SPECIAL FEATURE SEAR RESULTS-BASED FINANCING A PROMISING NEW TOOL FOR ENERGY ACCESS Marco Hüls, GIZ; Marcel Raats, RVO; Josh Sebastian and Martijn Veen, SNV Netherlands Development Organisation; and John Ward, Vivid Economics b    S TAT E O F E N E R GY ACCES S R EPO RT  |  2 0 1 7 Copyright © 2017 International Bank for Reconstruction and Development / THE WORLD BANK Washington DC 20433 Telephone: +1-202-473-1000 Internet: www.worldbank.org This work is a product of the staff of the World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work and accept no responsibility for any consequence of their use. 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Furthermore, the ESMAP Program Manager would appreciate receiving a copy of the publication that uses this publication for its source sent in care of the address above, or to esmap@worldbank.org Cover photo: © Arne Hoel | World Bank RESULTS-BASED FINANCING A PROMISING NEW TOOL FOR ENERGY ACCESS Marco Hüls, Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) Marcel Raats, Netherlands Enterprise Agency (RVO.nl) Josh Sebastian and Martijn Veen, SNV Netherlands Development Organisation John Ward, Vivid Economics INTRODUCTION A where the results are delivered by, and payments made to, s donors search for ways to promote energy access national or regional governments. There is also growing in the developing world, a new tool being piloted interest in using development impact bonds (DIBs) as a in the sector is results-based financing (RBF). It mechanism where private sector investors receive differen- offers incentive payments on the basis of results achieved tial returns on financial instruments depending on the to businesses that deliver pre-specified outputs—such as results achieved.1 the number of new electricity connections or advanced RBF represents a fundamentally different approach to cookstoves that are sold. By doing so, it tries to overcome supporting the private sector and other service providers market failures that constrain private sector delivery of in delivering energy access objectives. Of fundamental modern energy services. importance is that it changes the allocation of risk, placing So far, the global community has had limited experi- more delivery and execution risk on those who agree to try ence with the RBF in the energy sector, but a number of and deliver the results: if they fail to deliver the pre-speci- programs and initiatives are under way to explore how to fied results, they will fail to receive funds. This contrasts pilot and mainstream RBF into their activities. This paper with conventional ways of supporting energy access objec- focuses on how the RBF works in theory and in practice, tives where payments are made upfront, before it is known with a special focus on a project to spur solar market devel- whether the intervention will be successful. opment in Tanzania. This insight, in turn, helps to identify when it may be appropriate—and, just as important, inappropriate—to DEMYSTIFYING THE RBF turn to RBF. The transfer of risk may be expected to sharpen incentives to deliver, and there are numerous What exactly is meant by results-based financing? Unfortu- cases from the energy sector and other sectors where such nately, a tough question to answer, given that different benefits can be seen. On the other hand, it may not be organizations use different definitions to mean the same desirable or sometimes even possible for the recipient to thing and also use the same term to describe different bear the additional delivery/execution risk. The decision things. Nonetheless, one approach that is becoming on whether to use RBF turns, to a significant extent, on increasingly commonplace is to define a broader cate- whether the advantages of sharpening incentives is greater gory—results-based approaches—according to three key than the disadvantages of placing additional delivery risk characteristics: on the recipient. • Payments (or at least some portion of them) to a recipi- ent are made contingent on achievement of previously FIGURE 1 Various types of results-based approaches agreed results. • The recipient is given discretion as to how results are Results-based approaches achieved. • Verification of the achievement of results is undertaken by an independent third party before disbursement takes place. Results Based Results Based Development impact Aid (RBA) Finance bonds bonds (DIBs) Within the family of results-based approaches, it can then (RBF) Aid to national or Returns to investors be helpful to distinguish between different recipients. As regional governments Payments to service linked to results figure 1 shows, RBF refers to a situation in which results are linked to results providers (private provided by, and payments made to, service providers sector, NGOs) linked such as the private sector or non-governmental organiza- to results tions (NGOs), while results-based aid (RBA) refers to cases   1  2    S TAT E O F E L E C T RI CI TY ACCES S R EPO RT  |  2 0 1 7 Practically speaking, there are a number of precondi- • The length of time the recipient needs to wait before tions that can be used, in at least a qualitative sense, to receiving results based payments. The longer that re- help determine the circumstances within the energy access cipients have to wait to receive results-based payments, context in which this might hold: the larger those payments will need to be in order to