisk profile as the main reason behind their limitedinvolvement.However,somelocalfirmshavemanagedto raise financing from local financial institutions,and some banks are increasing their involvementwith renewable energy, for example Sterling Bank’sEnergizingEconomiesInitiative(EEI).17


Nigeria’seffortstoimprovefoodsecurity,energyaccess,andunemploymentledtothedevelopmentofthecountry’s2030NationallyDeterminedContribution(NDC)targetstodeliversustainableeconomicgrowthandmitigatetheeffectsofclimatechangeacrosssectors.Giventheenergysector’s~33percentcontributiontoGHGemissions,increasingsolarPVuptakeisnecessary.Greenfinancingasanoptiontoaccelerateuptakehasmadesignificantinroads,NigeriabecomingthefirstAfricannationtoissuesovereigngreenbondsin2017of~N11B(~USD29M),followedbythefirstcorporateissuetofinancesustainabledevelopmentinAfricabyAccessBankin2019,forN15B(~USD39M).

Greenfinancingoftenleveragesblendedfinancetocombinefinancial instrumentsfromcommercialcapitalsources such as institutional investorswith de-risking and catalytic instruments from concessional capitalsources includingdevelopmentpartners. InNigeriagrantsanddebt fromREF,AfDB,andBoIhavebeenblended with catalytic instruments such as the ~USD 75M NSIA-backed InfraCredit infrastructure creditguaranteeandInfraCredit’sfirst-losstakingandsecuritizationmodelstode-risk investments.Nonetheless,limited involvement from local financial institutions stifles access to green financing, despite some earlyexamples likeAccessBank’scorporategreenbond issuance.GreenfinancingcouldcatalyzeSASsectorgrowthbyfinancingprojectswhichwouldsubsequentlyberefinancedthroughcapitalmarketsasshownbelow.

Source: UNDP: Nigeria and the Paris Agreement; Climate Change and Green Financing Training, 2020; InfraCredit; Sustainable Finance Initiative: Case Study: Access Bank Green Bond

Case Box I: Green financing driving increased uptake of solar PV technologies

Project Refinancing

Project Identification

Primary finance

Project preparation

Commercial and concessional debt financingaswellas

guaranteesenabletheseprojectsbecomemore

bankable

Projectswithdemonstratedtraction and scale receive

intermediary and transaction supportingpreparationfor

financing

Credibleprojectsreceivegrantsandtechnicalassistanceto build capacity from DFIs

Thoughissuinggreenbonds,theseprojectsare

financedbycapitalmarketsfreeingupprimary

financingbybankstoredeploytotherprojects


2.2 Investment per type of SAS companyInternational SAS companies have attracted more financing (93 percent of known inflows) because they have substantial traction, proven operating models, and capital raise experience. The nineinternationalSAScompaniesinNigeriahaverelativelyhightractioninothermarketslikeEastAfricaorAsia.18 Thesecompaniesaremostlyvertically integrated,with

significant traction despite their complex businessmodels.Theyhistoricallyraisedcapitalfrominternationalinvestors,whichallowedthemtoprovetheirtraction,andtrickled-down investments fromparent companies intolocalsubsidiaries. Ina fewother instances, theyhaveraised local currency investment directly for subsidiaries or received grant funding as Lumos did through theNigeriaElectrificationProject(NEP)

Figure 2: Number of investment deals in SAS companies from 2015 - 2020

Figure 3: Value of investments in SAS companies from 2015 - 2020 (USD, millions)

Source: OCA analysis of data from consultations, press releases, company websites, and other secondary sources; Sustainable Energy for All (2020), State of the global mini-grids market report.

Local SAS companies find it comparatively hard to access capital from both international and local investors.Outoftheknown~52localSAScompanies,three are assemblers and distributors, while theremaining are importers, distributors, and retailers.19

They are often not vertically integrated throughoutthe value chain and they often sell more than onetype of product. Most are yet to achieve comparabletraction to that of international companies, and sothey face challenges accessing financing to scaletheir operations, as shown by the number of deals inFigure2.ProgramssuchasRuralElectrificationFund(REF)andNigeriaElectrificationProject(NEP)byREA,World Bank, and AfDB aim to identify credible localSAScompanies to provide capital to, althoughonly 8outof32NEPapprovedsuppliersareSAScompaniesand most are predominantly international.20 Also,specializedinvestorssuchasAllOnhaveemergedthatinvestsubstantiallyinlocalcompaniessuchasAuxano,ColdHubs,andCreedsEnergy.21

Within the SAS sector, SHS companies have attracted more investment compared to pico solar and productive use equipment (PUE). Investors note that companies focusingexclusively onpico solar aretoosmallandunabletogeneratesufficientrevenuesorprofitsneededtoattractinvestment,unlesstheyoperateon a high-volume, global scale. For PUE, investorsobserve that upfront, maintenance, and replacementcosts are currently too high for end users; investorinterest is increasing with new business models andtechnology, but most funding to date is comprised ofgrants.On theotherhand,demand forSHSsolutionsremainshighdrivenbyanunavailableorhighlyunreliablegrid, in addition to high demand for SHS-powereddomesticappliancessuchastelevisions.Furthermore,there is increaseddemandfor largercapacitySHSforeconomicandproductiveuses inshops,markets,andMSMEs, use cases that are making investment intothesecompaniesmoreattractive.22

18. AECF(2019),CountryspecificimplementationframeworkforREACTHouseholdsolarprograminNigeria;OCAanalysisanddatabase of companies

19. AECF(2019),CountryspecificimplementationframeworkforREACTHouseholdsolarprograminNigeria20. REA (2020), Nigeria SHS Programmes and Donor Sector Coordination Workshop – Day 121. All on 22. OCA Consultation and analysis

0

50

100

150

38

73

0

50

100

150

200

250

18

209

https://www.all-on.com/what-we-do/our-approach.html


EarlygrantandequityfinancinghavebeenvitaltothePUEsector’ssuccesstodate,asavailabilityoffinancingforPUEcompaniesdiffersgreatlyfromthatofotherSASsegments.ColdHubsprovidesagreatexamplefromNigeria.Thecompanyisalocalfirmthatproducesmodularsolar-poweredwalk-incoldroomsforoff-gridstorageandpreservationofperishablegoods.Theychargetheircustomers,mainlyfarmerstodate,onapay-as-you-storebasis.Thecompanyhashadinitialsuccessraisingequity,grantfunding,andprizemoney.Ahistoryofitsinvestmentsisasfollows:

• 2018: ColdHubssecuredanundisclosedamountingrantfundingfromMicrosoft’sAirBandGrantFundin2018.

• 2018:ColdHubssecuredanundisclosedamountoffinancingfromAllOntodeploytocoldhubsforfishstorageinIbenoandIbaka

• 2019: ColdHubswasawardedGBP75Kfromemerging1stintheUKaid-funded,GlobalLEAPAwardsOff-GridColdChainChallenge.

