Barriers to Entry

Home  /  Energy in sub-Saharan Africa Spotlight  /  Barriers to Entry
Credit: Robert Finocchio and Solar Sister

Credit: Robert Finocchio and Solar Sister

This section describes some of the difficulties an enterprise might have getting a product to its beneficiaries in sub-Saharan Africa (SSA).  Generally, in SSA, barriers to entry are high for enterprises in all energy-related sub-sectors.

High transaction costs for both consumers and distributors

For social entrepreneurs, getting a product to those who need it most is usually difficult and capital intensive.  Distribution requires a lot of working capital because it involves navigating difficult and underdeveloped infrastructure in order to reach last mile distribution.  Many rural African families already have to travel for miles to reach local markets to purchase necessities such as food, household items, and cooking fuel.  This requires considerable expenditures in time for the customer, and considerable expenditures in money for the distributor.  On the supply side, costs associated with product distribution make up approximately 30-50% of a PLSs cost structure.  The fragmented nature of many rural distribution networks further drives up transportation costs.

Working capital requirements associated with product distribution are driven up even more if the product requires after-sales service.  Many enterprises have been able to at least partially circumvent this problem by having their partners take care of after-sales service.  Yet, this type of model requires that the distributor provide training, which commands investment in time and money.

In areas where mobile payment is not available, payments often have to be collected physically. This requires either the enterprise or partner sending out a representative to the customer to collect the payment, or the customer travelling back to the point of sale or service center to make the payment.  This further drives up transaction costs associated with achieving last mile distribution.

Credit: Robert Finocchio and Solar Sister.

Credit: Robert Finocchio and Solar Sister.

Difficulties with product financing

Finance-related issues are one of the most oft-cited barriers to entry for social enterprises.  Many places in SSA lack finance infrastructure.  Even MFIs, which have been taking off in SSA, are not present in many areas.  While some BoP customers may be able to afford products at lower price points without needing access to finance, the lowest income sectors of the BoP, who live on less than a dollar a day, require finance in order to take advantage of the benefits of energy-related products

Unfortunately, due to regional dynamics, there is no one-size-fits-all solution.  A method of product financing that works well in one area may not be applicable in another due to lack of infrastructure.  For example, Fenix Intl. has been able to take advantage of existing mobile phone platforms and a partnership with MTN to develop a PAYG system that makes their smart battery product extremely affordable for BoP customers.  However, this business model could not be implemented where cell phone penetration is low, and may be harder to implement in areas where people are not already familiar with mobile payment.  Furthermore, as mentioned in previous section on product finance, each method of finance comes with a set of drawbacks that could end up hampering market penetration and scaling.

Upstream financing is also extremely challenging for many social enterprises, namely enterprises that are involved in distribution.  Distributors, epsecially those who outsource manufacturing to other enterprises, are forced between a rock and a hard place.  Working capital is often already very limited to begin with, and this often leads distributors to seek out finance, investment, and donations to help cover working capital requirements.  Yet, acquiring such funds is no easy task and often requires a lot of work on the management team’s part.

Part of the problem is that most manufacturers are unwilling or unable to extend credit to the distributor.  This would significantly ease the financial burden on distributors and allow them to deal with some of the other financial challenges that product distribution presents.

The table below, from the Lighting Africa 2012 Market Trends report, outlines some of the key needs and issues relating to product financing across the value chain.

 30ebeb96b576db2571ec397533b1b2c8

Credit: Robert Finocchio and Solar Sister.

Credit: Robert Finocchio and Solar Sister.

Consumer awareness and market spoilage

Adequate levels of consumer awareness are key to the development of new markets.  Many potential customers are unaware of the benefits that a product will bring to them.  For example, a mother in rural Ethiopia may not know that switching to a cleaner burning cookstove would reduce her childrens’ risk of respiratory infections.  Or an African family may not realize that a high quality PLS will pay itself back completely in several months to two years.  The only benefit they see from such a product would be better lighting and possibly more convenient mobile phone charging.  Many more are unaware that such life-changing products exist in the first place.  BoP consumers that lack awareness of a product and the benefits it brings are inherently hesitant to invest in the product, especially given their low amounts of disposable income.

The other side of the coin to lack of consumer awareness is market spoilage.  A number of NGOs and enterprises have distributed and continue to distribute low quality solar or battery-powered lighting products that are simply not rugged enough for the BoP market.  Such products often break after a few weeks or months, and may serve to benefit the consumer in that short time, but at the end of the day are useless.  The problem this creates is one of consumer perception.  The widespread distribution of such low quality products has fostered a perception of electric lighting products among many communities as unreliable and fragile.  As a result, many consumers are unwilling to invest more of their time and money purchasing products distributed by reputable enterprises that actually are reliable and durable.

Policy-related barriers and corruption

Kerosene subsidies present a significant challenge to energy enterprises in the lighting sector.  In this regard, they create the same perverse incentive that oil and coal subsidies do in the United States.  Without subsidies, alternative sources of energy such as solar and wind would be a lot more competitive than they are today, and both solar power and wind probably would have reached grid parity already in the United States.  Kerosene subsidies create a similar issue in SSA.  The switching costs from kerosene to PLS and SHS are already relatively high (unless a very effective financing regime is implemented), and artificially depressed kerosene prices only further discourage the adoption of safer lighting technologies.  This will occur whether or not potential beneficiaries know the risks associated with the usage of kerosene lamps as a primary lighting source.

Taxes and tariffs also add significant costs to a product throughout the supply and value chains.  VATs can contribute significantly to the cost structure of a product further down the value chain, and tariffs can further add to shipping costs.  Many countries have not yet provided tax exemptions for the products that social enterprises market and sell.  Furthermore, the transaction costs associated with paying these fees are often high due to lack of infrastructure.

Furthermore, inefficient bureaucracies increase the difficulty and cost of doing business.  Undertaking fundamental business operations such as incorporation and trade is oftentimes slow and costly due to a large number of regulatory hurdles and bureaucratic inefficiencies.  Oftentimes, this lack of expedience is due to a lack of proper administration and underutilization of information technologies.

Regulations and policies in SSA are generally enforced by local level officials, who often engage in corrupt practices.  These officials oftentimes demand bribes in exchange for favors or legal permission to undertake a particular business activity.  This puts early-stage social entrepreneurs that are strapped for cash in a very difficult position.  It cannot be stressed enough that engaging in these sorts of practices should be out of the question, even if it would make doing business substantially easier in the short-term.

  Next Section: Case Studies