encourage the recipient to take action and to over- • Whoever is providing the funds need to be a credible come pre-financing costs. and committed partner: recipients will not commit to undertake significant actions on the promise that suc- The nature of many energy access projects means that cess will bring payment if that promise is not credible. assessment of these factors will need to be made qualita- tively, drawing on the judgement and expertise of those • Those receiving the funds need to have a sufficient un- designing the intervention and in consultation with (repre- derstanding of the scheme and the incentives it pro- sentatives of) the intended beneficiaries. vides, and the capacity to respond to those incentives. • With funds coming only after the attainment of energy access results, the recipient will need to be able to se- THE ENDEV RBF FACILITY cure a reliable source of pre-finance: this will depend A program that is actively piloting the RBF is Energising on who the recipient is, the nature of the project being Development (EnDev), a multi-donor energy access part- undertaken and, in many cases, the nature of the finan- nership program established in 2005 and currently cial markets in the country where the project is being financed by six countries (the Netherlands, Germany, Nor- undertaken. way, the United Kingdom, Switzerland, and Sweden).2 It promotes sustainable access to modern energy services These conditions can often be satisfied by designing com- that meet the needs of the poor—long-lasting, affordable, prehensive packages, in which RBF is one element, with and appreciated by users. It is one of the first out- other elements focusing on ensuring that these conditions come-based and performance-based programs in the are met. However, even if these conditions are met, there energy sector. By end-2016, it had reached 17.3 million are a number of other factors that, if most or all are present, people in households, almost 19,400 social institutions, are likely to make RBF an attractive possibility, but which, if and 36,600 small- and medium-sized enterprises. absent, point to alternative approaches being preferable. So far, EnDev country projects have successfully partic- These are also the factors that can help those designing ipated in three rounds of selection for projects that are schemes think through precisely which types of results they financed by the RBF facility. Because of the significant may wish to use within an RBF scheme. They include: requirements for developing the proposals and the novelty • The extent to which the agent can control the risks that of the RBF concept, the selected countries were intensively are shifted onto them. RBF is more suited to cases supported by EnDev management and consultants. Cur- where the recipient is able to easily control the addi- rently, EnDev together with its implementing partners is tional delivery risk it faces. carrying out 17 RBF projects in 14 countries (figure 2). The portfolio is characterised by a balanced spread of imple- • The ease with which both parties can observe the rele- menters, RBF approaches, technologies, and geographic vant results (“clear line of sight”). If attainment of the outreach to Africa, Asia, and Latin America—with 5 proj- result is easily observed and verified, then the transac- ects that have a multi-country/regional character (figure 3). tion costs associated with the RBF scheme will be lower. It combines (i) risky but innovative projects with a strong It will also make it more likely that the recipient will re- focus on learning and (ii) models that have already been spond positively to the incentives created. piloted and are very likely to perform well. • The structure of costs involved in meeting the results. Some energy access solutions may require potential re- TWO YEARS IN—ENDEV RBF LESSONS cipients to incur significant fixed capital investments LEARNED before the result can be secured. The more costs that RBF recipients have to incur before any revenue is re- The cultural diversity represented in the program is a key ceived, the greater the risk faced by an RBF recipient. for innovation. Sharing experiences and learning is the This will increase the cost of finance for a recipient, po- basis for success. For RBF in particular EnDev is gathering tentially reducing the value for money proposition of experiences and lessons learned regarding the feasibility the RBF scheme. and suitability of the instrument as a market development tool. Throughout EnDev RBF implementation, the pro- • The additional investment required to deliver the re- gram is keeping track of emerging problems, solutions, sults does not entail a significant proportion of the and progress in order to transfer practical lessons to similar agent’s (potential) resources. It will be easier, and hence EnDev projects and extract general learning issues for later more attractive, to place the additional delivery risk of use beyond the RBF window. RBF on recipients who have significant resources rela- tive to the activities needed to deliver the results. They Suitability of RBF for different contexts can respond to the incentives without fear that failure EnDev’s experience suggests that the RBF facility can work may undermine the viability of their overall operation. best if it is flexibly embedded in a larger, more compre- hensive and interacting package of market or sector R ESULT S-BASED