• 2020: ColdHubswasawardedUSD100KintheGlobalMakerChallengeundertheMohammedbinRashidInitiativeforGlobalProsperity.

Withthesefunds,thecompanyhasrolledoutseveralpilotsites(almost30),allowingthecompanytomonitorthesesitesandgathercriticalinformationtobuildouttheirbusinesscase.

Morepatientcapitalisrequiredtocontinuethesegment’sgrowthtrajectory.ConsistentEnergyisanotherPUEcompanythatsellssolarenergysolutionstosmallbusinesses,schools,andofficesonaPAYGbasisforproductiveuse.Besidestheowner’sequity,ConsistentEnergyhasraisedfinancingfromlocalbanks—USD100Klocalcurrencyrevolvingloanat25percentinterestanda150percentcollateralrequirement—andsecuredsomegrants.CompaniesatthisstageinthissegmentneedupwardsofUSD1Mindebtandequitytoscaleoperations,butlocalbanksandgrantscannotfullymeetthisneed.Understandably,investorsarehesitanttoinvestinPUEbusinesseswithoutsignificanttraction,butlargerdebtorequityinvestmentsareneeded,particularlyforcompaniesprovidinglargersystems.ThemarketopportunityforPUEissignificantandcommerciallyviablebusinessesexist.ACETAFisconductingassessmentsforproductiveuseacrossthreeagriculturalvaluechainstoinformthegovernmentandinvestorsofmoreopportunitiesthatexistwithinPUE.

Source: OCA consultations and company websites

2.3 Investments in women-led businessesGender and Social Inclusion (GESI) investments have been limited due to low levels of investable SAS companies.Women’s involvement in theenergyspace in Nigeria is historically low primarily due tocultureandperception,butnewbusinessmodelshaveencouraged participation ofwomen.A few companieshave demonstrated traction and investment readinessthrough well-articulated business plans, strongcorporategovernancestructures,andlegalandfinancialcompliancetoraiseinvestment.SosaiRenewables,forexample, founded and led by Habiba Ali has raised~USD 600K through Bettervest and as a winner oftheUSADF/AllOnEnergyChallenge in2019.CreedsEnergy,ownedbyHannahKabir,wasalsoawinneroftheUSADF/AllOnEnergyChallengein2019andraisedgrant financing from FCDO’s Solar Nigeria. InvestorshaveexpressedwillingnesstoinvestinSAScompanies

that are women-led but want to see more investablebusinesses.23

The sector continues to leverage women across the value chain, either through capacity building or direct distribution.SolarSistersforexample,providescapacitybuildingtowomenentrepreneurstodistributedifferent solar products. ColdHubs employs women tomanageeachof theircold roomsbyhandlingcashcollections, reporting, and cashflow management,ultimatelyempoweringthemandtheirfamilies.AuxanoSolar employs more women in its core solar panel assembly business as women are perceived to be more carefulandpatientinlearningtheassemblyprocess.24 Tocatalyzewomen’s involvement in thesector,REA’sEnergizingEducationProgram (EEP)and theFemaleSTEMStudents InternshipProgramhasenrolledover180femaleSTEMstudentstohelpwithoperatingandmaintainingsolarhybridplants.25Asmorewomengain

23. OCA Consultation and analysis24. OCA Consultation and analysis25. Energizing Educational Institutions: The BUK Off-grid Solar Hybrid Initiative – Leadership

Case Box II: Raising capital as a PUE company


participation in the sector, there is higher likelihoodof women-led involvement at the management level,hopefully leading tomore investments intowomen-ledbusinessesinthefuture.InternationalSAScompanies

such as Lumos and Azuri and are already settingprecedentsforwomeninleadingrolesfortheirNigeriaor West Africa operations.

26. OCA Consultation and analysis 27. OCA Consultation and analysis 28. Central Bank of Nigeria (2020), Framework for implementation of the solar connection facility 29. Latifat Opoola (2020), Nigeria: COVID-19 - Bank of Industry Lists Key Interventions for Enterprises, 30. USAID (2020), Nigeria Power Sector Program Off-grid Stakeholder meeting presentation

Groupssuchaswomenandyouthareoftenoverlookedasapotentialrecipientforinvestment,notjustintheoff-gridenergysectorbutlargelyacrosssectorsthatreceiveequityfinancing.GiventheirpositionintheSASvaluechain,women-ledbusinessesareoftentoosmalltoabsorbcapitalanddonothaveadequatestructuresinplacetoattractinvestors.Nevertheless,severalwomen-ledbusinesseshaveproventhattheycanraiseandrepaydebt.Withtherightsupporttodevelopinternalcapacityandtraction,thesebusinessescanbeprimeinvestmentcandidates.AfewexamplesofinitiativesinSub-SaharanAfricathattargetthesegroupsinclude:

• RiseTideAfrica,agroupofwomenangelinvestorsthatinvestbetweenUSD50KandUSD100Kinwomen-ledbusinesses,

• Greenhouselab,athree-monthacceleratorprogramthatalsoinvestsbetweenUSD50KandUSD100Kinwomen-ledstart-upsandearly-stagebusinesses,

• TheAfricanWomenInnovationandEntrepreneurshipForum(Awief),aneconomicempowermentorganizationthatprovidedgrantsworthUSD5,000towomeninnovationandentrepreneurship,and

• USAfricanDevelopmentFoundation(USADF)thatprovidedtechnicalsupportandseedinvestmentuptoUSD250Kincommunityenterprisesincludingoff-gridenergyandyouth-ledenterprises.

TheseinitiativesareavailableforcompaniesinNigeria,andtheirpromotionorthecreationofNigeria-specificprogramscouldpotentiallyresultingreateraccesstofundingforwomen-oryouth-ledbusinesses.Thoughmoststakeholdersdidnotsignaloutagenderdisparity,insteadfocusingontheneedforbankableinvestmentsinthesector,suchinterventionscouldencouragediversityinoff-gridenergycompanymanagement.

Source: Venture Burn (2020), OCA consultations and analysis

2.4 Impact of Covid-19 PandemicThe Covid-19 pandemic has exacerbated the gaps in capital available for off-grid energy companies. Some investors have withheld their capital until thereismorecertainty.Forexample,theREACTHouseholdSolar Round 2 program by AECF was postponed.26

SAS companies report postponed conversations withinvestorsasinvestorsassumedthepandemicwillimpactinvestment return potential.27Otherinvestorsshoredupexistingportfoliocompanies,ensuringthesecompaniescan dealwith the prolonged economic impact on endusers.

