Changing the cash flow paradigm in emerging markets

By Charles Morris

This essay is aimed at the emerging market needs, particularly at prepayment, and is intended to provoke thought and, no doubt considerable debate. To many this essay will seem almost a little blasphemeous, perhaps, particularly to those who work in the more sophisticated marketplaces and for whom technology is clearly the only viable answer to creating efficiencies – and despite the number of myths still exisiting regarding end user behaviour that worldwide, although often for different reasons, are held as irrefutable truths (for example, how many people actually read their meter?).

I have no doubt that many readers will agree that the entire process of billing, from the installation, maintenance and reading of a meter, the development and delivery of an invoice, to the collection of the payment is an expensive necessity within the industry. The cost of sophisticated technological solutions is justified with a great many arguments, ranging from environmental to economic, including the need for prepayment, user pays billing, loss management, research, flexible tariff development, demand side management, engineering planning, improved efficiencies and therefore profits, information provision to customers (typically web-based) and so on. The more sophisticated the community the more these justifications apply. However, the closer one comes to the needs of emerging communities the less these justifications can be applied. For example most don´t have access to the Internet.

Let’s get a few numbers and realities in mind before moving further. Almost 4 billion people, 65 percent of the world’s population, live on less than $2,000 per annum. That’s near enough to $5 per day. Most of this is spent on food, water, housing and, surprisingly, education. That leaves precious little for electricity (or gas). No one is surprised at the levels of energy theft as the folk in these communities struggle to make enough money just to survive from day to day. Indeed, theft of energy in many emerging economies is seen by some of their governments as a form of social welfare and, tacitly, simply accepted.

The folk in these communities pay premium prices for products delivered in small quantities that they can afford on a daily basis. A cup of cooking oil or two cups of rice is affordable while the 2 l container of cooking oil or the 2 kg bag of rice is a week’s income. Whole distribution industries exist that break down bulk quantities until they reach the corner store where sales of small quantities are the accepted practice. The corner store also knows all its customers and handles credit in a manner that traditional businesses could never cope with. The folk in these communities knowingly pay the premium price as it is affordable, while a monthly energy bill is almost impossible to cope with. We in the industry tend to have a “one size fits all” approach to the way we bill, accept and receipt payments as daily meter reading and billing is not a viable option, and yet we impose these requirements in communities where they simply cannot be successful.

To ameliorate the problem we look to various forms of prepay metering systems for a solution but in many communities it is discovered that the meters, and the cash handling and control mechanisms that necessarily go with them, have an overall cost that makes any realistic payback an illusion – and there is still the problem of theft to resolve. Sure, a sophisticated metering system, post or prepay with AMR capabilities, monitoring and analysing consumer consumption and network energy flows, allows discovery of where theft is taking place, but again the overall cost of equipment and its maintenance and operation very often far exceeds the possible profit on the whole community´s consumption, with or without the theft. In other words a sledge hammer is being used to crack a nut. Resolving commercial or industrial level theft is both easier and more cost effective.

We are constantly looking to sophisticated society and technological solutions to resolve problematic situations in emerging communities without considering that the solution might indeed be as simple as using neither and accepting that these emerging communities need solutions based on the way the community operates – something that many of us have difficulty understanding. The majority of readers will have incomes considerably higher than the $5 a day many of the folk in the emerging communities survive on and we simply struggle to understand how such communities work. The accepted understanding of business theory does not hold up in such communities and the same rules of margins and acceptable returns simply do not apply. (The network infrastructure still has to be provided, usually mandated by local law, within these communities and although the consumption per delivery point is relatively low, the cost of the network infrastructure and its maintenance is still significant.)

Are there alternative mechanisms, non technological, for ensuring payment for delivered energy and the reduction of theft? Almost certainly there are. They will come in different flavours, dependant on the community and its culture. The possibility needs to be considered that the solution may not use technology or business rules as we understand them. Emerging communities exist and survive. Do they know and understand a few things we do not? Clearly they do as while we might not like to admit it, most of us reading this magazine could not survive in such communities. As much as we might like to we cannot change these communities overnight and the reality is that they are going to be customers of the industry for many years to come. Unless there is a radical downward shift in the cost of technology then either the very real expense of a technological solution must be faced or we must take a serious look at possible alternatives. If metering is the cash register of our industry and the cost of the cash register and its back office is uneconomical then as the “keepers” of the cash flow mechanism it behoves us to consider alternatives – a real challenge and a paradigm shift.

