Last mile electrification and universal connectivity have been hailed as a way to drive innovative, inclusive and sustainable growth for the continent. But, today, only 40% of the African continent is online, and nearly 600 million lack access to electricity. These significant barriers are hindering Africa's social and economic development.
During a recent roundtable discussion, industry experts convened to discuss what synergies exist between last mile electrification enabled by solar home systems (SHS) and internet access in Africa. The discussion was hosted in late March by E3 Capital in Nairobi, Kenya.
Are there key synergies and interdependencies between SHS and connectivity business models in Africa?
On the surface the most observable interdependency between SHS and connectivity business models is power – SHS companies supply it, and connectivity companies rely upon it.
Laurent Van Houcke, Co-Founder and COO at Bboxx, told the roundtable that, “electricity is a bottleneck to all service providers. Telecoms cannot expand as people cannot charge their phone to use their service.”
In that way, the entry point for synergy between connectivity and SHS has been devices, such as smartphones and the like. This relationship was so symbiotic that many SHS companies began to finance smartphones for their customers. “The business model has always been supplying solar home systems to the bottom of the pyramid. The best way to achieve more connectivity for them was to start financing devices for them,” said Nick Imudia, Chief Executive Officer at Dlight.
Despite this synergy, Andy Halsall, Chief Executive Officer at Poa Internet, told the roundtable that the energy solar model wasn’t as interdependent as it appeared. “When we’ve tried to blend energy and connectivity, there appears to lots of synergies. We have a pre-paid model and the solar firms have a pre-paid model. They sell a solar kit and then somebody pays that off—that’s a consumer financing model. As connectivity providers, we have to provide equipment and then we want to get as much revenue from that customer for as long a period of time in order to payback on that investment. So on first inspection it looks like we are both in the consumer pre- paid financing business. However I’m not sure connectivity providers are, we are far more focussed on providing a long-term service rather than consumer financing” explained Halsall.
Sanjeev Debipersad, in his capacity as Director of Investments Portfolio at AECF, has advised SHS companies to broaden their focus beyond their reliance on connectivity companies. He emphasizes that for SHS companies to establish a steady stream of business, it is essential to address the challenge of building a thriving private sector and economy around their products. To achieve this objective, it is necessary to explore how NGOs and development aid organizations can contribute their knowledge and expertise towards creating a successful combination. It is important to note that the key to success lies in identifying a productive use for SHS products, and that connectivity is just one of many potential uses.
The urban rural divide
The roundtable agreed that in many ways the divide between SHS companies and connectivity providers drilled down to a difference in customer bases. “The starting point of the conversation are who are the base customers. Our base customers are really rural,” said Imudia. While a consumer financing business model has had success in urban and peri-urban areas, some members of the roundtable expressed doubts about its profitability when applied to connectivity companies in rural and ultra-rural regions, citing challenges associated with operating in these contexts.
Many of these hurdles were outlined in an IMF working paper, “Digital Connectivity in Sub-Saharan Africa: A Comparative Perspective,” which identified five key sub-indices that determine a country’s ability to access connectivity, these included (i) infrastructure; (ii) knowledge; (iii) affordability; (iv) quality; and (v) actual internet usage. Members of the roundtable discussed at length the issues of affordability, low data consumption and level of internet sophistication as major barriers to connectivity in rural areas.
“If the energy model is rural, then the connectivity model for rural will be for some time to come based on delivering relatively small amounts of data at relatively high price points. We are not going to see a sudden jump in rural connectivity to hundreds of gigabytes of consumption per customer a month. We need a different solution for this problem. This in part is why we are focussed on underserved urban communities,” Halsall told the roundtable.
The long road to affordability
Today, from an implementation perspective the technology exists to reach the last mile for both electrification and connectivity, the issue now lies in whether the consumer can afford it.
“These rural satellite towers will get connectivity to the middle of nowhere. They can get connectivity to deep rural areas but at an unaffordable price point for meaningful levels of connectivity,” said Halsall.