The government and investors have, however, set up interventions to mitigate the impact of Covid-19 on the SAS sector. The Central Bank of Nigeria hasestablished a 150 billionNaira solar intervention fundthat will provide long-term low-interest credit facilitiesto the NEP pre-qualified SAS companies in support

of the federal government’s plan to roll out 5 millionsolar connections under the Covid-19 EconomicSustainability plan. The facility will be administeredthrough select commercial banks at concessionaryrates of 9 percent interest—lowered to 5 percent due to Covid-19—witha2-yearmoratoriumonprincipal,andamaximumtenorof10years,notexceeding~USD1.3Mpercompany.Thegoalof theeconomicrecoveryplanistoprovideenergyaccessto25Mpeopleandcreate250K jobs.28 The Bank of Industry also announcedsomeinterventionsforbusinessestomitigatetheimpactofCovid-19 includinga2percentdecrease in interestrates for one year startingApril 2020 and a 3-monthmoratoriumon principal repaymentswith an option toextend to 12months.29AllOn set up aUSD500,000Covid-19 relief fund to support solar powered solutions tohealthcenters.30TheNEPfundedbyWorldBankandAfDBhadalsosetupaCovid-19fundtosupportSAScompanieswithinitsportfolio.

Case Box III: Gender equality and social inclusion in off-grid energy investments

https://allafrica.com/stories/202007150027.html


2.5 SAS sector financing needThe SAS sector is capital intensive and while most companies attest to needing local currency financing, financing needs are unique to a company’s operatingmodelandstageofdevelopment.SeveralinternationalSAScompaniessuchasBBOXXNigeriaarerelativelynew in themarket andhave linedupequity financingto establish their Nigerian operations. However, acompany likeLumoshassignificant traction inNigeria

andhasraiseddebtfinancing to fuel itsgrowth.Localand smaller SAS companies still need patient capital in the forms of grant and equity to establish stronggovernancestructures,provecommercialviability,andachieve scale to prove bankability. They could alsousemoreshort-termdebtfinancingforworkingcapital.Figure5 illustrates the typical financingneed forSAScompanies based on operating traction and operatingmodels.

Figure4:SASfinancingneedatdifferentstagesofgrowthandoperatingmodels

Source: Gogla (2018), Providing Energy Access through Off-Grid Solar: Guidance for Governments

Source: OCA consultations, press releases, company websites, and other secondary sources; Sustainable Energy for All (2020), State of the global mini-grids market report.

31. NIPC (2020), Nigerian Renewable Energy Investment Opportunities: Africa Investment Summit; REA (2019), Opportunities in the Off-GridSectorinNigeria:FocusontheNigeriaElectrificationProject(NEP)

32. REAN (2020), Assessing the Accessibility of Government Social Intervention Funds for Renewable Energy Sector

Notwithstanding the investment flows, interventions to date, and a USD 1.2B market opportunity, the financing gap in the SAS sub-sector stands at USD 1.5 billion for the next five years, indicating limitations to accessing financing.31SAScompanieshavedemonstratedabilityto

scalebutaccesstofinancingandtheabilityofcompaniestoabsorbcapitalisaprimarylimitation.Despitetheavailabilityof multiple local and regional funds, poor awareness offunds also limits access to finance.32 The next sectionoutlinessomeofthebarrierstoinvestmentforthesector.

3,500

3,000

2,500

2,000

1,500

1,000

500

0Financing need Investments Funds available Financing gap

3,107

227

1,508

Figure5:EstimatedfinancinggapintheSASsector(USD,millions)

1,364


3.1 Supply-side barriers to investment

Investor perception that the SAS business model is high risk has negatively influenced investment to date. Demand for SAS goods isstillelasticinmanymarkets,especiallyintherural

areaswithreadilyavailablesubstitutessuchasbattery-poweredtorchesorotherenergyproducts.Consumersareaware thatSASproductsarerelativelyexpensive,and many historically did not trust solar technologiesdue to sub-standard products on the market thoughoverall perception is improving over time due toconsumer awareness programs and increased SAScompanysalesofhigh-qualitysystems.33 Several SAS suppliers have resorted to Pay-As-You-Go (PAYG) toaddress affordability issues, where the credit risk foroff-grid populations is high, especially in low-incomeareas.34 Other SAS companies also work with localcooperatives and credit groups to facilitate paymentandconsumerfinancing.35 Investors,however,perceivesocial objectives such as electrifying rural areas asunprofitable, thereby withholding lending to SAScompanies.36

The unstable macroeconomic environment in Nigeria has also increased the risk profile of investments into the country, deterring hard currency investment. Since2016,theNairahaswidelyfluctuatedbecauseofinternational oil price volatility. The recent drop in oilprices in the first quarter of 2020 resulted in reducedaccess tohardcurrency inNigeriaanddecreased thevalueoftheNairaagainstthedollar.37TheCBNhastriedtoregulatethedemandforhardcurrencytostabilizetheNaira value, resulting in a shortage of hard currencyin Nigeria.38 Therefore, businesses borrowing in hardcurrency but receiving revenue in local currency areunabletoacquiresufficienthardcurrencyfromregulatedforexproviderstomakerepayments,andblackmarketforex operators often have higher exchange rates.International investors, therefore, often withhold hard

currencyfinancingtosafeguardinvestmentsfromforexlossesandSAScompanies are also unwilling to takehardcurrencyloansbecausetheyareriskyandcostly.39

Some investors also have limited understanding of the SAS market and companies’ financing needs. Many commercial investors have limited exposure tothesectorandareunawareof itssector-specificrisks.While themarket potential for SAS products is clear,consumer data for many areas remains scarce.40Non-bank commercial debt investors typically price theirfinancial instrumentsat>USD250Kticketsizeswitha>9percentinterestandlookforaninternalrateofreturnofabout10percentwithafive-to-ten-yearturnaround,plus collateral requirements to secure investments.41 Many SAS companies, with the exception of someinternational companies, are often unable to absorbsuch largevolumesofcapitalatmarket ratefinancingterms.

Other investors are discouraged to enter the market given uncompetitive financing terms offered by development partners. To generate a sufficientpipeline, investors aswell as government and relatedMinistries, Departments, andAgencies (MDAs), haveofferedcompetitivelendingterms.SomeinvestorshaveprovidedconcessionalratesatthemaximumCBNrateless300basispoints,anddenominatedlendingratesattheLondonInter-BankOfferedRate(LIBOR)plus400basispoints.However,fundsfromtheBankofIndustry(BoI)arepricedbetween5-8percent,outpricingtheseinvestorsandsqueezingthemoutofthemarketdespitethepotentialforfasterfunddeploymentwithcommercialinvestors.42WhilefacilitiessuchastheBoIofferfinancingterms palatable to SAS companies, they are oftendifficult to access due to complex requirements andprocesses,furtherstrainingSASaccesstocapitalandresultinginSAScompaniespursuingfundselsewhere.