FINANCING: A PROMISING NEW T OOL FOR ENERGY A C C E SS   3  FIGURE 2 EnDev piloting the RBF for energy access in Africa, Asia, and Latin America Solar (6) Cookstoves (6) Mini-grids (2) Street lights (1) Gasifier stoves (1) GIZ/EnDev (10) Domestic biogas (2) SNV (4) Solar Water Heaters (1) HIVOS (1) Solar Water Pumping (1) TECHNOLOGIES ORGANIZATIONS Practical Action (1) Grid connections (1) CLASP(1) Africa: Benin, COUNTRIES RBF TYPES and AMC (2) Ethiopia, Kenya, Malawi, APPROACHES Auctions (2) Mozambique, Rwanda, (Market development) Tanzania, Uganda OBA (10) Asia: Bangladesh, CCT (1) Cambodia, Laos, Nepal, Voucher (2) Vietnam Credit OBA (3) South America: Peru Inducement prize (2) NOTE: CCT = Conditional Cash Transfer; AMC = Advanced Market Commitment; OBA = Output-based Aid. development support. Such a package consists of techni- close follow-up and technical assistance will also be re- cal assistance to companies and financial institutions, quired. along with the joint development of sector and market • In Rwanda, very much to the contrary, the picoPV RBF is strategies with the main actors. RBF can fit as a prominent operating in a nascent market. For that reason, the proj- instrument, but seldom as an exclusive one—the situations ect is also implementing more classical interventions— in which RBF can act as a single driver for market develop- such as coordinating sector actors and advising the ment are rare, given that the energy access markets that government on a national monitoring system for pi- EnDev works in typically have small and often weak private coPV sales—to track progress toward government tar- companies, within weak business and financial environ- gets and avoid double dipping. ments. Weak markets and market actors require consider- able technical assistance and not all market development Normally, incentive schemes are designed to encourage barriers can be addressed through financial instruments. participants to stay in the market for a longer period, build- Even in relatively mature markets, with strong private sec- ing up the confidence of market actors and allowing all tor players and financial sector capacity in place, RBF is still levels of the supply chain to develop. The time horizon for a new modality of working for all involved, requiring tech- the EnDev RBF to stay in the market is four years, including nical assistance during the roll-out of RBF instruments. the time needed for design and inception of the country In some cases, RBF schemes might be combined with RBF structure. This is considered too short for markets to existing projects that have personnel in place and provide fully develop from scratch. Ideally, the RBF will lift a nascent the necessary capacity development in the energy access market to the next sustainable level. sub-sectors. In other cases, cooperation with technical Although in all EnDev RBF projects the final trigger for assistance activities from other organizations has to be disbursement is the actual and verified supply of energy found—or if the need for capacity building is only very low service to end consumers, the aim of the interventions is to (as might be the case in more advanced markets), it can be realize specific market shifts. Thus, as illustrated in figure 3 integrated as a commercial cost for the entrepreneurs into the portfolio comprises a multitude of intended shifts, the RBF incentive. resulting in a variety of specific bottlenecks addressed by • In Kenya, RBF for developing mini-grids is placed with- the different RBF schemes. Many projects support the in a larger context of policy and regulatory advice and expansion of distribution infrastructure into dispersed extensive technical assistance to project developers. In areas, some address consumer (or retailer) financing con- a regional RBF for domestic biogas, the EnDev RBF straints through the support of credit schemes at MFIs, and adds to the existing market development support activ- some support the distribution of higher quality or perfor- ities of the Africa Biogas Partnership Programme. mance solutions. As a result, every RBF design is unique and tailor made to the specific market situation. • In Tanzania, the RBF for rural picoPV operates as a EnDev has also found that there is a substantial need to stand-alone intervention, relying on a fairly developed engage with all actors in the RBF chain—from financial urban solar market and the high levels of awareness institutions to private energy service providers. This helps created by past donor-financed activities—although strengthen their capacity to work with the RBF model, to 4    S TAT E O F E L E C T RI CI TY ACCES S R EPO RT  |  2 0 1 7 FIGURE 3 A snapshot of EnDev’s results-based financing portfolio Portfolio Tranche 1 (approved in 2013): COUNTRY TECHNOLOGY FOCUS EXPECTED MARKET SHIFT BENIN Solar (Pico, Street Lighting) Ensure Quality in New Market from Beginning ETHIOPIA Improved Cooked Stoves Urban to Rural Distribution & Market Development RWANDA Solar (Pico) Support Growth of Nascent Market (focus on retail chain) Village Mini-Grids Functional in Government Paradigm Shift (Privatisation) TANZANIA Solar (Pico) Support Growth of Nascent Market (focus on import chain & distribution) BANGLADESH Solar (Pico) Diversification of Existing Market (downsizing, pro-poor) VIETNAM Biogas Last Step Towards Subsidy Free Commercial Market . Portfolio Tranche 2 (approved in 2014): COUNTRY (LEAD) TECHNOLOGY FOCUS EXPECTED MARKET SHIFT KENYA Solar (Pico) Market Acceleration via Building Sustainable and Affordable Credit Lines Village Mini-Grids Market creation for private sector operated mini-grids KENYA Improved Cook Stove Acceleration of Market Entry via Sustainable Credit Line (Next Generation) Creation NEPAL Improved Cook Stoves Fostering portable ICS technology development and (Hood Stoves) marketing via design competition PERU Solar (Water Heating) Scaling (Peri-Urban) SWH Market to Fully National Reach in Rural Areas . Portfolio Tranche 3 (approved in 2015): COUNTRY (LEAD) TECHNOLOGY FOCUS EXPECTED MARKET SHIFT BANGLADESH / KENYA PV systems and efficient Increasing availability of quality appliances for off-grid appliances systems CAMBODIA / LAOS / Advanced clean cookstoves Making advanced cookstoves available through VIETNAM competitive tendering KENYA / TANZANIA / Biogas Increased availability of credit and improved after sales UGANDA service MOZAMBIQUE / MALAWI Improved cookstoves Integrating subsidised cookstoves in social programmes as an AMC for a commercial market SUB-SAHARAN AFRICA Grid densification Introducing cross-country competition into a monopoly utility market . develop business plans and planning, and to understand tion role. In an iterative process, the challenges could be monitoring and verification requirements. overcome and processes streamlined, with responsibility Monitoring in the way that is required for RBF is not a eventually transferred to the financial institution and to the standard business practice for either the financial institu- independent verification agent. But even in quite advanced tions that act as central player in the EnDev RBF projects or markets or with strong actors, RBF requires intensive and the private companies that benefit from it. In Rwanda, the continued communication. Understanding RBF goals and verification process for a solar RBF saw several rounds, as strategy on both the company and the sector level, as well the initially submitted claims were found to be unaccept- as understanding the rules of delivery and payment, is cru- able or below standard: many telephone numbers were cial for ownership and a successful RBF project. Otherwise missing; or the company claimed sales that had already the intervention faces the risk of misaligning with govern- been reported to a different donor financed program and ment policy, other donor programs crowding out the RBF, thus did not qualify for earning RBF incentives. As this was or companies investing, but not fulfilling, the verification the first verification process, EnDev took a strong coordina- demands. R ESULT S-BASED FINANCING: A PROMISING NEW T OOL FOR ENERGY A C C E SS   5  Next to firm performance, the success factor that has local firms will need to be able to understand the cash emerged most clearly from implementation so far is the flow implications. permanent, local presence of an experienced task team leader or task team that can react to local challenges, nav- Verification strategies and cost igate the difficult negotiation phase, keep government The complexity of monitoring and evaluation and verifi- and other donors aligned with the RBF objectives (to do no cation should not be underestimated, especially when harm, at the least), and—most crucial—make sure that the going into bigger numbers, and especially with move- (often new and difficult to understand) implications of RBF able over-the-counter products like lanterns and cook- are understood by all stakeholders. stoves. Striking a balance between a reasonable prevention of fraud and the costs for verification is RBF and pre-financing important; projects are making use of a mix of methods of Given that the centerpiece of RBF is that the private sec- physical field checks and phone checks, accepting that a tor (including the financial sector) bears the full risk of dis- 100 percent check is too costly. Despite thorough plan- semination of energy access solutions, it is important to ning, verification systems and manuals need to be carefully think through pre-financing needs. Pure RBF dis- adapted to the market realities after being tested in the cards the possibility to provide concessionary up-front first claims. Otherwise there is the risk of the verification finance. Only a few market actors and financial institutions result not adequately reflecting the outcomes achieves. will be able or willing to come up with the necessary pre-fi- For example, a failed phone verification of customers nancing on their own. EnDev’s experience shows that tra- could actually be caused by patterns of phone ownership ditional banks, for instance, show little appetite to engage and usage, rather than non-performance of the partici- in RBF, or provide pre-finance for energy access activities pating firms. (A more detailed discussion on verification in general—which even with RBF incentives in place, they cost is included in the Tanzania example below.) perceive as an overly risky endeavour. This creates the risk of the RBF making just a few already strong firms and financial institutions stronger, and eventually supports the TANZANIA’S PICO-SOLAR RBF SCHEME creating of monopolies and oligopolies. Such an effect could be avoided by a careful selection of participating One of the EnDev RBF programs that feeds into the above firms and financial institutions, and to open or strengthen lessons learned