Grid Extension: The Community-Based Approach
Introduction - Rural Electrification in the Developing World: Limits and Challenges
Key Messages
1. Around 1.5 billion people in the developing world today still live without access to electricity. Rural populations are disproportionately affected by this phenomenon, especially in Sub-Saharan Africa where rural electrification rates are merely above 10%.
2. Utilities lack incentives to engage in rural electrification due to its low perceived profitability. Therefore, a variety of alternative institutions have been designed, partly promoted by governments, to accelerate the process of rural electrification. These options include on a macro-level the creation of a separate division within the utility, the creation of a rural electrification agency/ fund or the creation of private companies and SMEs. On a micro-level rural electrification cooperatives have been employed in combination with one of the macro-level approaches.
A staggering amount of 1.5 billion people in developing countries today do not have access to electricity with the grand majority of them to be found in South Asia and Sub-Saharan Africa (World Bank, 2010a). In the latter 587 million people did not have access to electricity in 2009. This constitutes more than half of the population of Sub-Saharan Africa in which rural areas are still disproportionately affected regarding the lack of electricity. While in urban areas, for instance, electrification rates are close to 60% in rural areas merely above 10% of the population enjoy the same privilege (IEA, 2010; IEA, 2008).
| 2000 | 2005 | 2009 | |
|---|---|---|---|
| Total | 508.9 | 547 | 587 |
| Urban | 120 | ||
| Rural | 465 |
Alternative rural electrification projects, e.g. off-grid installations, which might provide an opportunity to lower the costs of electrification also often do not constitute a viable option since it is complicated and costly for utilities which are characterized by their highly centralized nature to operate several more decentralized projects on a village level (Foley, 1992b).
Utilities in developing countries which are often already struggling to provide electricity to consumers that have already been connected to the grid often show little interest in engaging in rural electrification (REEEP/UNIDO, 2006). However, in many of these countries rural electrification has become an undertaking increasingly important to the government which often tries to promote the latter through the provision of subsidies (USAID SARI, 2004). This financial assistance by the government which provides a first step to overcome the financial constraints associated with rural electrification is further complemented by a variety of alternative institutional options which have been designed to facilitate the process of rural electrification and ensure full dedication to this process.
These options include, at a macro-level:
• the creation of a separate department within the utility responsible for rural electrification only,
• the creation of an entirely new institution like rural electrification agencies
• the creation of private companies as well as small- and medium-sized businesses.
On the micro level a possible option is the formation of local electricity cooperatives which aim at facilitating the implementation and operation of rural electrification projects by including the local communities in the process (Foley, 1992b). Most rural electrification projects that employ this micro-level approach usually do so in combination with one of the macro-level options. These combined approaches are employed for rural electrification via grid-extension as well as for decentralized off-grid solutions.
These approaches all benefit from the shared commonality of constituting a separate body solely responsible for rural electrification. Yet, each approach displays some advantages as well as disadvantages and should be carefully fitted to the circumstances in which it operates.
On the Macro-Level: Institutional Approaches to Rural Electrification
Key Messages
1. The existing three approaches have all been tested in different developing countries and have all proven to entail some advantages and disadvantages.
2. Creating a separate division within a utility saves time and money by building on existing resources but faces the danger of minimizing independence. In many developing countries utilities already face financial constraints limiting the feasibility of this approach.
3. The REA approach is becoming increasingly widespread in developing countries, including Sub-Saharan Africa. Establishing clear responsibilities and mandates has proven to be advantageous but is also a slow and cumbersome process often delaying effective implementation.
4. Private companies decrease the burden on public budgets but do not have the capacity to develop an overall electrification strategy making an additional institution a necessary complement.
Creation of a separate division within the utility
Creating a separate division within the utility responsible for rural electrification seems to be the simplest, fastest and least-costly approach. It does not require any new legislation to be passed and avoids many complications and delays often experienced when setting up an entirely new institution. It also builds on already existing competencies and know-how and allows human resources to be used most efficiently (Foley, 1992b).
Additionally, utilities often have the advantage of having easier access to financial provisions. In many countries, for instance, cross subsidies are in place supposed to help lower costs for rural consumers by charging urban and industrial consumers higher tariffs and utilizing the profit to cover higher costs in rural areas thereby lightening the cost burden on rural consumers. However, in some countries, e.g. in Tanzania, only the national utility TANESCO has access to this cross-subsidy mechanism (AEI, 2009). This gives national utilities like TANESCO a financial advantage in carrying out rural electrification.