33. Shell Foundation (2018), Nigerian Off-Grid Market Acceleration Program: Mapping the Market34. Acumen and OCA (2019), Roadmap to Exits in Off-Grid Energy 35. OCA Consultation and analysis36. OCA consultation and analysis 37. Council on Foreign Relations (2020), Amid Oil Price Collapse, Nigeria Is Running out of Foreign Exchange, 38. Tope Alake and Alonso Soto (2020), Nigeria Naira Remains Under Strain After Devaluation, 39. OCA Consultations and analysis40. Shell Foundation (2018), Nigerian Off-Grid Market Acceleration Program: Mapping the Market41. OCA Consultation and analysis 42. AECF(2019),CountryspecificimplementationframeworkforREACTHouseholdsolarprograminNigeria;OCAConsultationand

analysis

3. BARRIERS TO INVESTMENT

https://www.cfr.org/blog/amid-oil-price-collapse-nigeria-running-out-foreign-exchange

https://www.bloomberg.com/news/articles/2020-03-24/oil-plunge-puts-pressure-on-nigeria-to-devalue-the-naira-further


3.2 Demand-side barriers to investmentDespite substantial grant financing, many SAS companies are not ready to raise or absorb external capital given their current scale of operations. Smaller SAS companieshaveshownlimitedabilitytoevaluateinvestmentneedsandprepareforacapitalraiseprocess.Further,thefinancingneedsformanyofthesmallercompaniesareoftenbelow theminimum“ticketsize” requirements for investorspresent in themarket(tensorlowhundredsofthousandsindollarsversusmillions).Consequently,smaller localSAScompanieshaveraised littlefinancing from institutional investorsandareoftenputoffinseekingforeigninvestmentduetothelongprocessofaccessingfinancing.43

Limited availability of local financing and forex hedging options further limits access to capital.Hardcurrencyfinancingaccountsfor93percentofcapitaldeployedin the off-grid energy sector in Nigeria since 2018.44 SAS companies have limitedforexhedgingoptions,increasingforexriskexposureasaresultofthepredominanceofhardcurrency in themarket.Localfinancing,however,remainsoutofreachdueto unfavorable interest rates and predominantly short-tenured loans.45As a result,demandforthecurrentinvestmentopportunitiesamongNigerianSAScompaniesislimited.

3.3 Regulatory/policy barriers to investmentHistorically, limited or poor implementation of SAS-specific regulation has failed to provide sector actors with the confidence necessary to enter the market. In 2017,theWorldBankclassifiedNigeriainthebottom26countriesinitsRegulatoryIndicatorsforSustainableEnergy(RISE),aslightimprovementfromthebottom10in2016.Therankingilluminatestheroleofpoliciesandregulationsindrivinginvestmentsforachievinguniversalelectrificationandcallsforinterventionsthatcreateanattractivepolicyenvironmentandcorrespondingstability.46LowimplementationofsectorreformshistoricallypreventedregulationsfromtakingrootinNigeria,thoughinrecentyearstheGovernmenthasshownmoresignificantintentthroughtheactivitiesofREAandothergovernmentbodies.47

Unfavorable fiscal policy for solar components increases product prices, reducing affordability and hence market penetration. Currently, batteries andinvertersattractover20percentinimportdutieswithanadditional7.5percentinValueAddedTax(VAT).Whilethereareseveraltaxincentivesforoff-gridenergyactors,theincentive mostly applies to infrastructural investments as opposed to SAS products. Therefore,SAScompaniesdonotoftenbenefitfromthesetaxbreaks.

Further, current consumer payment platforms from financiers are not easily accessible to rural communities, due in part historically to regulation.Upuntil2018,Nigeria’sRegulatoryFrameworkforMobilePaymentServices(2009)excludedmobilenetworkoperatorsfromprovidingmobilefinancialservices,despiteNigeria’srelatively highmobile phonepenetration rate of ~87 percent.48This in part slowedthegrowthofPAYGcompaniestoreachlast-mileconsumers.ThePaymentServiceBanksare potentially an alternative tomobilemoney solutions that could increaseaccess to remittance and non-credit services to last mile distributors.

43. Insights from conversation with Chibuikem Agbaegbu Country manager, Nigeria, ACE TAF 44. REA(2019),OpportunitiesintheOff-GridSectorinNigeria:FocusontheNigeriaElectrificationProject(NEP)45. Shell Foundation (2018), Nigerian Off-Grid Market Acceleration Program: Mapping the Market46. World Bank (2016), Regulatory Indicators for Sustainable Energy: A Global Scorecard for Policy Makers, RISE, 47. SE4All (2016), Action Agenda48. Shell Foundation (2018), Nigerian Off-Grid Market Acceleration Program: Mapping the Market; Jumia (2019),

Hard currency financingaccounts for 93% of capital deployed intheoff-gridenergysectorinNigeriasince2018.SAScompanieshavelimited forex hedgingoptions,increasingforexriskexposureasaresultofthepredominance of hardcurrencyinthemarket.

https://rise.esmap.org/scores

https://www.jumia.com.ng/sp-mobile-report/


Stakeholders have deployed large amounts of technical assistance to build capacity for both investors and companies.49REA,through its REF and NEP, has allocated

~USD 44 million specifically to technical assistancefor SAS and mini-grid providers.50 Development partnersincludingFCDO,USAIDNPSP,andIFChaveprovidedtechnicalsupporttolocalfinancialinstitutionsto understand the emerging solar market and unlocklocal financing in Nigeria.51 Innovation hubs like AllOn’swork inconjunctionwithpartners like theNigeriaClimate InnovationCenter(NCIC)andtheCleanTechIncubationandAccelerationFoundation (CTIAF)havedeveloped SAS company capacity and bankabilitythrough the provision of incubation and growthacceleration support.51 Though these have catalyzedinitial growth, more TA is still need to close the gapbetween companies and investors.

Stakeholder coordination has spurred greater collaboration in the SAS sector. REA, in additionto USAID NPSP and All On, convenes developmentpartners, donors, investors, and other sectorstakeholders through its quarterly Off-grid Investors/Donors Coordination Meeting that provides aplatform todiscusskeyactivitiesand identifypotentialcollaborations.53 In addition, the Renewable EnergyAssociationofNigeria(REAN)representsandadvocatesforprivateSAScompanies.Donorsandotherpartnerssuch asACE TAF are providing technical assistanceto bolsterREAN’s capacity in lobbying for the privatesector,whilealsoleveragingtheassociationtosupportcompanies.54Morecollaboration is critical toeliminateduplicatedeffortsandincreasestakeholderengagementinpursuitofasoundenablingenvironment,forexample

more streamlined importation processes and reduced tariffs,bothcriticaltocatalyzingsectorgrowth.55

Development partners and the FGN have also spearheaded several initiatives to encourage investment into the sector. DevelopmentpartnerssuchasAFDhaveextendedlinesofcredittolocalcommercialanddevelopmentbanks,amongthemAccessBankandUnitedBankofAfrica(UBA),tospurlocalfinancingandreduce the dependence on hard currency financing,thereby reducing exposure of companies to foreignexchange risks.56 Guarantees such as USAID’sDevelopment Credit Authority for EcoBank attemptedtoreducecollateralandcredithistoryrequirements,butlimitedimprovementintenuresandinterestrateshaveresulted in limited utilization.57 Development partners andsome investorshavealsospurred innovationandscale-up with grants such as FCDO’s Solar Nigeria,WorldBank’sNigeriaClimateInnovationCenter(NCIC),and the Off-Grid Energy Challenge by All On andUSADF.Theyalsoback initiativesalongside theFGNthroughREAandBoIthatavailed~USD150milliontoSAS companies.58