is Tanzania’s pico-solar scheme. It was insti- commercial pre-financing channels for RBF participants— tuted because innovative mechanisms are needed to spur particularly for local firms that lack access to international last-mile distribution of clean energy solutions—given that banks and impact investors. out of 41.5 million inhabitants (CIA, 2015), only 36 percent This difficulty has been particularly visible in the mini- of the total population and 20 percent of those in rural grid RBF in Rwanda, as the incentives are paid upon areas have access to electricity (REA, 2016), and a vast achieving results and the costs of pre-financing are consid- majority of the country is expected to remain off-grid for erable. Factoring in the high interest rates for obtaining the coming decades. The overall rationale and intent of such financing, most projects require as much as 50-70 RBF in the Lake Zone—which covers 6 regions (Mwanza, percent RBF incentives to attract the private sector—and Kagera, Geita, Shinyanga, Simiyu, and Mara)—is to increase there is a clear divide between local and international firms sustainable rural consumer access to pre-electrification in terms of financing options. energy services (basic lighting and communication) via In general, therefore, while RBF rewards only performing quality pico-solar technologies. After successful piloting in companies, the incentive design needs to be carefully done the Lake Zone, the RBF facility will expand to include the to not just benefit a specific type of company. If the only Central Zone of Tanzania in the course of 2016. companies benefiting from the RBF are foreign companies, the RBF results in market distortion rather than market Designing the RBF Tanzania program development, driving out potential local actors. Technical The pico-solar EnDev RBF was conceived as a way for sup- assistance is important to make sure that existing local com- pliers and end sellers to bolster their investments in solar panies are supported in both meeting the high application distribution chain development by rewarding players with and construction standards of the RBF project and obtain- incremental sales-based performance incentives, chan- ing reasonable terms for the required pre-financing. neled through mainstream banking. Its design is based on Several firms have borrowed money on the basis of an key outcomes of market intelligence research in the Lake RBF contract and seemingly secured a right to future RBF Zone (with over 10 million inhabitants), which indicated payments. This raises the question of what to do with strong demand for pico-solar products (with an average 35 firms that do not meet the RBF payment triggers or suffer percent of people wanting to buy) and a lack of supply from the sometimes longer than expected payment and (only 3.5 percent of people owning solar) (figure 4). The verification process typical for new RBF projects—which intent is to increase the supply of quality solar products to can easily push firms into insolvency. Although especially the area without subsidizing customers. Only IFC Lighting the former can be considered a normal business risk, Global approved products and services are eligible for the which can be reduced by a careful selection of companies RBF incentives to avoid the promotion of sub-standard “at-entry” of RBF, for the latter care should be taken that and fake solar products. RBF verification and payment cycles are in line with com- The RBF program is open to the private sector from panies’ regular financial planning. In addition, smaller May 2014 to August 2018, with a focus on the solar 6    S TAT E O F E L E C T RI CI TY ACCES S R EPO RT  |  2 0 1 7 FIGURE 4 Solar market intelligence on the Lake Zone • Increasing number of reliable solar • Unreliable sources for quality • 35% of all consumers indicate suppliers entering the market solar options meeting diverse solar preference. More than 60% • Expansion dependent on the ability consumer needs and incomes in rural areas. to consistently place large import • Small working capital paired • Avg. energy expenses TZS 40,000 orders with poor pricing practices monthly • Lack of reliable retail chain tapping embed a high margin /low • More than 45% of energy expense the deeper rural market turnover culture dedicated to kerosene, charging, • Limited means for economies of • Market Norm: Uniform, batteries and candles—all easily scale w/o incurring high costs expensive and low quality satisfied with pico-solar. and/or losses products become • Only 3.5% of consumers indicate • Limited entry of new players solar ownership Suppliers Retailers Consumers pico-PV subsector (small solar home kits, lanterns, and investment of the private sector without over-subsidizing phone chargers). The way the program works is that the or distorting markets. At the same time, the fund aims to private sector is paid in the form of: (i) a product bonus account for the performance of the solar products, as to end retailers, allowing them to build up stock and pro- products with a stronger energy output tend to have a vide a means to scale their business; and (ii) a capital stronger impact at the household level, while higher bonus to suppliers (as based on rural end retail sales vol- investments are needed from the private sector to deliver umes), off-setting part of the initial investments that these larger products and services to rural markets. those