Despite these advantages, however, this approach does not avoid many of the pitfalls described above. While it creates a separate division more dedicated to achieving rural electrification it has only proven viable in countries in which the utility was able to fulfill its other tasks efficiently. In most developing countries, however, this is often not the case. Many utilities experience financial and technical constraints (Foley, 1992b). In some countries utilities even find themselves in such a dilapidated state due to politicization, mismanagement and corruption that they are facing complete bankruptcy (USAID SARI, 2002). It can, therefore, be likely assumed that a separate division responsible for rural electrification would not be exempt from these problems and its overall effectiveness would suffer greatly as a result of that.
Even in cases in which the financial difficulties of the utility are less severe it has proven difficult to maintain the autonomy of such a division and ensure that resources will not be diverted to other priority areas. Yet, in those countries in which the utility was working rather efficiently from the start and did grant the separate division a sufficient degree of autonomy this approach was employed successfully, e.g. Algeria and Malaysia (Foley, 1992b).
A similar approach is the delegation of the responsibility for rural electrification to one of the regional offices of a utility as it was done in Tunisia (Barnes & Foley, 2004).
Creation of a Rural Electrification Agency (REA) / Rural Electrification Fund (REF)
The setting up of rural electrification agencies is becoming an increasingly popular approach in many developing countries including countries in Sub-Saharan Africa. The institutional arrangements of these agencies, however, vary on a case-by-case basis. While in some circumstances the REA manages the financial means available to the agency, in others only a REF with a secretariat exists. In the majority of cases both exist as two separate legal entities, however, with the REA assuming tasks such as providing technical assistance and expertise as well as planning, coordinating and monitoring rural electrification projects while the REF coordinates donors, banks and manages funds (World Bank, 2010a).
The benefits of setting up a rural electrification agency are that it avoids many of the challenges faced by the separate-division-within-the-utility approach mentioned above. It clearly delineates the responsibilities of the utility and the responsibilities of the agency which leads to the establishment of a more autonomous institution with the sole focus on rural electrification (Foley, 1992b).
This helps to establish a clear mandate for each institution which leads to greater transparency and reduces an overlap in activities. These mandates and responsibilities are also generally institutionalized in specific acts which constitute the foundation of these agencies and which further provide clear regulations, e.g. regarding the amount of subsidies provided by the agency (ASER, 2011).
Another advantage of the REA approach is that by handing over responsibility for rural electrification to an agency other than the national utility the likelihood of engaging private companies (at least in countries with a liberalized electricity market) greatly increases. This increases competition and could result in increased efficiency and in consequence to the acceleration of rural electrification. Additionally, private capital and investment reduce the burden on public budgets in financing rural electrification (Niang, 2006).
Yet, this approach also creates problems such as delays in operation due to delays in setting up the institution itself as well as a lack of funding. In many cases it can take years before the passing of the legislation to set up the institution and before a functioning institution is in place due to a lack of capacity. Moreover, since rural electrification agencies are often partly government funded they also often lack autonomy and can suffer from political intrusion (EUEI PDF, 2010).
Nevertheless, this approach still holds potential for success depending on the context and has been employed in a variety of countries such as Thailand, Jamaica, Bangladesh, India, etc. (Foley, 1992b). In recent years, the REA approach also became more prominent in Sub-Saharan African countries and a variety of countries, e.g. Uganda, Tanzania, Kenya, Senegal, etc. have established REAs within the past 5-10 years (Niang, 2006).
Creation of private companies/ small- and medium-sized businesses
The engagement of private companies in the rural electrification process has been difficult and experience has shown that it needs to be accompanied by regulatory support and management of the overall rural electrification process by state authorities. In the majority of cases this approach was employed following the general liberalization of the electricity market and the privatization of previously state-owned companies. Thereby large state-owned companies were partitioned into smaller units with separate responsibilities for generation, transmission and distribution and the different units became privatized. These newly privatized companies can then engage in rural and peri-urban electrification through a bidding process for pre-defined projects which are either established by public authorities or which have been requested by the communities, e.g. in the case of Chile or Cameroon. Based on pre-developed criteria the public authorities then award the contract to the “best” bidder (Jadresic, 2000; Devex, 2010).