The FGN has also enacted several policies and regulations to encourage growth in the off-grid energy sector. Nigeria has taken critical steps,beginningin2005withtheenactmentoftheElectricitySector Power Reform Act (ESPRA) to unbundle thestate’s monopoly on electricity and catalyze sectorinvestments, also resulting in the creation of REA tooversee and implement the FGN’s commitment torural electrification.59 Since then, eight critical energypolicy documents have made an impact on off-gridenergy,asstakeholderscancontinuetofocusonactive

49. Insights from conversation with Chibuikem Agbaegbu Country manager, Nigeria, ACE TAF50. WorldBank(2007),OperationManualforRuralElectrificationFund;REA(2020),NigeriaSHSProgrammesandDonorSector

Coordination Workshop – Day 151.`ESI Africa (2016), Nigeria: IFC partners with FCDO to accelerate solar power52. Business Day Nigeria (2020), Increasing Nigeria’s energy access and bridging gaps53. Power for All (2018), Campaign Updates54. Africa Clean Energy Update55. REA (2020), Nigeria SHS Programmes and Donor Sector Coordination Workshop – Day 256. SUNREF (2018), AFD supports the Nigerian banking sector with SUNREF57. USAID/PowerAfrica,RenewableEnergyandEnergyEfficiencyProject2014-2018;REAN(2020),AssessingtheAccessibilityof

Government Social Intervention Funds for Renewable Energy Sector58. GuardianNigeria(2015),BoI,UNDPtostake$4.8monrenewableenergyprojectsinNigeria;REA(2020),READisbursesCapital

Grant for Solar Home Systems (SHS)59. GOGLA (2018), Technical Notes: Quality Matters

4. ExISTINg INITIATIVES TO ENCOuRAgE INVESTMENT


implementation.60 Government organizations includingFederal Ministry of Power, REA, Nigerian ElectricityRegulatory Commission (NERC), Central Bank ofNigeria,andNigeriaInvestmentPromotionCommission(NIPC)havedrivenmajorreformsthroughthecreationof policy documents that outline the government’sobjectives,strategies,andtargetsforrenewableenergy.Thesepolicies, regulations, andorganizationsprovidethe necessary bedrock against which the Nigeria’soff-grid energy sector can grow but commitment toimplementation will dictate their effectiveness. Part ofACETAF’stechnicalassistanceapproachistosupportthegovernmentatafederalandstateleveltoimprovepolicies and implement them in order to catalyzeinvestmentintothesector.

There are also several investment policies currently in place to encourage foreign investment into the sector.61 The Federal Inland Revenue Services(FIRS) provides foreign investors with a 100 percentwithholding tax (WHT) exemption on loans to localcompanies,providedtheseloansareforaperiodofatleast7years,witha2-yearmoratorium.Further,underaminimumtaxexemption,localcompaniesareexemptfromminimumtaxpayments,assumingthataminimumof25percentofequityisforeign.Finally,theNIPCActprovides that foreign investors into local companiesare guaranteed “unconditional transferability of fundsthrough an authorized dealer in a freely convertiblecurrency”includingdividendsorprofits,andremittancesofproceeds,netoftax.62Additionally,theNIPCpioneerstatus incentive provides eligible companies a taxholidayonincometaxforuptofiveyears.63

Current moves toward quality standards for SAS products will help to safeguard consumer interests by limiting low-quality products. In Nigeria, non-quality verified (QV) solar products have accountedfor ~70 percent of product sales, largely in part dueto their affordability, up to four times cheaper thanQV products.64 The introduction of the StandardsOrganizationofNigeria(SON)qualitystandardsundertheSONConformityAssessmentProgram (SONCAP)

ensures minimum product standard conformity.65 TheSON has adopted the International ElectrotechnicalCommission (IEC)standards forSAS throughsupportfromIFCandACETAF,andissettingupatestinglabformarketqualitychecksandsurveillancewiththeaimof implementing the standards and issuing productcertifications.66Inadditiontoensuringcustomersafety,quality standards improve trust needed to grow SASproduct adoption.

Consumer financing mechanisms have been piloted to increase affordability of SAS products.PAYGhasincreased affordability and uptake of SAS products,with over 53percent of customers surveyed selectingproducts based on mode of payment offered.67 In Nigeria, stakeholders have overcome the limitationson consumer financing imposed by the CBN withinnovativemechanisms.Lumos,forexample,partneredwith Global System for Mobile CommunicationsAssociation(GSMA)andMTNNigeria,topilottheuseofairtimecredit toprovidePAYGservices.68Programssuch as Power Africa’s Beyond the Grid (BTG) andIFC’sLightingNigeriahaveworkedwithMFIstoprovidecreditforSASproductstolast-mileconsumers.LightingNigeria has collaborated with 14 MFIs, disbursing~100Kloansforatotalvalueof~USD3.4MwhileBTGandAfDBpartneredwithLAPO,Nigeria’slargestMFI,toreachits~90percentfemaleclientbase.69Whiletheseinitiatives have increased affordability and ability toservevulnerablepopulations,limitedgeographicreachofMFIslimitstraction.

Finally, the CBN recently released the Revised Payment Service Bank (PSB) Regulation that permits licensed promoters to provide small scale non-credit services in rural areas. The PSBs willacceptdepositsfromcustomersandsmallbusinesses,execute payments, issue debit cards, and providefinancialadvisoryservices.ConsumersinremoteareascanleveragetheseservicestomakepaymentsforSASproducts and services delivered. Eligible promotersincludebankagents,telcos,retailchains,postalservices,mobilemoneyoperators,andfintechcompaniessubject

60. GOGLA (2018), Technical Notes: Quality Matterss61. GOGLA (2018), Technical Notes: Quality Matters62. GOGLA (2018), Technical Notes: Quality Matters63. GOGLA (2018), Technical Notes: Quality Matters64. GOGLA (2018), Technical Notes: Quality Matters65. ACE TAF (2020), Importation Guide for Solar PV Products and Technologies in Nigeria66. REA (2020), Nigeria SHS Programmes and Donor Sector Coordination Workshop – Day 2, OCA consultation and analysis67. Acumen (2017), An Evidence Review: How affordable is off-grid energy access in Africa?68. GSMA (2016), Mobile for Development Utilities Lumos: Pay-as-you-go solar in Nigeria with MTN\69. Lighting Africa (2019), Nigeria: A program designed to impact 6 million people; AfDB (2015), AfDB Group signs loan agreement with

Nigeria’sLAPOMicrofinanceBank


toapprovaloftheCBN.70Theregulationhassignificantpotential to increase financial inclusion in rural areas,butthereareonly3PSBproviderslicensedtodate,dueto the highminimum capital required to be granted alicense (~USD 130M).71 More promoters need to belicensed to realize further reach and higher financialinclusion. Adequate access to the PSB services canfacilitateefficientconsumerpaymentofSASsolutions.