Consider the following. For most of us, electricity is sold in kilowatthours and our governments typically mandate that the metering systems we use must comply with set accuracy values (typically class 2.0 for domestic metering). However, interestingly enough, the same set of laws regulating the accuracy of metering systems generally “assume” that electricity will be sold by the kilowatthour and is, therefore, generally silent regarding the sale of electricity as a “service for a fee”, regardless of consumption levels. This is no great revelation as almost universally power companies have historically sold the energy used by unmetered street lighting and remote sites such as farm pumps or low power radio transmission sites for a fixed or contracted fee. Noone gets particularly excited over this as such loads are generally easily calculated and the cost of the meter and its reading is simply not viable. In reality many countries do not mandate the sale of electricity in kilowatthours but only the accuracy of the metering system, and even in countries where the price per kWh is regulated, the law rarely actually mandates that it must be sold in kilowatthours. Even in the New Zealand electricity market, arguably, perhaps, the most sophisticated and innovative electricity market in the world, where all energy is reconciled in half hours, there is considerable allowance in the regulations for the use of unmetered and “profiled” loads. The mechanisms used in New Zealand (available on the Internet) clearly show that the ability of over zealous regulators of prices to “ensure” that end users get a “fair deal” and are not the victims of price gouging can be demonstrably met. These mechanisms are not rocket science and require little to no expensive technology.

Electrical energy consumed by emerging communities is limited by the community member’s ability to find the capital to purchase the expensive appliances that use high volumes of energy. In the warmer climates the total load is restricted to two or three light bulbs and perhaps a TV, radio and a fan. Refrigerators, washing machines, electric cookers and air conditioning plants are typically outside possible ownership due to their high capital cost. Simple “profiling” can be used to develop a suite of typical load patterns and therefore cost. Take away the cost of the entire metering system and its reading and a small to moderate underestimation in the cost, perhaps intentional to ensure a fair service fee, becomes insignificant. Are we so concerned with accuracy at any and all costs that we have lost sight of the fact that we also need to make a profit?

Continuing in this sacreligeous vein, perhaps, all we need in these communities is a switch and a padlock. Pay the daily fee (affordable) and the power stays on. Don´t pay and the switch is padlocked off. Perhaps we find in each block a person with the resolve to operate their own business and for a percentage of the daily fees collected to manage the padlocks and switches. Let’s get radical and offer a further reward for any theft discovered. Take away the cost of the now defunct need to produce invoices and collect on them, and we can easily afford to pay the managers a reasonable percentage for the fees collected.

Can it work? It has been tried in many countries with varying degrees of success. Sure I have glossed over a number of arguments, both for and against, but think about it for a minute or two. We have done away with the need for metering and billing (yes we still need sample metering to ensure that our suite of profiles is acceptable) but we have created a number of small businesses in a community that have a great need and understand how business is done in their neigbourhood. Credit is controlled locally by people who know and understand the neighbourhood. Theft is being policed where it happens, in the neighbourhood. Balance this against the cost and difficulty of traditional metering, billing and collection. This is not new to the emerging communities but the idea is relatively new and even, perhaps, a little radical for the industry. As many reasons can be given against such a proposal, ranging from long term economic to environmental resource management, as they can for it. The negative is easy as we, in the industry, have spent a lifetime justifying the need for technological solutions, but changing the paradigm takes much more effort and very few of us like change.

I often ask the “experts” who are hell bent on telling me I can´t do something to stop and think about it. Take a different approach and tell me how I can – sometimes a real challenge but funnily enough we usually find an answer … it simply requires looking at the problem from a different perspective, not usually the traditional one.

Am I advocating the above as a simple solution? No, I am advocating that we, as the experts in the industry, take a look at the emerging communities and their need for affordable energy and our needs to reduce theft and to be paid for the service we provide and objectively consider that perhaps the answer is not a technological one but rather a philosophical change in the way we do business in such communities, where the cost of delivery must be kept to an absolute minimum and in affordable daily doses.

For those wishing to explore further the concepts of the paradigm changes in doing business in emerging communities recommended further reading is “The Fortune at the Bottom of the Pyramid” by C. K. Prahalad.