An advantage of this approach is that it generally brings in private capital which reduces the burden on the public budget (Niang, 2006). On the other hand, however the experiences with private companies show that they only engage in the implementation of individual rural electrification projects and do not assume responsibility for the overall planning and coordination of the rural electrification process. Consequently, the establishment of a central agency to engage in these tasks still remains necessary.
In general, this approach has been employed in a variety of countries, e.g. Chile, India and Cameroon, with mixed successes. While in Chile the rural electrification rate rose from 53% to 76% within a period of 7 years (1992-1999) and this approach was generally considered as successful, in India’s state of Orissa private companies often quickly incurred large losses of profit due to theft of electricity, unpaid bills, lack of meters, etc. and therefore quickly chose to withdraw from the rural electrification business. This difference in outcomes seems in large part to be due to the lack of regulatory support in Orissa but also to a lacking service orientation of the companies themselves (Jadresic, 2000; Harper, 2000).
An example of a country in which newly established small- and medium-sized businesses that were not previously part of a state-owned business took on the task of rural electrification is Zambia. In Zambia, however, these businesses were used for the promotion of off-grid installations creating local companies to market solar home systems (SHS) which before had been distributed for free. In many cases rather than setting up entirely new businesses many international donors like the World Bank have also favored the support of existing businesses by assisting in the development of viable business models and providing loans and subsidies (Cruickshank & Yadoo, 2010). These companies, however, focus on solar home systems only which as an overall strategy cannot be regarded as a fully effective rural electrification model and is not to be compared with grid extension.
On the Micro-Level: Community-based Approaches to Rural Electrification
Key Messages
1. Rural energy cooperatives cannot engage in the rural electrification effort on their own and have to co-exist with one of the macro-level approaches. The central agency on the macro-level manages and coordinates different rural electrification projects and supports existing cooperatives.
2. Cooperatives are formed by the consumers which they will serve and are based on democratic principles.
3. With the support and under the supervision of the centralized agency cooperatives engage in the day-to-day operation and maintenance of the distribution network.
Rural electric cooperatives
The rural cooperative approach first emerged in the US in the 1930’s where the first Rural Electrification Administration was founded in 1935 and the first Rural Electrification Act was passed in 1936. The special feature of this approach is that rural cooperatives are usually formed by the consumers that will be served by them which increases incentives to ensure the success of rural electrification projects (GENI, 2008).
The general concept is that the consumers buy electricity in bulk from the utilities and distribute it within a pre-defined area. As a part of this process consumers also assume responsibility for the maintenance and operation of physical assets as well as for the financial management of rural electrification projects, e.g. by engaging in bill collection and ensuring the payment of bills and loans to the utility (Foley, 1992b).
In order to establish such a system the most common approach generally employed is to establish a central organization first which chooses the areas to be electrified as well as assists in setting up the cooperatives and channeling (donor) funds to install the supply network. In general, this has been done by one of the macro-level institution mentioned above, in the majority of cases by a REA/REF.
Once the area to be electrified has been chosen and the cooperative established the distribution network has to be installed. This is usually largely funded by the supporting agency but in many cases cooperatives also have to contribute a certain percentage of the costs in advance. Afterwards the cooperative assumes responsibility for the operation and maintenance of the equipment and ensures that fees are paid in a timely manner. By combining the measures of pre-payment and management of the installations which reduces costs for the supporting agency the cooperative repays the initial investment loan over an extended period of time (Foley, 1992b). In some cases ownership of the equipment is passed on to the cooperative after all payments have been made, e.g. in the case of Bangladesh. There the transfer of assets has yielded largely positive results and has demonstrated the importance of local ownership (NRECA, 2002). While this has worked well in Asia, projects in other sectors in African sectors have shown that asset transfer and ensuring local ownership is not a straightforward and easy task to achieve. Best practices in this regard would, therefore, have to be examined on a separate note.
With regard to existing examples of cooperatives asset transfer has not seemed to constitute a problem but a variety of other problems have been encountered. Cooperatives, despite their willingness to operate a rural business often encounter similar problems as utilities and private companies, meaning relatively small profit margins. This makes it problematic to ensure that sufficient capital for maintenance of the equipment and re-investment can be saved. Even in cases in which capital is saved, e.g. in a village fund, cooperatives are often convinced to allow their utilization to remedy more pressing issues within the village (Foley, 1992b).