ACE TAF has been in the forefront providing support to different stakeholders to catalyze sector growth. Theirinterventionscoverenablingenvironmentfactors,knowledgemanagement,andstakeholdercoordination.Under enabling environment, ACE TAF supports

governmentstakeholdersinimprovingandimplementingpolicies thatare favorable to theSASsector, suchasthe custom duty policies that have historically limitedthe sector’s growth potential. ACE is also facilitatingseveralmarketstudiesandsupportingthedevelopmentof databases that will increase the overall sectortransparencyforinformeddecisionmakingbydifferentstakeholdersinthevaluechain.Whileprovidingsupporttothedifferentstakeholders,ACEalsocoordinatesthestakeholders to facilitate interaction, communication,and mutually beneficial outcomes for stakeholders. Adetailed overviewofACETAF’s activities are listed inTable 1.

70. Central Bank of Nigeria (2020), Guidelines for licensing and regulation of payment service banks in Nigeria 71. EFInA (2020), Payment Service Banks (PSBs) in Nigeria: Landscape Assessment and Key Learnings from India to Implement

Optimal Payment Service Banks

Manyinterventionsoccuratthenationallevel,buttoachieveuniversalaccessitisvitaltoconsiderdifferencesacrossStates toensure thatbusinessescanexpandand reach last-milecustomers throughout theentirecountry. Northern Nigeria has lower electrification rates than other geopolitical zones, ranging from ~53percentinKadunato18percentinYobe.TheyalsorankfavourablyintheEaseofDoingBusinessIndex,asseenwithJigawabeingthe3rdbestfordoingbusinessasanSMEstateinNigeria.Ofcourse,socio-politicalinstabilityinsomeofthesestatesisalsoakeyconsideration.WhilerankingoftheeaseofdoingbusinessintheWest,South,Eaststatesmaybelow,theyonaveragehavehigherSASadoptionrates.

Sector stakeholders have started to promote investment at the state level. For example,NIPC’sBookofStatesevaluatesall36statesandtheFederalCapitalterritoryfordifferentinvestmentopportunitiesacrosssectors.ForSAS-specific interventions,ACETAF isofferingsupport tostategovernments to improve theenablingenvironmentforoff-gridsolaranddriveelectrificationgoalsatthestatelevelthroughits“State-LevelStand-AloneSolarMarketSupport.”

Source: NIPC (2020), Book of States; Uduak Akpan, (2015) Technology Options for Increasing Electricity Access in Areas with Low Electricity Access Rate in Nigeria; OCA Analysis

Case Box IV: A State-level view of investment for off-grid in Nigeria

Legend: Ease of Doing Business1stquartile

2ndquartile

3rdquartile

4thquartile


5. RECOMMENDATIONS TO ACCELERATE INVESTMENT

Building from the base of current sector interventions, stakeholders should streamline pathways for financing and accelerating

sector growth. TheSASmarket isearmarked toplaya substantial role in achieving universal electrificationinNigeria, estimated to provideTier 2 access to over88millionpeopleby2030.72Comparedtothisgoal,thesector has achieved relatively limited traction, thoughinterventionsand investmentshavespurredsignificantearlysectordevelopment.Thissectionoutlinespotentialinterventions that can accelerate investment andincreaseenergyaccess.

5.1 Supply-side interventionsFinancing structures tailored to SAS business models in Nigeria are needed to increase transactions, and small local SAS companies still require early-stage equity to prove their operating models and set up proper team structures capable of attracting investment. Early-stage investors havehistorically made equity investments of USD 2-9Minto local SAS companies and USD 15 – 25M intointernational SAS companies.73 Examples include theUSD8MequityinvestmentintoGoSolarAfricafromSMEFundsCapital,Anergy’sUSD9MSeriesA investmentfromBreakthroughEnergyVenturesinpartnershipwithAllOnEnergy,ElectriFI, andNorfund, andColdHubs’~USD 280K investment from Factor[e].74 With betterknowledgeofhowtoscaleSASbusinesses,companiescanmore likely achieve successful exits.Anexampleofasuccessfulexit intheformofsecondarysalewasBlueHaven Initiative’sacquisitionofAcumen’ssharesinM-KOPA.Otherexitstrategiesobservedinthemarketincludesharebuybacks,mergers,andacquisitions.75

Concessionary capital can cushion the working capital needs for SAS companies by limiting commercial rate repayment obligations. Currently,localcurrencyfinancingcharges20-25percentinterestrates,andhardcurrencyfinancingcharges15percentincludingcollateralrequirementsofupto150percentoftheborrowedamounts,whichistoocostlyforsmallSAS

companies.76 Concessionary debt in both hard andlocal currency, forexampleusing lower interest rates,innovativesecuritizationstructuressuchasdebenturesonassets,guarantees,orreceivable-backedfinancing,can allow companies to develop a track record ofrepayment while encouraging streamlined operationsandimprovedgovernancestructures.LocalbankscanprovidethisbyleveraginglowercostfundsprovidedbytheCentral Bank of Nigeria to provide local currencyloans at lower interest rates.

Concessional financing from development partners and DFIs can also mitigate investment risks for more commercial investments in the form of blended finance. Blended finance can combine concessionalandcommercialcapitaltoprovidedebt,equity,orrisk-sharing to SAS company investments. Here, high-risk and impact-focused investors take on more riskthroughmechanismssuchasfirst-loss layers in juniortranches or guaranteemechanisms,while risk-averseinvestorssuchascommerciallenderstakeonreducedrisk. By crowding in commercial lenders, impact-focusedinvestorscatalyzecommercialinvestmentintothe SAS sector.77 Blended finance can provide moreconcessionary or “patient” capital that eases SAScompanies away from dependence on grant capitalwhileincreasingprivatesectorinvestment,visibility,andcomfortininvestinginthesector.

Medium to large SAS companies typically seek larger tranches of capital at more commercial rates given their traction and financial robustness. Thespecific financing structures and terms suitable forlargeSAScompaniesvariesdependingontheircurrentand projected cash flow performance, their leverage,and shareholders’ willingness to raise more equity.Nonetheless,financinginstrumentssuchasmezzaninedebt, for example All On’s investment into SosaiRenewable Energies Company, can provide flexiblepayment terms to allow businesses to access growthcapitalwhileatthesametimeprovidinglucrativereturnsto investors.78

72. María Yetano Roche et al (2019), Achieving Sustainable Development Goals in Nigeria’s power sector: assessment of transition pathways

73. OCA analysis of data from consultations, press releases, company websites, and other secondary sources; Sustainable Energy for All (2020).

