What Have We Learned from Recent PAYGo Off-Grid Solar Analysis?

Increasingly common in East African markets, PAYGo off-grid solar firms have often been described as ‘platypus’ companies — i.e., companies that have individual features that are well known in the commercial wild but are combined in ways that have defied easy classification and analysis. Following a period of intensive pioneering technical work on data standardization undertaken by a coalition of experts at GOGLA, MFR, IFC, and CGAP – and in close cooperation with firms in the PAYGo off-grid solar industry – the first results of a sectoral analysis can now be shared.

The work undertaken since 2019 has tried to establish a set of standards and key performance indicators (KPIs) through which a more rigorous, benchmarked assessment of PAYGo performance and portfolio quality can be established. These focus on three key areas – Company and Operational data, Portfolio Quality measures, and Financial Performance. Although this remains a work in progress, the effort so far has made a significant contribution to standardization, and, because that clarifies the investment opportunity in the sector, has helped to encourage further funding.  This is especially important in the current era where, regarding client uptake and company performance in particular, the COVID-19 pandemic and the impact of the war in Ukraine have cast long shadows, with high-interest rates and local currency depreciation delivering significant financial pressure.  

Because of this standardization work, analysts at the PAYGo PERFORM Monitor run by GOGLA and MFR have been able to dive into the data pools in detail and begin to draw important conclusions about portfolio quality and growth.  Here, we share initial findings from the latest detailed analysis undertaken by MFR.  

Portfolio growth

The current size of the market (using outstanding receivables data estimated by MFR) can be seen in the graph below, with a total portfolio of USD 708 million split across the three largest markets: Kenya (USD 348 million), Tanzania (USD 90 million), and Uganda (USD 87 million).  

MFR analyzed growth in portfolios over a 12-month period (2021 to 2022) using data from 30 PAYGo in-country firms in the database, and over that period, 77% of firms displayed either stable or improved growth. The line graph displays the data by quartile for the period 2021-2022. This finding demonstrates that both the best-performing and median quartiles have shown significant growth over the period and higher growth rates in the second half of the year compared to the first half. It is worth noting that these are nominal local currency figures and that, if we were to factor in recent inflation rates, real growth would be somewhat lower. The worst quartile displays moderately positive followed by moderately negative growth in that latter period, demonstrating the large differences in the performance of firms within the sector.  

This overall portfolio growth indication is reinforced when looking at the growth in customer numbers in the graphic below, where figures were either improved or stable for 88% of firms.  

Management of credit risk

However, looking at the data on portfolio quality, it becomes clear that improvements in the management of credit risk are needed in order to improve the quality of that growth,  and examples of firms successfully taking action on this do exist. Collection rate is the indicator used in the industry to measure the speed of customers’ repayments, calculated as actual cash flow from follow-on payments during the period, as compared to the scheduled follow-on payments during the period. Collection rate data displays a moderate median of 72% in 2022, in line with previous years, also reflecting the repayment flexibility for clients.  

Nevertheless, large differences are apparent between companies, with the best quartile of collection rate at 79% and the worst at 54%. The successful companies have been able to achieve consistently high consumer satisfaction and portfolio quality and are profitable and bankable (the major shocks mentioned above notwithstanding) which is an important point to note. The graphic below shows the picture for the receivables at risk - more than 30 days (RAR 30) and write-off ratio. The RAR 30 is a measure of the percentage of outstanding receivables that are more than 30 consecutive days late as a percentage of the total outstanding receivables. The write-off ratio is a measure of the receivables actually written off the balance sheet of a firm. These ratios provide troubling indications of the number of consumers who will have access to their power sources suspended due to payment difficulties and raise important questions for the industry on how best to manage this important aspect going forward.  

Looking at the data by quartile, the trend of increasing credit risk is evident throughout, although with the best quartile on a flatter trajectory. Similarly, more firms in the dataset (50%) had a worsening RAR 30 and write-off ratio over the year, compared to the firms showing an improvement (37%). This clearly indicates the importance of improving credit risk management (CRM). At the same time, a part of the negative trend can probably be explained by the aging of the portfolios. Portfolios manifest more credit risk when they are mature compared to when they are recently disbursed  – often, customers’ repayment performance tends to be higher at the beginning of contracts and can decline over time. While CRM can definitely help improve a company’s financials, it is not, on its own, going to directly deliver service to the poorest customers. This is an area where targeted subsidies and/or blended finance products, carefully managed in cooperation with the PAYGo companies, and underpinned by sound financial management can really help improve access to this vital service.      

Solvency and profitability

Acknowledging that this is a dynamic and uncertain period, the analysis did show some positive indications for both solvency and profitability (see the global picture in the figures below). Solvency here is measured by the equity-to-assets ratio, which is calculated by dividing total equity by total assets - this measures the proportion of a company's assets financed by shareholders' equity and gives one indication of a company's ability to withstand a financial shock. This ratio increased by 5% from H1 2022 (13%) to H2 2022 (18%) and is at adequate levels in absolute terms. The best quartile continued to converge with the median quartile. However, the worst quartile decreased significantly. Compared to figures in 2021, 28% of 25 firms improved their performance, 16% remained stable, and 56% were declining.  

Regarding profitability, the graph below shows the median quartile of Earnings Before Tax (EBT) margin (cash flow). It’s worth noting that total cash flow from customers is used in this margin calculation instead of revenue as a prudential and comparable measure, given the diversity of revenue recognition standards currently used by different firms (see PAYGo Accounting brief for more details).  While profitability has improved, it still remains negative on average. Nonetheless, the overall trend among firms surveyed is positive, with the median EBT margin improving by 3% from H1 2022 (-23%) to H2 2022 (-20%).  

It should also be noted that the best quartile has been profitable since H1 2022 with an EBT margin (cash flow) of 10%, which demonstrates that sustainability is possible. This should be seen as a clear source of encouragement to the sector. Large differences are observed between firms in terms of EBT margin (cash flow), with the best quartile having just moved to the positive zone, and the worst quartile remaining significantly negative. Compared to 2021, 54% of the 23 firms in total improved their performance, 8% remained stable, and 38% deteriorated.   

Conclusion 

Emerging data indicates that firms that achieved positive profitability rely on higher collection rates and have significantly lower RAR30 and write-offs, underlining the key role that credit risk management plays in profitability. However, it is also important to note that collections only relate to one side of the profitability equation and that company costs also play an important role.

Indeed, given the worsening trend in portfolio performance, even for the best quartile of companies, it could be valuable to examine in future analyses if and how the more successful companies are controlling costs to produce a better overall bottom line.  To build on these analyses, the PAYGo PERFORM Monitor initiative will continue evaluating trends in portfolio quality, including more sophisticated analysis by cohort, which factor in the age of portfolios in the analysis of the receivables generated, allowing more precise conclusions to be drawn. This will be essential in directing efforts to where they are most critical, targeting specific aspects of credit risk management and helping to build a financially healthy sector for customers and companies. The quality and consistency of the data has been crucial to this comparative analysis and is a key result of the standardization work undertaken by the technical committees. More insights will undoubtedly follow. 

Special thanks to Drew Corbyn (GOGLA) and Bill Gallery (IFC) for their insightful comments on an earlier draft of this blog.