In order to monitor these developments and ensure the financial survival of the cooperative the centralized institution plays an important role in monitoring the cooperatives performance as well as providing advisory services after the establishment of the cooperative (Foley, 1992b). Additionally, the centralized institution also continuously has to provide trainings for managers and operators since know-how and capacity are generally very low upon establishment of the cooperative and have to be built over time (Nygaard, 2009).
This shows that similarly to the private companies approach cooperatives cannot engage in rural electrification without the support of a centralized organization which provides expertise and engages in coordination and planning.
Cooperatives, in general, are very similar to private businesses in the way they function. Boards are usually elected democratically by the owners of the corporation’s equity and the board appoints management and staff. In most cases board members are unpaid (Barnes & Foley, 2004).
In the case of the South Lalipur cooperative in Nepal, for instance, the secretary is the only full-time paid member of the board which consists of a chairman, a vice-chairman and a treasurer otherwise. Moreover, the cooperative employs two overseers, 12 technicians and one social mobilizer.
The social mobilizer assumes the task of collecting fees from the families and advising families on how timely and accurate payment can be achieved (Cruickshank & Yadoo, 2010).
The cooperative approach has been employed in a variety of countries and practical experiences highlight its advantages as well as disadvantages.
Electrifying Africa: Grid Extension Models in Sub-Saharan Africa
Key Messages
1. The cooperative approach has not been applied in most African countries. So far only few cooperatives exist which are engaged in the management of diesel-fueled mini-grids instead of grid extension. Only in Burkina Faso have cooperatives managed grid extension with disappointing results that, however, seem to be due to the specific set-up of the cooperative model in Burkina Faso.
2. Grid extension has been managed by more centralized macro-level approaches. In Ghana this approach constituted cooperation between the Ministry of Energy and the national utility yielding great success rates. Tanzania and Senegal have both employed the REA approach which has been widely successful in Senegal. In Tanzania electrification rates are still very low but the REA has also only been operational within the last 4 years.
In Sub-Saharan Africa electrification rates are even lower than the average for developing countries. Total electrification rates range around 29% as compared to 64% for developing countries on average. In rural areas the share of the population having access to electricity is as low as 10%. Ghana and Senegal rank among the countries with the highest electrification rates in Africa while in Tanzania electrification rates are still relatively low (AEI, 2009).
Whether or not grid extension is the appropriate technical solution to remedy this problem is a topic on its own merit. Considering the sparse population in rural areas and the resulting low anchor loads mini-grid or off-grid solutions might be better suited but are not always as reliable as receiving electricity from the national grid. For these alternative solutions as well as for grid extension, however, different institutional models have also been employed in different African countries.
Rural energy cooperatives have hereby mainly played a role in the management, operation and maintenance of local mini-grids rather than the extension of the national grid. Examples thereof can be found in Tanzania, e.g. the Urambo Electric Consumers Cooperative Society – UECCOO, or in Uganda with the Bundibugyo Electric Cooperative Society – BECS. In these cases mini-grids were fueled by diesel-generation and were either installed by the national utility, as in the case of Tanzania, or by private companies like in Uganda (Marandu, 2002; Ilskog et al., 2005; REA, 2009)
In the Tanzanian case the Urambo Electric Cooperative has proven as a very successful model for the management of mini-grids and could therefore also possibly become a successful approach to grid extension (Ilskog et al., 2005). In Uganda the approach is still relatively new and pilot projects are only in their early stages providing limited evidence with regard to their effectiveness (REA, 2008).
Only one case seems to exist so far in which cooperatives were employed to manage grid extension – the case of Burkina Faso. However, the cooperative approach in Burkina Faso incurred a significant amount of problems. Being instituted as complementary to already existing private companies operating in rural areas cooperatives in Burkina Faso faced a great amount of competition. Additionally a rural electrification agency and the utility were also involved in the rural electrification process, requiring cooperatives to cooperate with several actors at once. While the utility remained important as the sole owner of the transmission lines the REA/REF was the main source of funding, providing a 60% subsidy to cover the initial investment costs and an additional 40% which had to be repaid within 10 years. Upon repayment of this loan cooperatives would then be formally regarded as the owners of the distribution system. Yet, this ownership seems to have remained on a formal level with private companies assuming responsibility for the building, operation and maintenance of the network while cooperatives were merely responsible for covering the arising maintenance costs (Box 1.1.1) (Nygaard, 2009).