companies are making to engage in a new market By this logic, the RBF incentive per pico-solar product -paid after verification of approved pico-solar sales to in Tanzania is based on an energy service calculation that rural consumers. considers both the brightness (lumens) and duration (run- Unlike a loan that is limited to a fixed, one-time pay- time per solar day of charge) of light that the product is ment bearing interest, the final value of the RBF secured capable of providing. The resulting “lumen-hours per solar by actors depends on their cooperation to mutually deliver day” performance of the pico solar product is considered results. The more solar verified as being sold, the more to be quantifiable as a number of “energy service units.” financial incentives suppliers and retailers are entitled to An annual monetary value (Euro cents) is applied to each receive. If one party fails to deliver, neither party is capable qualifying energy service unit that is payable to the private of benefitting. The incentive value as earned by the com- sector in the form of RBF Product Incentives. panies are unique per product, based on the energy ser- All pico-solar products—and the associated perfor- vice (lumen-hours per solar day charge) per product, mance values and standards used to determine the num- according to IFC Lighting Global technical spec sheets. ber of energy service units a product is capable of The roster of eligible products is being updated on a quar- providing—are based on publically available information terly basis, following approval of new products, while the from IFC-Lighting Africa. The RBF incentives are further incentive levels decrease in value by 25 percent per calculated to ensure a “minimum energy service unit,” annum. which is set according to the Minimum Performance and A total of 2.2 million Euros in RBF incentives are avail- Standard Targets of 100 lumen-hours per solar day (25 able in the Tanzania RBF facility and are to be paid to ser- lumen light output, 4 hour run time/day solar charge). The vice providers in the supply chain. As such, it operates as energy service units available are thus based on the actual a temporary and short-term buy down on the associated energy service units of the product less the minimum delivery costs of each unit of IFC Lighting Global approved energy service units. The resulting difference is considered pico-solar product sold by legitimate suppliers and retail- to be the RBF Energy Service Units (RESUs) for a specific ers to rural consumers. The RBF fund in Tanzania is driven Lighting Africa approved product (figure 5). by three main sets of actors: (i) a financial institution (the Each RESU is assigned an annual monetary value as Tanzania Investment Development Bank (TIB)), (ii) pico-so- defined by the RBF program in the form of Euro cents lar import-suppliers, and (iii) end retailers. SNV’s main role (RESU rate). RBF Product Incentive values are further bal- in this project is to broker relations among actors that anced by a maximum threshold or “RBF Incentive Cap.” ensure fair, transparent, and verifiable financial transac- This cap has been put in place to ensure the intent of RBF tions throughout the management of the fund. incentives as a tool to reasonably offset, not fully absorb, costs associated with developing distribution chains (that Putting a value on RBF “energy service units” is, rural sales agent engagement) and that the incentive At the end of the day, the instrument that makes its way to values do not exceed retail market prices of pico-solar the private sector will ultimately be monetary in nature— products. To further limit market distortions and actor which means that it must strike a balance in incentive val- dependency risks, the value of RBF incentives decreases at ues so that they are lucrative enough to stimulate the an annual rate of 25 percent—which also stimulates com- R ESULT S-BASED FINANCING: A PROMISING NEW T OOL FOR ENERGY A C C E SS   7  FIGURE 5 How “energy service units” are There is no magic formula for realizing detailed estima- determined tions of transaction costs for either RBF private sector play- ers or implementing practitioners. The reality is that delivery costs in reporting and verification are most often RBF Energy Service Unit (RESU) directly proportional and move in parallel to the size of RBF claims prepared by the private sector. Instilling regular feedback mechanisms with firms on progress and imple- Actual Energy Actual Energy mentation in between received claim cycles can further Service Service enable significant means for adequate cost estimations and budget preparations. IFC-LA Spec IFC-LA Spec Verifying results Sheet LESS Sheet In order for suppliers of pico-solar products to earn these RBF incentives, quality products and services need to be provided to customers. Each RBF claim is subject to verifi- X Lumens* X Lumens* X Hours X Hours cation (on paper, by phone and in the field), which is coor- dinated by SNV and involves independent verification agents. The feedback from verifiers provides significant insights panies to move quickly and achieve results. into aspects of sales and product services—insights that The true intent of the RBF in Tanzania has been to stim- are not necessarily related to compliance with project ulate the investment of suppliers to set up operations in rules. An important takeaway for practitioners and