Solar Home System Challenges for the Private Sector in Mozambique

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Solar Home System Challenges for the Private Sector

Although the Mozambican SHS market is growing, the growth is still limited by many factors which are explained below: Growing informal market for low-quality SHS products: The SHS market is populated with cheap low quality SHS imported mainly from South Africa, Tanzania or China. These SHS can be up to 50% cheaper than those from registered companies as they are imported informally without paying VAT and import duties. The average price for a low quality SHS on the informal market can be as low as USD 50, while a Tier 1 SHS (20 W with 3 lights and a charger) on the formal market already costs more than USD 100[1]. Hence, the informal SHS products have distorted the market and created an uneven playing field for formal registered companies. They also negatively impact the consumer perception of SHS as they lack quality and durability (life-span of less than 6 months).[2][3][4]

High import duties and VAT: Unlike other Sub-Saharan countries, Mozambique does not have tax rebate for SHS products. On the contrary, the normal VAT of 17% is applied on imported SHS. Import tariff of 7.5% tax is levied on core components of SHS (eg. panels, batteries) and an additional 20% on appliances and accessories. These duties, when passed to the consumers, then account for up to 45% of the total cost[4], significantly increasing the price of SHS for end-consumers. One of the reasons for the high import duties could be the government’s intention to protect local manufacturing of PV panels by FUNAE[5].

For a detail breakdown of import duties and VAT for different solar products, please refer to this article.

Grants are taxable: Under the current legislation (2021), grants received by SHS companies are taxable as “corporate income tax”. Hence, the companies need to factor in the tax amount into their expenses and cannot pass on the full grant advantage to the end consumers.[4]

Regulatory barriers: The World Bank ranks Mozambique at 138 out of 190 countries for ease of doing business in the country[6]. The administrative process of registering and running a business is cumbersome and often lacks transparency regarding rules and regulations[7].  Corruption is also a major limiting factor for doing business in Mozambique[8]. The custom clearance of imported products is rated as a slow and complicated process[9]. For more information about doing business in Mozambique, please see this chapter.

Access to finance: Access to finance in the local economy is constrained due to high collateral requirement, high interest rate and lack of information[7].  In 2020, commercial banks had a lending rate of 21% on average and 18.5% for most credit-worthy borrowers[8], making it difficult for SHS companies to stock up on products. This lending rate has gone down compared to past years but is still very high. For more information about access to finance, please see this chapter.

Natural Risks: Mozambique is prone to natural disasters such as floods, landslide and cyclones that directly impact the end consumers and their ability/willingness to pay for SHS products. For e.g., in 2019, cyclones Idai and Kenneth displaced more than 100,000 people in Sofala, Zambezia, Manica, Inambane and Cabo Delgado provinces[10]. When Idai hit Mozambique, SHS company Epsilon saw a 75% drop in payments and a complete halt in sales of new SHS units for six-months in the impacted region[11]. However, this also presents an opportunity for the SHS sector to collaborate with humanitarian agencies for providing immediate access to energy during relief activities.

Poor infrastructure: Mozambique has very poor infrastructure, e.g. in terms of road networks, which challenges the distribution of SHS in rural and dispersed communities. The national highway (EN1) is the only road connecting the north and south, while the rest of the country is largely disconnected. The road networks are also frequently affected by flooding and other weather conditions and are mostly unpaved[12].

Internal conflicts: Since 2017, there has been an insurgency in the northern province of Cabo Delgado, led by an Islamic militant group.[13] In 2020, the insurgency led by the Renamo Military Junta also aggravated as they rejected the peace agreement with the government[14] . In October 2020, 355, 000 people were expected to be internally displaced in Mozambique[10]. Hence, the ongoing internal conflicts create uncertainty and insecurity for businesses.

Click here to read more about the conflict situation in Mozambique and the humanitarian efforts with regard toto access to energy.

COVID-19 Crisis: The global COVID pandemic has impacted companies worldwide and widened the poverty gap also in Mozambique. It has particularly affected the poor and vulnerable families who are forced to shift their expenditure from energy to food and other basic needs. This has resulted in reduced sales of new SHS and payment default. In addition, the import of SHS also takes longer because the supply chain is disrupted due to travel and other restrictions worldwide. Click here to read more about the impact of COVID19 specially on the energy sector in Mozambique.

Conclusions

The Mozambican SHS market is growing, thanks to the support of many donor programmes and there is an interest to involve the private sector more into the market. However, there are still limiting factors that hinder private sector participation. To incentivise private sector participation a better regulatory framework, as well as easy access to credit and information, would be needed. From the consumer side, there is a wiliness and ability to pay but this could have been impacted by the current COVID-19 crisis. Private sector, governments, donor organisations and other interested stakeholders are encouraged to use the information at the provincial level to make informed decisions about the Mozambican market.

Further Readings

  • High import duties and VAT: Unlike other Sub-Saharan countries, Mozambique does not have tax rebate for SHS products. On the contrary, the normal VAT of 17% is applied on imported SHS. Import tariff of 7.5% tax is levied on core components of SHS (eg. panels, batteries) and an additional 20% on appliances and accessories. These duties, when passed to the consumers, then account for up to 45% of the total costLink to the Mozambique Energy Hub
  • Mozambique Country profile
  • Mozambique Energy Access Situation
  • Doing Business in Mozambique
  • Mozambique – Consumer Finance

References

  1. ↑ Based on the prices from Solarworks! for the lowest Tier SHS
  2. ↑ Economic Consulting Associates and Greenlight, “Off-Grid Solar Market Assessment in Mozambique.”
  3. ↑ World Bank, “Mozambique - Energy for All (ProEnergia) Project.”
  4. ↑ 4.0 4.1 4.2 Hodgkinson and Smeshko, “Challenges in the Solar Home Industry in Mozambique.”
  5. ↑ BERF, “Business Environment Constraints in Mozambique’s Renewable Energy Sector: Solar PV Systems and Improved Cook Stoves.”
  6. ↑ World Bank, “Doing Business 2020.”
  7. ↑ 7.0 7.1 Santos, “The Business Environment of Mozambican Manufacturing Firms.”
  8. ↑ 8.0 8.1 World Bank, “Mozambique Economic Update | Mind the Rural Investment Gap.”
  9. ↑ PwC, “Mozambique.”
  10. ↑ 10.0 10.1 OCHA, “Cyclones Idai and Kenneth”; OCHA, “Mozambique Situation Report.”
  11. ↑ “Expanding the Horizons of Pay-as-You-Go Solar.”
  12. ↑ The Borgen Project, “Building a Diverse Economy with Infrastructure in Mozambique.”
  13. ↑ Zamfir, “Security Situation in Mozambique.”
  14. ↑ allAfrica, “Mozambique.”
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