Compared to the cooperative approach employed in the US or Asian context this example already shows significant differences with regard to the responsibilities assumed by the cooperatives and regarding local ownership. Cooperatives in Burkina Faso did not have to contribute a certain percentage of the costs in the early stages of the project and more than half of the costs were subsidized by the REA/REF. They also did not assume any management or operational tasks and were merely supposed to provide funds for maintenance of the network. Indeed Nygaard (2009) notes that one of the problems which led to unsuccessfulness of this approach in Burkina Faso was the lack of ownership by the cooperatives. The provision of training to improve the technical and economic capacities of cooperatives would have been necessary to remedy this problem. Moreover, a certain amount of equity should have been provided by the cooperatives to create a feeling of responsibility otherwise actors will rely and remain dependent on other institutions involved in the process (Nygaard, 2009).
While the cooperative approach has, therefore, not yielded much success in Burkina Faso this seems to be the results of the specifics of the case. Apart from this example cooperatives, however, seemed to have not played a prominent role with regard to rural electrification through grid extension in the African context. Other operating models, e.g. centralized utilities assuming responsibility for grid extension have featured more prominently. In recent years, REAs and REFs have also increased in number and have been institutionalized in many African countries to manage the rural electrification process.
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The cooperative approach in Burkina Faso was less successful than in some of its Asian counterparts. Some of the factors that contributed to that were, according to a former employee of the REA in Burkina Faso, the fact that “cooperatives are only formally responsible for running rural electrification in Burkina Faso. With the REA being responsible for technical assistance call for tenders are usually made by the REA on behalf of the cooperatives. Afterwards a private company builds and operates the system. Usually these private companies completely take over making it difficult for cooperatives to play a responsible role, partake in making any decisions and becoming a strong and respected actor. They become more of a fake organization needed to fulfill the requirements for being considered for rural electrification.” “The whole set-up of the cooperative approach is already problematic. Cooperatives are established using a top-down approach and have mainly been introduced by international donors. The problem of that is, on the one hand, that people don’t really feel any responsibility, also because they did not have to invest anything. On the other hand, the concept of cooperatives changes in a development setting. In the West cooperatives were used as a means of pooling resources. In many developing countries they are seen as a way of gaining access to resources."
Reasons for this difference in perception can partly be attributed to local circumstances and partly to general problems of dependency within a development context. “One reason why people would not want to pool their resources in a communal organization is bad experiences made in the past. There are numerous examples of organizations that were used to pool resources but when the money was needed it was no longer there. People simply feel it’s safer to keep their money to themselves and raise communal money, e.g. for repairs, when it is needed. People in developing countries also see it as more of a strategy to access funds due to experiences with the general development context. This also makes it more difficult to get people to take the initiative in starting cooperatives since they know that if they can await something from above the best strategy is to simply just wait.” In order to remedy some of these problems especially more financial involvement has been suggested. “Asking for 20-30% of the initial costs raises the sense of responsibility. In many development projects in other sectors 10% are the usual requirement but often local parliamentarians simply contribute these 10% on their own making it seem to the villagers like they were the ones who brought the new benefits to the village and thereby also defeating the purpose of asking for a communal contribution.” |
Tanzania: A young REA approach
Tanzania has a relatively low level of electrification. In 2010 only 10% of a population of 37 million people had access to electricity. In rural areas where 75% of the population live, this rate is even lower with only 2% of the population having access to electricity (Msofe, 2009).
In order to improve this situation a National Energy Policy (NEP) was launched in 2003 which among other components foresees the creation of a rural electrification agency in Tanzania. Consequently, the REA was established in Tanzania in 2005 but only became fully operational by 2007. The REA is an autonomous body whose activities are supervised by the Ministry of Energy and Minerals (REA, 2011; Uisso, 2009). It is governed by a rural electrification board (REB) consisting of members of different ministries engaged in the rural electrification process and other institutions, e.g. civil society organizations, consumer representatives, donor community etc. (REA, 2011). In addition to the REA a rural electrification fund (REF) was established to manage the financial funds dedicated to rural electrification. Both institutions are financed through government budgetary allocations, levies on electricity as well as donor funding, e.g. from the World Bank and SIDA (Msofe, 2009; Uisso, 2009).