poten- untapped last-mile markets. While the presentation of the tial developers of RBF instruments is that verification incentives is on a cost per unit basis, the actual use is to should be implemented as more than just “policing”, but offset the start-up costs of initiating viable distribution also as a value added service to the private sector. Imple- chains. For developers and practitioners, these final points mented in this way, verification not only confirms quantita- have proven to be the most seriously needed for consider- tive outcomes but also positively influences the quality of ation in evaluations of incentive values. It is critical that achievements. A wealth of practical experience has been assessments of incentive values go beyond unit cost com- gained in the realities of verification. parisons to include a fuller accounting of the wider range of delivery costs necessary to actually get products to rural Results to Date markets, along with potential cost burdens of meeting the The first 18 months of operation of the RBF instrument in unique reporting compliance standards required to make the Lake Zone has clearly acted as a stimulus to initiate claims against the RBF Fund. Without these estimations, private sector investment into the region. Where previ- the valuation of RBF incentives can risk not being lucrative ously there was the stable presence of only a single legiti- enough to stimulate sufficient uptake among players in the mate solar provider servicing the market, there are 8 private sector. additional firms now actively engaged. Direct, salary based employments by these firms have reached well over 300 Managing transaction costs employees, along with a continuously growing roster of While considerable attention in an RBF scheme is focused district and village level sales agents, promoters, and tech- on how much a firm could potentially earn, there is also the nicians, whom at present number over 200 people. inherent reality that complying with the terms and condi- As a whole, firms have cumulatively submitted claims tions of an RBF instrument will naturally also come with (both verified and in processing) valued at 320,000 EUR costs—for both implementers and the private sector. and achieved an initial sales and service outreach to more For the private sector, the first set of expenses relate to than 12,000 rural households—effectively placing the ben- the pre-financing aspects of initiating sales. As a post-fi- efits of solar energy within reach of more than 45,000 peo- nancing instrument, an RBF instrument by its very nature ple. Whereas at the outset of the program there were only has little ability to provide for initial investments in stock, 3 legitimate pico-solar product options available to con- human resources, or operational set-ups. While these con- sumers in the area, product diversity has expanded to siderations will vary significantly in their actual value more than 15 types of entry and small solar home system (depending on the specific business model and scale that devices, all of which are approved by Lighting Global. firms are capable of undertaking), their costs should be well Of particular note in the delivery of these services to anticipated and not underestimated. Thus, practitioners rural consumers has been a high diversity in the business and developers need to assess the availability of pre-financ- modeling that each firm has chosen to apply. A total of 10 ing in local markets or funds available to firms. There are firms3 have successfully applied to the RBF Fund, 8 of also the realities of ensuring that sufficient investments are whom are entering the Lake Zone for the first time. These made by firms to capture process and administer the neces- firms not only use traditional retail outlets but also village sary data flow to compose RBF claims. RBF implementers level agents and rural micro-finance institutions (MFIs). Of managing the scheme can help offset cost incursions in particular note has been the increased adoption and appli- these areas by providing standard reporting tool formats cation of Pay as You Go (PAYGO)-based business models and content definitions (like clear location definitions). by 4 participating firms, which enable consumers to acquire 8    S TAT E O F E L E C T RI CI TY ACCES S R EPO RT  |  2 0 1 7 larger systems that are purchased in monthly instalments not mandatory under an RBF modality—and given that with mobile money. RBF implementers can only play a facilitating role with lim- The initial success in the operation of the RBF scheme ited ability to control implementation speed or success—it has acted as a catalyst for local firms to leverage addi- is essential that all aspects of an RBF instrument are trans- tional financing to support further scaling of their last mile parent, realistic, and relevant to the private sector. operations and/or diversification of their services to larger domestic and institutional solar installations. Solar com- Well thought-out design. Market intelligence is an import- panies participating in the Tanzania RBF scheme have ant first step in the design of any RBF scheme to ensure been able to realize grant- and loan-based financing to that specific opportunities and bottlenecks are fully con- values cumulatively exceeding 500,000 EUR. In this way, sidered. RBF implementers also need to be prepared to the RBF has enabled local companies to keep up a com- adapt