One of the pleasures I get out of helping to organize the TechnoServe alumni community in New York is the chance to learn about what’s happening on the front lines of business and development in developing countries. Our TechnoServe group met yesterday and we heard from Jukka Valimaki, the CFO of EGG Energy – which is doing interesting things to bring electricity to members of the base of the pyramid.
EGG operates a battery subscription service which it is rolling out in Tanzania. They’ve developed a business and distribution model for providing rechargeable batteries to Tanzanians in villages that don’t have access to the grid. EGG charges batteries at a power station, and then distributes them through a network of shopkeepers and other local entrepreneurs. Consumers use the battery to power lights, cell phone chargers, and other electronics in their home for 3-5 days; when the battery is used, they return to the distribution point, pay a small fee (about $0.60), and receive a new battery. It’s not a perfect analogy, but think of it as a milk-delivery service for electricity.
I had some familiarity with the company before the meeting, but within a few minutes of hearing from Jukka, the multiple value propositions of EGG were clear.
First and foremost, EGG is providing electricity to the villages in Tanzania at a lower cost than conventional methods. EGG charges an up-front fee of $50-60 to consumers to outfit their homes and install wiring so they may use the batteries , and subscription and battery swap fees which total about $60-70 per year. In the first year, the customer recoups the installation fee, and in year two they save roughly half off of what they would spend on traditional energy sources. (Jukka said that the installation fee hasn’t been a big obstacle to users adopting the service, and that micro-finance institutions have shown a willingness to finance the up-front costs.)
Electricity is a prerequisite to meaningful development and education, and EGG is making it more affordable and available. And besides for winning on price, EGG’s batteries are much greener and healthier than current energy sources, such as burning kerosene, timber, and crop waste. In addition to being cleaner for the environment, electric batteries have health benefits for users: unlike fuel sources, they don’t release harmful smoke in the home, an issue which largely affects women and children.
While there are a lot of challenges for EGG to prove its financial and operational models and grow to scale, the company has a lot of promise. In a time where multiple bottom-line businesses are all the rage, EGG has potential to be a financial-developmental-environmental-health win-win-win-win.
EGG received seed funding from a few business plan competitions and other early stage funders, and is now in the process of raising a round to build new charging stations, expand into new territories, and develop its distribution network. My sense is that it would be a very interesting option for funders and (impact) investors, and was surprised to hear Jukka spoke about some of the the difficulties of fundraising.
One thing which has stuck with me is the incredible tax burden that EGG (a Delaware-registered company) and its investors face, which limits its attractiveness as an investment. Consider the taxes levied on a dollar of operating profit that the company earns in Tanzania.
The rates that I’m using may be slightly off, but the story doesn’t change much with different numbers. It’s hard to realize a competitive return for investors when 40% of your profits are swallowed before the money even enters the states.
I am a novice in this area, and I imagine that I’m presenting a very simplified case and there are many options that I am not considering. For example there could be more involved corporate and/or investment structures which will help reduce the tax burden. It’s also possible that EGG will reinvest its profits into growing the business for a while, and that the company’s investors will be motivated by its social mission and willing to accept a lower financial return than traditional investments. And lastly, it’s likely that larger companies have more sophisticated structures and strategies to limit their tax burdens than businesses like EGG do, and that this problem is limited largely to start-ups operating in developing world.
Maybe I’m particularly sensitive to this tax issue after having read about how Google, big Pharma, and other multinational corporations avoid taxes by sending their revenues on an electronic trip around the world, with stops in Ireland and the Netherlands before finally ending in Bermuda. These techniques have lowered the companies’ tax rates to the low single digits.
It seems to me that forward-thinking companies like EGG are the types that should be attracting investment and receiving tax breaks. It’s hard enough to start and grow a multiple bottom-line business in a developing country, and it seems especially hard to do so given the realities of the tax environment.
I’d love for someone with more knowledge as an investor in or operator of a company in developing countries to provide some input or feedback in the comments.