The REA/REF in cooperation with the Tanzanian national utility TANESCO, who acts as the project developer, has so far implemented a variety of projects including on- as well as off-grid installations for rural electrification. Thereby it provides funding to TANESCO to connect previously unconnected areas as well as finances research and development for the innovation of low cost distribution designs (Uisso, 2009). Additionally to its classical role of providing financial means to undertake projects the REA also provides trainings and capacity building expertise for project developers that are engaged in rural electrification activities as well as providing technical expertise and assistance in setting up collaborations between project developers (Msofe, 2009).
Complementary to the REA the Tanzania Energy Development and Access Project was launched. The latter is mainly financed through funds provided by the World Bank and the GEF and is comprised of an on-grid as well as off-grid component. However, the on-grid component does involve the extension of the grid to provide increased energy access to rural populations but focuses on strengthening the existing grid and improving the efficiency of TANESCO. The off-grid component which focuses on the provision of funding for renewable energy off-grid installations mainly aims at increasing access to electricity in rural and peri-urban areas of the country (Msofe, 2009).
In undertaking these activities the government aims at achieving its target of providing access to electricity to 25% of the population by 2025 (Free Energy Foundation, n.d.).
Ghana: A promising centralized approach
In comparison to Tanzania, Ghana had already achieved higher levels of electrification by the 1980’s than Tanzania today. Through a well-defined strategy it has accomplished to increase these numbers even further and today ranks among the countries with one of the highest electrification rates in Sub-Saharan Africa.
The road to this success in Ghana was paved by employing a highly centralized approach based on the National Electrification Scheme (NES) which was established by the Government of Ghana in 1989. The aim of this scheme was to extend access to electricity to all communities of more than 500 people in Ghana within a period of 30 years, from 1990-2020 (Abavana, 2008; Abavana, 2004).
The NES is mainly managed and implemented by a combination of public authorities and utilities. Thereby the Ministry of Energy assumes the role of policy formulator and coordinator for the electricity sector and is responsible for the overall management of the NES. It is assisted by two smaller public agencies, the Energy Commission and the Public Utilities Regulatory Commission, with the former being responsible for licensing and the enforcement of technical standards and the latter setting and enforcing service quality standards and regulating tariffs. The technical implementation of the extension of the grid is undertaken by Ghana’s public utilities which are divided into separate generation, transmission and distribution facilities (Vanderpuye, 2010).
In order to achieve its objective the NES was composed of four components: the District Capitals Electrification Program, the National Electrification Program, the Self-Help Electrification Program (SHEP) and the System Re-enforcement Program (Abavana, 2008). The first component was implemented during the first phase of the scheme and included the electrification of all district capitals and all communities en route to these capitals. The other three components were and are being gradually implemented throughout the lifetime of the scheme and regulate that as part of the National Electrification Program at least five communities per district per year have to be electrified and within the System Re-enforcement Program the efficiency of already existing distribution lines has to be improved (Abavana, n.d.). Thereby it is ensured that electrification takes place relatively evenly throughout the country and that already existing customers receive a reliable and improved service.
The most successful component of the program to date, however, is the SHEP which, similarly to the cooperative model, heavily relies on the involvement of the community. The Self-Help Electrification Program (SHEP) gives communities that want to accelerate their connection to the grid the opportunity to apply for an earlier connection in return for taking over responsibility for the erection of low voltage distribution lines. Apart from being able and willing to finance these distribution lines the community also has to ensure that the houses of at least one-third of their members have to be wired and ready to connect to the grid. Other rules include that only communities within a maximum of 20 km distance from the already existing grid can apply to be included in the program (Abavana, 2008). In order to ensure that a community is capable of fulfilling all of the requirements representatives of the Ministry of Energy visit every community that applies to be included in the program to assess its capability. While the Ministry of Energy is therefore responsible for the selection of communities and general management of the program it also awards contracts to the implementing agents and administers the technical implementation. Implementation as well as operation and maintenance are thereby generally the responsibility of the distribution utilities. The Ministry of Finance manages the funds available for the implementation of the program (Vanderpuye, 2010). Funding for SHEP is provided through a mix of investments from the communities themselves, government budgetary allocations and international donors, e.g. SIDA (Abavana, 2008).
Despite a rather complex process and interaction of a variety of actors as well as the multitude of pre-conditions to be fulfilled by the communities the SHEP has proven very successful. As part of a total of 3000 towns that were connected to the grid between 1990-2008 more than half, 1900, received their connection as a part of SHEP. The other 1100 communities were connected as part of other components of NES and a smaller number of additional communities now receives electricity through the installation of off-grid solar PV installations which was introduced as complementary to the NES in 2001 (Abavana, 2008; Abavana, 2004). Overall, these means have led to a drastic increase of the electrification rate in Ghana which was as low as 15% in 1989 and had reached 66.7% by 2008 (DEA, 2007; Vanderpuye, 2010).
