The innovative financing facility revolutionising mini-grid project development in Myanmar
Enabling access to bridge financing for mini-grid developers is crucial to the success of electrification efforts. In our latest blog, we explore the essential role that the new Myanmar Equipment Financing Facility is playing in scaling up mini-grid project development in Myanmar.
One of the many challenges facing mini-grid developers in Myanmar, and in many other countries, is the high cost and limited availability of credit, including both corporate debt and project financing. Lack of access to credit increases the cost of capital for developers, which increases project costs and the rates that rural customers pay. Lack of access to credit ultimately stifles the ability of developers to grow their businesses and build new mini-grids. Until as recently as early 2020, developers were forced to finance upfront costs through their own balance sheets, slowing the pace of construction and restricting cash flow that could be used for new development. This, in turn, prevented developers from providing electricity to some of the 50% of Myanmar’s communities that lack access to a safe, reliable source of energy.
Since the launch of the World Bank National Electrification Project (NEP) in 2018, mini-grid developers have had access to a 60% subsidy for capital expenditures (CAPEX), distributed by Myanmar’s Department of Rural Development (DRD). Under the program, developers are responsible for 20% of the CAPEX and the remaining costs are covered by a contribution from the community receiving the mini-grid. However, as subsidy payments are received upon the completion of certain milestones in the development of the project, mini-grid developers are still responsible for raising capital to cover the initial costs. As these costs are approximately USD$4,000/kW, and typical mini-grids are around 100kW in size, the total amount that developers require can be considerable.
The NEP subsidy scheme has helped the off-grid energy sector establish a footing in Myanmar, and several developers have been able to attract equity investment from strategic partners such as Engie, EDF and others. Yet the true challenge facing the mini-grid sector in Myanmar, as in most other countries, is what happens next: will the sector be able to reach commercial viability and scale-up to meet its full market potential (see Smart Power Myanmar’s Decentralised Energy Market Assessment), and what will be needed to help the sector grow?
Enter the Myanmar Equipment Financing Facility (MEFF) — designed specifically to address the challenge of speeding up project development and helping the sector grow. The MEFF was designed by Smart Power Myanmar and launched in January 2020, and is now part of a unique partnership between DRD, a range of local commercial banks, and Smart Power Myanmar. In just a few short months, the MEFF is already enabling developers to access affordable financing; between January and August 2020, $18.3 million had been made available and developers had drawn down enough to impact 25,000 lives across 10 villages.
The Myanmar Equipment Financing Facility
Smart Power Myanmar originally developed the MEFF in late 2019 with the principal aim of facilitating $20 million in loans during 2020, which we deemed would be sufficient to cover the equipment costs of every mini-grid being developed this year under the NEP off-grid scheme. The success of equipment financing in Myanmar was predicated on significant support from the DRD’s mini-grid team who, in addition to overseeing the mini-grid subsidy scheme, helped to promote the MEFF, convened commercial banks, and provided valuable technical inputs during the design phase.
As mini-grids are a new asset class for the banks, Smart Power Myanmar and DRD provided training to their risk departments and other staff in order to build a better understanding of mini-grid market and project economics. The training involved introducing banking staff to the World Bank National Electrification Program, explaining the core technological features of mini-grids, outling the potential size of the off-grid sector in Myanmar, and providing detailed descriptions of the risks associated with equipment financing and potential risk mitigation approaches.
“We see high growth potential in [the mini-grid] sector. Thanks to the increase in local and foreign investment, the energy sector has grown substantially in Myanmar.” — Myanmar Citizens Bank Executive Vice President Me Me Kyaw
These activities led Myanmar Citizens Bank (MCB) to become the first commercial bank to adopt the MEFF design in January 2020 and begin offering debt financing for mini-grid development, marking both the first commercial infrastructure financing instrument of its kind in Myanmar and the first time this commercial bank had engaged with this asset class. Since then, A Bank and AYA Bank have also adopted the MEFF.
The impact on developers and future potential
Today, other local banks in Myanmar are actively exploring adopting the MEFF or establishing other debt offerings to meet the growing needs of Myanmar’s energy sector. In the coming years, commercial banks will play a key role in enabling the development of hundreds of mini-grids and last mile grid connections, transforming hundreds of thousands of lives across the country.
“To access traditional loans from banks we need to provide collateral, which makes it difficult for us to access the amounts needed. Equipment financing is different because it is based on our contract value. There is no limitation on how many sites we can work on.” — Managing Director of Techno-Hill Engineering Barani Aung, one of the mini-grid developers making use of the Myanmar Mini-Grid Financing Facility
The true significance of the MEFF lies in its ability to unlock project debt and pave the way for commercial banks to expand their debt offerings for mini-grid developers to include more sophisticated project finance approaches. By familiarising banks with mini-grids as an asset class, and by strengthening relationships between banks and developers, the MEFF increases the likelihood that developers will be able to use financial leverage to scale up development efforts.
“Ensuring access to finance and project debt is crucial as we build a robust and scaled-up energy sector that provides energy access for thousands of communities across Myanmar. Before, developers were facing cashflow challenges, but now they are able to quickly develop projects and access commercial debt financing for the first time.” — DRD Deputy Director General U Maung Win
Equipment financing does not solve every barrier standing between Myanmar and universal electrification. In the off-grid sector, there remains a need for better planning to ensure that mini-grids are sized appropriately. Optimised planning procedures would also ensure that there are sufficient commercial and industrial energy users, who are necessary for increasing plant utilisation and profitability. There is similarly a need to improve procurement processes, both for selecting developers under the DRD subsidy scheme and for the purchase of equipment by developers, and a great deal more clarity is required on legal ownership of mini-grid equipment to provide confidence to developers and investors. Another vital question is whether the financing required for continuous growth be readily available from multilateral and bilateral financing institutions, and what impact will potential gaps in financing have on the long-term health and growth of the sector. The on-grid sector also requires regulatory reform, liberalisation and new sources of capital. However, by paving the way to reduced project costs and scale, equipment financing plays a crucial role in the integrated approach to electrification that is needed to transform millions of lives in Myanmar through access to energy.