74. Crunchbase, REA (2020),

75. Acumen and OCA (2019), Roadmap to Exits in Off-Grid Energy76. OCA Consultation and analysis 77. REA(2019),RuralElectrificationAgencyProgrammesandInitiatives78. OCA Consultations and analysis

https://www.crunchbase.com/

https://rea.gov.ng/nigerian-solar-energy-startup-arnergy-closes-9-million-series-round-major-milestone-local-energy-companies/

https://rea.gov.ng/nigerian-solar-energy-startup-arnergy-closes-9-million-series-round-major-milestone-local-energy-companies/


ThoughtheSASsectorinNigeriaiscurrentlynascent,companieswillneedtoattractmorescalableformsoffinancetoreachthecountry’selectrificationgoals.SomelargerPAYGSHScompaniesareattemptingtousetheir receivables balances to raise financing through securitization.Under securitization, theSASproviderpoolscustomerreceivablestocreateassetsthataresubsequentlypledgedtoaSpecialPurposeVehiclewithoversightfromtheSPVtrustee.

TheSPVrequiresunderwritingandongoingmanagement.Anunderwriterperformsriskassessmentsandduediligence todetermineeligibilityof loansandpricedebt tranches,basedon thecreditqualityof thepooledreceivables—historicandprojecteddefaultor repayment rates.Oncecompleted, theasset-backedsecurityiscreated,usuallyintwotranches:seniorandsubordinateddebttranches.AnSPVtrusteemarketsandsellstheinstrumentstoapoolofinvestorsrangingfromcommercialinvestors,DFIs,andotherretailinvestors.DFIscouldinvestinthesubordinatetranche,providingafirst-losscreditenhancementtothesecurity.

Thesecuritizationprocesscanbecomplexandcostly,andthereforemoreapplicabletomediumtolargesizedSAScompanies.Smallercompaniescan,however,employ factoring.Under factoring, theSAScompanieswouldselltheirreceivablesatadiscounttoathirdpartyandreceiveupfrontcash,muchlikesecuritization.Thediscountratewouldbeinformedbytheriskinessofthereceivables.InNigeria,thisformoffinancingwouldhelplargercompaniestocontinuetheirscale-upwhileimprovingtheirliquidityposition,asseenoutsideofNigeria.

Source: GOGLA (2020), Market Trends Report; Global Innovation Lab: Solar Securitization for Rwanda; CGAP (2018), Strange Beasts: Making Sense of PAYG Solar Business Models

To crowd in this needed equity and debt investment, SAS companies still require grant or other concessional funding from development partners. Variousgrantschemescanhelpcompanies—thosewithnew businessmodels or ones overlooked in previousrounds—demonstratetraction.Results-basedfinancinglinkspaymenttothecompletionofspecifiedperformancemeasuresoroutputs,suchasnumberofconnections,allowingfunderstosteersectorgrowth,forexamplebytargeting certain products or geographies. ExamplesincludeNEP’sUSD 60MSHS output-based fund thathasdeployedUSD1Mtosupport~86,272SHSsysteminstallations covering around 20 percent of the of theretailcoststothegrantees.79Alternatively,matchgrantfunding can serve as another form of grant finance,

requiringcompaniestocontributecapitalatpredefinedproportionswiththeinvestor,therebysharingintheriskandencouragingstreamlinedoperations.Somefunderssuch asAECFhave assessed the applicability of thisfinancingoptionandestimatedthataratioof1:1wouldbeidealforsmallerSAScompaniescomparedto2:1formedium-sizedcompanies.80

Guarantees or first-loss facilities are currently lacking despite their potential value in catalyzing investments into SAS companies. Development partners could set up guarantees to incentivizecommercialinvestmentintotheSASsector.Guaranteeswould allow SAS companies to take up commercialdebt financing against the facility, therefore hedging

Case Box V: Receivables securitization structure overview in off-grid solar

79. Donor Coordinator meeting (10 November 2020), 5M solar connection programme80. AECF(2019),CountryspecificimplementationframeworkforREACTHouseholdsolarprograminNigeria

SAS provider

Consumer

Investor

Receivablefinancing

Receivable portfolioLoan

Principalandinterest

Consumer point of contact

Special purpose vehicle(SPV)


the commercial investors against the risk of loss.One example is a forex-based guarantee to hedgecommercial investors against forex losses in hardcurrencyinvestment.USAIDhashistoricallyprovidedasimilar facility in the formofapartial creditguaranteeto Ecobank through the USAID Development CreditAuthority.81

Increased data and sector transparency are also required to bridge the information gap and increase investor confidence in making investments. TheRural Electrification Agency (REA) is developing theNigerian Energy Database (NED) to house energystatistics and promote increased sector transparency. The NED will capture consumer energy access dataandmarket potential to help companies identify high-valuemarketsandsubsequentlyattract investments.82 Similarly, ACE TAF is developing the Energy AccessExplorer platform that analyzes spatial data sets onenergy supply and demand and produces graphicalrepresentations of energy access maps to improveenergyaccessplanning. Initiatives suchas these canhelp companies identify viable market opportunities,and as a result attract investors willing to support

their growth. Additionally, data from sources such asNithio,anAI-drivendataprovider thatusesgeospatialcustomerprofiling,canprovide investorswith relevantinformation to provide receivables-backed financing.83 GreatercollaborationacrosssectoractorswillincreasetransparencyaroundthefinancialperformanceofSAScompanies,financingneedsforSAScompanies,optimalinvestment terms, and key performance indicatorsneededforinvestmentdecision-making.

5.2 Demand-side interventionsItisalsonecessarytoimprovetheabilityofcompaniesto prepare to raise and absorb capital. A common complaintoffinanciersisthatcompaniesinthesector,localcompaniesespecially,arenotinvestmentready.84 Tailored TA can ensure that companies are investorready, forexamplesupportingthemtostreamlinetheiroperating models, treasury management functions,develop financial evaluation skills, improve creditmanagement,andprepare investormaterials.NewTAmodels are evolving to provide more direct supportto businesses that can ultimately give investorsmoreconfidence.

81. World Bank (2019), Off-Grid Solar Market Assessment and Private Sector Support Facility Design; REAN (2020), Assessing the Accessibility of Government Social Intervention Funds for Renewable Energy Sector

82. REA(2019),RuralElectrificationAgencyProgrammesandInitiatives83. Nithio 84. REAN (2020), Assessing the Accessibility of Government Social Intervention Funds for Renewable Energy Sector

ItisimportantforSAScompaniestobuildtheinternalcapacitytoraiseandmanageexternalcapitalbeyondtechnicalassistance.Thecompaniesshouldfocusonfiveoverallareasincluding:

1. Financial management and evaluation w Performauditsandmaintaincleanandaccuraterecordsofhistoricalfinancialperformance,financialposition(assetsandliabilities),andcashposition.

w Monitor,record,andevaluatekeyfinancialandoperationalperformanceindicatorssuchasprofitability,costoptimization,andproductefficiencymetrics,amongothers.

2. Operations management and optimization w Monitorandmanageoperationalefficiencysuchasdurationandcostofcustomeracquisition,inventorybalanceandturnover,andsales/distribution,amongothers.

w Activelymanagecustomercreditrisksandreceivablescollections. w Measureoverall impactofoperatingactivitiessuchas improvement inelectricityaccess,customersatisfaction,andnumberofwomenimpacted,amongothers.