In addition to providing increased access to electricity the government has also taken measure to ensure that once poorer consumers have been connected the running costs for electricity will be affordable. Lifeline tariffs and cross-subsidization were introduced charging higher tariffs to wealthier and high usage consumers to ease the burden on poor consumers in rural areas (ESMAP, 2006).
Despite the successes in Ghana which have led the country to become one of the most highly electrified countries in Sub-Saharan Africa some of the overall figures are illusive. While Ghana has indeed increased overall access to electricity rural areas are still disproportionately affected by the lack thereof. Access to electricity in most urban areas in Ghana is still three times higher than in rural ones. The national objective of achieving universal electricity by 2020 is according to estimations also highly unlikely to be achieved (KNUST, 2009). Reasons for that are manifold ranging from inadequate and unreliable support by the government to a lack of private capital and a lack of commitment by the national utilities (Barfour, 2009). A variety of measures to improve the current rural electrification strategy have therefore been suggested, e.g. the targeting of small-scale businesses and the promotion of increased productive use. This ensures that the general economic conditions of the connected households will be improved and that households, consequently, will be capable of covering the monthly charges (Karekezi et al., 2006). In this way rural electrification could contribute to the general improvement of living conditions in rural areas and the long-term financial sustainability of the electricity providing utilities could be ensured.
Senegal: Liberalization and ASER – a successful combination
Similarly to Ghana, Senegal has also managed to substantially increase its electrification rate in the past 15 years. Yet, Senegal followed the same approach as Tanzania in the establishment of a rural electrification agency, the Agence Sénégalaise d’Electrification Rurale (ASER).
Before the mid-1990’s the national utility SENELEC was responsible for the country’s electrification but had largely failed in achieving any significant progress with only a quarter of the population having access to electricity. This quarter also mainly resided in urban areas with electrification rates in urban areas reaching up to 50% while only 5% of the rural population had access to electricity (Gökgür & Jones, 2006). To improve this condition the government decided to engage in the unbundling of the main utility and to open up the market to other private companies. It also established the rural electrification agency ASER in combination with the CSRE which is the commission in charge of the regulation of the electricity sector in 1998 (Niang, 2006).
ASER is an autonomous agency supervised by the Ministry of Energy and Hydraulics that fulfils a multitude of functions. It generally manages the rural electrification strategy which contains two main programs: one focusing on the allocation of concessions for rural electrification to the private sector and the other supporting locally initiated rural electrification projects (ASER & Columbia Earth Institute, 2007). It also selects companies to implement electrification projects and supervises the implementation process, provides technical and financial assistance to these companies and sets minimum service standards to be adhered to (ASER, 2011; Niang, 2006).
With regard to the first component ASER thereby follows a “traditional private company approach” by dividing the country into different concession areas to be electrified. For each area to be electrified ASER accepts bids by private and public companies and selects the best bid employing different criteria, e.g. cost-benefit analysis. To create a notion of economic feasibility and thereby providing an incentive to bid, concession areas are relatively large with around 5000-10000 users within one concession area. Concessions are awarded for a term of 25 years. ASER also provides subsidies which can be as high as 80% of the calculated investment costs (Niang, 2006). On the other hand, ASER requires the concessionaire by contract to connect a certain number of households which are further than 20 km away from the grid to ensure that remote households will also be connected (Gouvello & Kumar, 2007). Thereby a balance is created between providing financial incentives for private companies to engage in rural electrification projects but similarly ensuring the social impact of the latter.
Apart from providing technical and financial support to companies engaging in rural electrification community projects, similarly to Ghana, are also supported by ASER. ASER provides financial support to the conduct of studies within the areas to be electrified as well as providing investment grants for the materialization of projects (Niang, 2006). While in Ghana these projects are mainly aimed at grid extension in Senegal it is unclear if communities engage in the latter or are rather involved in projects to provide electricity through off-grid installations. This, however, applies to all projects in Senegal since the concessions offered by ASER are all technology neutral and the choice of whether to undertake grid extension or employ mini-grid or off-grid options such as solar PV is left to the companies or communities (Gouvello & Kumar, 2007).
