Assessing Business Environment Constraints in the Mozambican Renewable Energy Sector

Business Environment for Renewable Energy in Mozambique responds to a DFID request for BERF to analyse business environment constraints faced by private sector firms entering the off-grid renewable energy market, specifically for Improved Cook Stoves (ICS), Pico Solar Systems, Solar Home Systems (SHS) and Green Mini-Grids (GMG).

The review addresses

i) the policies/strategies, laws and regulations that govern investments in Mozambique’s PV and ICS industries;

ii) the organisations and institutions that operate and shape the market and

iii) specific business environment issues that affect the performance of businesses in the market.

Stakeholders were consulted, including representatives from government ministries, intergovernmental organisations, academic researchers and private sector companies in the renewable energy sector to identify the binding constraints for market growth.  Recommendations aim to to mitigate the constraints.

Key Business Environment Constraints in the ICS and PV Markets

  • Demand is weak, as most rural consumers lack information and knowledge about ICS and PV products, as well as the money to buy them.
  • Expectations for subsidies, have been raised crowding out private investments.
  • Maintenance and support is lacking which reduces confidence in the quality and value of ICS and PV systems.
  • Consumer financing is almost non-existent.
  • Reaching rural consumers is costly due to poor infrastructure.
  • Macroeconomic environment conditions are worsening with rising inflation, a falling exchange rate and shortage of foreign exchange which makes it difficult for PV companies to secure foreign investments into start-ups, and to deliver value-chain and consumer financing.
  • Technical and managerial skills are scarce.  Temporary work permits to bring in foreign expertise are difficult to obtain, making it hard to set up efficient distribution networks and customer support services to raise the value of the products to the consumer.
  • Government of Mozambique’s interventionist actions in the market and inconsistencies in measures to catalyse private involvement in the industry also create uncertainty and increase risks of investing.
  • Legislation to provide investment incentives exist, but laws are not consistently applied. Interventions to sustain the market sometimes create perverse incentives and crowd-out private investors.

Prioritising Reforms

The development of the PV and ICS sectors should be driven by different policy objectives.

The primary objective of developing the off-grid PV sector is to deliver connections to as many people as possible, by using the most efficient and cheapest technology available on the international market. In order to achieve this, reforms should:

  • Catalyse international investments;
  • Eliminate barriers and reduce the cost of importing PV equipment and accessories;
  • Facilitate access to international expertise.

The primary objective of the ICS market is to deliver the largest adoption through the distribution of products that respond as closely as possible to the local needs and tastes of users. In order to achieve this, reforms need to:

  • Support a national/regional system for Research and Development (R&D) based on testing and recognised industry standards;
  • Establish economies of scale in production so as to lower prices;
  • Eliminate barriers and costs of importing components for locally produced ICS.

A list of feasible policy actions to improve the business environment in the sectors is provided in the full report.

Mozambique Renewable Energy

PPD Interventions in Sub-Saharan Africa: Lessons for Zimbisa

An Evidence and Learning Note prepared for DFID Zimbabwe provided useful suggestions on Public Private Dialogue (PPD) systems, approaches and mechanisms that have worked in other contexts, which could be suitable for DFID’s PPD programmes in Zimbabwe.

BERF’s Evidence and Learning research team reviewed the evidence on BER and investment climate programmes funded by other donors and the benefits to the countries. The research team was asked to provide analysis on:

Economic Impacts

  • PPD programme performance including economic costs and benefits
  • Impact of PPDs on high-level reforms and ‘whole economy’ benefits.

Inclusive Stakeholder Engagement

  • Innovative PPD platforms or solutions to address investment climate constraints and inclusive growth especially for women and poor rural people
  • Models of inclusive stakeholder engagement, (for example texts, smartphones), to build the capacity of women and young people and support an improved enabling environment for investment.
  • Examples of effective ‘bridge-building’ solutions used by governments and Business Membership Organisations (BMOs) including the approaches that have been sustained in difficult political economy situations.

Financial Sustainability

  • Innovative, low-cost solutions employed by BMOs to build capacity, sustain membership and implement outreach activities to achieve financial sustainability.

The team concluded that PPD can be a powerful driver of business environment reform. In many countries, donor-supported interventions have been effective in promoting dialogue, resulting in significant improvements in the investment climate. However, donors have been slow at implementing PPD projects in Sub-Saharan Africa, and the reforms have often been less successful than elsewhere.

Evidence of the importance of PPD for African firms and economies is now emerging, and suggests that two aspects of PPD are especially important:

  • Good PPD institutions and laws enhance economic growth, other things being equal; and
  • Membership of a BMO is associated with an increase of a firm’s productivity by 25–35 percent. Such firms have reduced corruption, improved public utilities and higher labour productivity. The effect is similar for firms of all sizes, and includes both domestic and foreign firms (although the effect is larger for the latter).

Donor methodologies for PPD interventions can be categorised as a traditional approach or a market systems approach, each founded on differing theories of change. Both types of programme have challenges in common.

  • The traditional approach, associated with the IFC and World Bank, emphasises a structured process mediated by a neutral secretariat, facilitated by evidence-based research to focus dialogue and maximise returns.
  • The market systems approach developed recently in a DFID-funded programme implemented in Nigeria focuses on the market for business environment reform. The private sector demands reforms from government. The approach emphasises sustainability and catalytic interventions, and has achieved success strengthening local institutions for research and media.

See report here