The minimum pricing for 3G connectivity hovers around 30 cents a gigabyte without subsidies. For consumption to reach a level where a consumer can watch large amounts of video the price point would have get down to 1 to 2 cents per gigabyte.
“Lots of customer are still years away from being able to pay USD 10 or USD 20 a month unfortunately. DRC’s average consumption of airtime is only USD 2 a month in urban areas. I think we forget how poor people are in rural areas, and, unfortunately, technology and business models are not going to change that fact,” said Van Houcke.
Olu Olutola, Connectivity and Digital Advisor at USAID, told the roundtable that, “affordability would have to be achieved through partnerships with governments and donor communities.” However, many at the roundtable argued that subsidies were not a long-term solution. “It’s very difficult to build a sustainable business model based on subsidies or grants, especially in Africa. Because once that is removed you go back to square one, which is the challenge we faced,” said Andre Mounif, Senior Investment Officer at STOA.
While the roundtable participants all seemed to agree that affordability was still a major hurdle to scale, they didn’t put off the possibility of it being achieved down the road. Halsall closed off on a more optimistic note. “When we started in places like Kibera most people weren’t consuming a lot of data. Bit by bit data consumption goes up which provides the rationale for building the infrastructure to service more consumption. There is an evolution to get to it.”
Does a profitable business model for connectivity in rural areas exist?
There was consensus with roundtable participants that a single ideal connectivity business model, replicable in different African rural areas, does not exist. Olutola told the roundtable participants that, “the ideal model really depends on the market. What you get in Kenya would be totally different from what you would get in the DRC, because the markets are totally different. There is no one size fits all.”
Sanjeev Debipersad, in his role as the Director of Investments Portfolio at AEC, has emphasized the importance of gaining a deep understanding of the problem before attempting to solve it. He has suggested that funding visibility and analysis studies can help identify opportunities for creating or leveraging value chains in rural areas. According to him, it is crucial to comprehend the needs of the target audience before offering any solutions. To illustrate this point, he cited a GSMA study on rural usage in Uganda that revealed people used the internet primarily to check the weather and for mobile money transfers. He cautioned against assuming that simply pushing data through conventional means would yield success. Instead, he urged stakeholders to engage with their target audience and ascertain their actual needs.
Unlocking opportunities through innovative partnerships
Keval Bid, Senior Investment Officer at FMO, told the roundtable that the way to unlock opportunities and a sustainable business model is through innovative partnerships. “The question is how do you uplift collective income to then create a market for all of you? Unfortunately, in Africa, one often has to build supporting business infrastructure to support one’s core business and as a result you often end up building multiple businesses. The question around partnerships and synergies is how do you look at that ecosystem to work whilst improving the community income. If you don’t do that no one is going to move up the chain. You need to think about wider partnerships around creation of income,” said Bid.
Debipersad told the roundtable that he believes that the conversation shouldn’t be about interdependencies but about where the nexus of opportunities lies between connectivity and solar. As an example, mobile network operators (MNOs) are currently providing opportunities for rural expansion and offering several different business models.
“There will be a rapid expansion of these networks into rural areas gauging from the investor appetite to fund these rural towers. I see huge opportunities for solar home systems. My view of solar home systems companies is they are fantastic distribution networks. If they follow these MNOs or whoever has won these contracts into these villages, they’ve got ready markets to further augment their products by testing productive use technologies,” said Debipersad.
Paras Patel, Founder and Managing Partner of E3 Capital, concluded the roundtable by offering investment proof points on where he’s seen SHS connectivity synergies operate most effectively. “From an investment perspective, whenever we’ve seen the nexus between SHS and connectivity, it acts as a justification of unit economics as opposed to offering a commercial value proposition that works for the end user. We're now starting to explore this within our portfolio, specifically where we have larger and more concentrated catchment areas - DRC and Chad; within these areas, we have metro grids where we think the synergy evolves from just providing electricity. Our perspective is that multi-utility operators, and areas where we'd findmarginal increases in CapEx and OpEx, are where we can start to drive different revenues sustainably.” he told participants