3. Capital raising w Prepareinvestormaterialincludingabusinessplan,investorteaser,andfinancialmodel. w Definethefinancingneed,optimalfinancingstructure(equity,debt,grant,orquasiequity),andtimeline

for investment. w Shortlistandreachouttobestfitinvestorstointroduceanddiscusstheinvestmentopportunity. w Bepreparedtoaddresscriticalquestionsfrominvestorsandtonegotiateonkeyfinancingterms.

Case Box VI: Strategies to improve investment readiness

https://www.nithio.com/


Case Box VI: Strategies to improve investment readiness (continued)

While development partners have historically provided technical assistance, SAS companies are keen on working with private investors that are also interested in their business development. Investors could supplement their investments withtechnicalassistancesupport toensure thecompaniescanabsorbandefficientlymanagethecapitalraised.AllOn’shubisanexampleoftechnicalassistancefacilitythatbuildsapipelineofinvestablebusinessesthattheyhaveeventually invested in,whileAECFalso couplestechnicalassistancewithfinancing.

Programs tailored to local companies that further bridge the gap between them and international companies can support the long-term sustainability of the sector.LocalcompaniesknowtheNigeriancontextwellandarecapableofdevelopingbottom-upsolutionsfor themarket, but often lack the same resources asinternational companies. Beyond improving theirinvestment readiness, as above, programs can targetlocal companies to increase linkages with investors,or couple concessional capital with TA to allow localcompanies to scale to the point where they can thenraisefurthercapitalfromcommercialinvestors.85

5.3 Policy and regulatory interventions Fiscal policy reviews aimed at increasing the affordability of SAS products and the scale potential of SAS are required to drive further investments. RemovalofVATandimportdutiesonsolarcomponentsisa keyproposal to reduceoverall product costsandincrease SAS product uptake. Case studies of pricesensitivity in Kenya identified a 32 percent increasein household uptake of solar products due to a price

reduction from USD 7 to USD 3.86 In Nigeria, suchan intervention could be achieved through a gazettenotice by the Minister of Finance, exempting certainitemsfromVATorimportduties.ACETAF’scost-benefitanalysis on the socio-economic impact of import tariffexemptionsforsolarproductsanditsImportationGuidecanbeleveragedtoinformthegovernmentonoptimalcustom duty revisions.

Import duty exemptions and tax holidays could also foster the growth of investments and uptake of SAS. These fiscal policies would incentivize firms that areengaged in the importation, provision or manufactureof machinery, equipment, and parts for use in cleanenergy generation. Exemptions would reduce productcoststherebyimprovingproductaffordabilityeffectivelycreatinga largerbaseofpotentialcustomers.87Theseinterventions are covered in more detail in reports suchasStrategicFiscal Incentives toUnlock theOff-GridCleanEnergySectorinNigeria:OpportunitiesandRecommendations by All On.

More licensing for the PSB financing platform is required to facilitate consumer PAYG remittances. To ensure a wider reach of financial inclusion, theCBNwouldneedtolicensemorepromoterstoprovidepaymentservices.WhilePSBswouldnotextendcreditto consumers to purchase SAS solutions, they wouldmake iteasier forconsumers tomakepaymentsoncethe solutions are purchased. Increases in repaymentefficiency could ensure that SAS companies aregenerating sufficient operating cash flows to coverworking capital needs. Nonetheless, more consumerfinancing platforms are still needed to mitigateaffordabilityconstraintsfortheSASproducts.

85. All On ; AECF 86. GOGLA (2018), Providing Energy Access through Off-Grid Solar: Guidance for Governments87. All On (2019), Strategic Fiscal Incentives to Unlock the Off-Grid Clean Energy Sector in Nigeria: Opportunities and

Recommendations

4. Risk management w Establishacleargovernancestructurewithacompetentmanagementteamthatcaninspireconfidence

from investors. w Establishchecksandbalancesintheuseofcapitalraisedtoachievestatedinvestmentplans. w Createmonitoringandevaluationfunctionstoalignoverallfinancialandoperationalperformancewith

investor expectations.

5. Business planning and marketing w Articulatethebusiness’marketshare,targetmarket,valuepropositionofproductsandservices,andcompetitiveadvantage.

w Ascertainthequalityofproductsandservicesincludingthereliabilityandsustainabilityof thesupplychain.

https://www.all-on.com/the-all-on-hub.html

https://www.aecfafrica.org/index.php/about-us/who-we-are


The SAS sector is an essential component of Nigeria’s goal of 100 percent electrification by 2040. Despite increased commercial activity and investor focus in recent years,

the USD 1.2 billion revenue potential remains largelyuntappedasaccesstoaffordableandsuitablefinancingremains elusive for many companies. Coordinated and strategic investment, technical assistance, andregulatory implementationarerequired tocatalyze theinvestmentneededbythesector.

Development partners and government have been integral in creating an enabling environment for the SAS sector’s financing and growth.Theiractivities,rangingfromconsumerawareness,technicalassistancetofinanciers,technicalassistancetocompanies,policyreform, and subsidies have openedmarkets to beginscale-up.Continuedsupportintheseareasisessentialas the sector grows. Investors still require tacticalsupportthroughguaranteesandforexhedgingfacilitiesbeforedeployingcapital,whiletheycaninvestalongsidesubsidyandconsumerawarenessprograms.

Ultimately, the right type of financing can unlock the potential for SAS companies to meet the current market opportunity. Small local SAS companies still require early-stage equity to prove their operatingmodels and set up proper team structures capable of attracting investment. Medium-sized SAS companiesneedlargertranchesoffinancingtoscaletheiroperationsand can absorb more commercial rate terms. Flexible financingstructuressuchasmezzaninedebtcanallow

medium-sized companies to scale their operationswhile providing lucrative returns to investors withoutstraining their profit andcashposition.Concessionarycapital and blended finance can crowd in commercialinvestmentsbyprovidingthefinancingneededtosetupproperoperatingstructures,cushioningworkingcapitalneedsbyabsorbingsomeofthecostsofcapitaltoSAScompanies, and absorbing investment risks such asrevenuevolatilityandforexfluctuation.

SAS companies are keen to work with investors that can support them in their growth efforts.Early-stage and commercial impact investors should aim tounderstand the localmarketstructureandprovide therightcapitalstructuresforthesector,incoordinationwithfinance from DFIs. In the meantime, the governmentcanplayakey role in increasing theattractivenessofthesector throughfiscal incentivesandconcessionarycapitalarrangementswithlocalfinanciers.Nonetheless,it is essential that SAS companies are also willing toworkwithin theconstructsofavailablecapitalsourcesand build internal capacity to raise and absorb external financing.

The recommendations outlined in this report have the potential to catalyze investments into the sector. Coordinated implementation by public and private investors, SAS companies, the government,anddonors is required for successful implementation.If SAS companies can access the right financing andtechnicalsupport for theiroperations, theycanunlockthetremendousSASmarketpotentialinNigeria.

6. CONCLuSION

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