themselves to private sector ways of working by pro- petitive pace alongside much larger companies who have moting the RBF instrument as a business proposition. And access to more substantial investment and equity-based implementers and developers need to pay keen attention financing. to making as much use as possible of existing market systems and tools so as to build upon conceptual under- Lessons learned in Tanzania standing already present among all players—in effect, What special lessons can we learn from Tanzania’s pico-so- embedding the RBF scheme in a complementary fashion lar project so far? Certainly, a number of critical pre-condi- within existing and understood market dynamics. Succes- tions emerge: sive rounds of private and financial sector consultations and RBF design re-adjustments have proven to be critical A favorable business climate. To a large degree, the RBF for the acceptance and positive response from these play- is only a complementary instrument, catalyzing market ers when the RBF scheme was eventually launched. development if certain pre-conditions are given. A favor- As a result, the roll out of the RBF instrument in Tanzania able business climate with appropriate policies and regula- has not come as a surprise to the private sector; rather, it tions should be in place to ensure a level playing field. In has articulated itself in the market as a response to address Tanzania, the presence of exemptions in taxes and constraints that were identified by key sector players. This import-excise duties on solar goods, limited fossil fuel sub- approach has acted to strengthen private sector trust and sidies on kerosene, and broad public sector endorsement ownership in the resulting RBF instrument and highlights and support of solar as an important contributor to the the risk to outsourcing market intelligence research and off-grid energy mix for more than a decade, have together RBF design to external players or third parties that will not helped create a conducive market environment for solar. be closely involved in subsequent RBF implementation. There must be a solid degree of market maturity and suffi- Initial results of this front-runner in EnDev’s global port- cient private sector capacity to ensure that the key players folio of RBF initiatives look promising. Nevertheless, view the RBF as a tool for innovation and scaling, and can longer-term impacts, like its eventual effect on the sustain- financially initiate or leverage the RBF instrument. ability of the outcomes realized in Tanzania—that is, com- panies continuing to provide and expand their energy Private sector buy-in. While RBF in Tanzania has operated products and services outreach—will be measurable only in a manner that liberates the private sector and acts as an in the coming years after the RBF project has come to its enticement to engage in accelerating rural solar distribu- close. Replication and scaling of the initiative, whether tion, private sector buy-in and contribution throughout all more widely in Tanzania and or in other country contexts, stages of the lifecycle of an RBF scheme has proven to be will need to continue to facilitate the careful observation of a mandatory pre-condition in order for firms to fully take best practices in RBF design, implementation, and admin- the plunge into absorbing additional risks inherent to istration gained to date. developing new markets. As private sector transactions are NOTE 1. For more information on how RBF and RBA can be used to promote energy access and other energy sector objectives, please see the guides developed by Vivid Economics and ESMAP at www.esmap.org/node/1328 2. At the global level the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH acts as a lead agency for the coordination of the program, in cooperation with the Netherlands Enterprise Agency (RVO.nl). Implementation at country level is shared by GIZ and other implemen- tation partners (such as SNV, Practical Action, MAEVE, ADES, HIVOS, and CLASP). The RBF facility embedded in EnDev is funded by the UK. 3. Ensol, Global Cycle Solutions (GCS), Off Grid Electric, Sunny Money, Zara Solar, Mobisol, Lotus (with Tigo), Simu Solar, Sollatek and Ongeza; dealing in products and services from manufacturers including Green Light Planet, Omnivoltaic, d.Light, Fosera, Azuri, Niwa, Mobisol and M-POWER. R ESULT S-BASED FINANCING: A PROMISING NEW T OOL FOR ENERGY A C C E SS   9  REFERENCES Energising Development (EnDev) website: http://www. SNV, How Results Based Financing is spurring solar market endev.info/ development in Tanzania, Mumssen, Y., Johannes, L., & Kumar, G. (2010), Out- http://www.snv.org/update/how-results-based-financing- put-Based Aid: Lessons Learned and Best Practices. spurring-solar-market-development-tanzania Washington D.C.: World Bank Group. World Bank (2011), Implementation Completion and Results Results-based Financing on Energypedia: https:// Report on a Grant in the Amount of US$0.85 Million energypedia.info/wiki/Results-Based_Financing Equivalent to the Naandi Foundation for a Andhra Result-Based Financing for low carbon energy access (RBF): Pradesh Rural Water Scheme Project. Washington D.C.: https://www.gov.uk/guidance/result-based-financing- World Bank Group. September 19th. for-low-carbon-energy-access-rbf SPECIAL FEATURES To download the State of Electricity Access Report, overview, and Special Features, visit: http://esmap.org/SEAR