While ASER therefore engages in the majority of tasks relating to the general management of the rural electrification program, CSRE is solely responsible for the establishment of tariffs. CSRE sets the maximum tariffs. Companies can then choose whether to employ the maximum tariff or charge a lower tariff within their concession area. The tariffs set by CSRE generally vary between different concessions but not within concession areas (Niang, 2006). Despite setting the maximum tariff CSRE also determines the payment structure for fees to be paid by the customers by having introduced a tariff which adds a “payment facility”. This means that only a part of the connection costs has to be covered upon connection while the remnant can be repaid over time additionally to the monthly costs thereby making initial connections more affordable for families (Gouvello & Kumar, 2007).
Combining these measures the REA approach has almost doubled electrification rates within a decade, increasing the rate from 25% in the 1996 to 47% in 2007. Dividing these figures into urban and rural areas, however, urban populations have benefited immensely having reached 80% electrification rates while in rural areas still only 13% of the population have access to electricity (ASER & Columbia Earth Institute, 2007). In the future the focus of the electrification effort should therefore shift to rural areas and corresponding incentives need to be designed to engage companies in these areas. Alternatively other institutional options, e.g. the engagement of rural communities could also be pursued.
Lessons from Around the World - Cooperatives in the US and Asia
Key Messages
1. The cooperative model was pioneered in the United States having since been replicated in several developing countries around the world with the US model as the basis for replication.
2. In the US, Bangladesh and Nepal the model has been successfully used to increase electrification rates, reduce theft and improve fee collection rates.
3. In the Philippines and India cooperatives have been affected by political interference which has reduced their capability to function effectively.
The United States: A Forerunner in Cooperative Rural Electrification
The model of community based rural electrification originally stems from the US and was established in the 1930’s. By 1935 rural areas in the US faced similar problems compared to rural areas in developing countries today with an electrification rate as low as 12.6%. With utilities similarly unwilling to engage in rural electrification due to its perceived low profitability a new model had to be established. This was the birth hour of rural electric cooperatives in the United States which soon proved to be an extraordinarily successful approach. With strong backing from public authorities, electrification rates soon soared up and within a period of 20 years electrification rates in the rural United States increased by more than 80% to 94.4% in total (Barnes, 2005).
Initially, as the basis of the US model, a rural electrification administration was established in 1935 which had the task of providing funds to a variety of borrowers including cooperatives (NRECA, 2002). However, with time cooperatives essentially emerged as the REA’s main borrowers and became the main competitors of private businesses who had at first rejected any involvement in rural electrification. (GENI, 2008). Feeling threatened by this rapid development and spread of cooperatives utilities and private companies soon showed more interest in engaging in rural electrification but only focused on electrifying those areas in the countryside that contained the highest earners leaving the poorer areas to cooperatives. This posed an additional challenge which, however, did not squander the success of cooperatives. Instead cooperatives proved extremely effective in rapidly repaying their loans and achieving financial self-sustenance (Barnes, 2005).
Once financial independence from the government was achieved cooperatives additionally formed the Rural Utilities Cooperative Finance Corporation to strengthen their independence further (NRECA, 2002).
Initially, however, the REA acted as the financing institution for cooperatives in the US. Having to borrow money itself from the Reconstruction Finance Corporation the REA’s funds were rather small with 50 million in 1936 and 40 million a year during the five subsequent years. Therefore, no significant subsidies could be provided to cooperatives and the REA acted as a middleman providing the same money it had borrowed as loans to the cooperatives. These had to repay them within a timeframe of 25 years which could, however, be extended by a further 5 years in some cases. In order to ensure that these loans could be repaid the first cooperatives focused on villages with a high number of middle-income farmers whereby poorer families living in the area also benefited from their inclusion. Additionally a membership fee of 5 USD was charged in every cooperative and the costs for wiring of houses were carried by the consumers themselves, although spread out over time by adding an additional 10 cents to the monthly electricity bill. Poorer farmers could trade in their labor by aiding in physically constructing the distribution lines and were thereby exempted from having to pay the initial membership fee. The construction was, however, supervised by experts from the REA who also offered their expertise for the initial planning of the distribution network. Moreover, the REA also assisted in the operation and maintenance of the system, supervised the operations of the cooperatives and sponsored road shows to educate people in non-electrified areas about the benefits of the system (Barnes, 2005).
The cooperatives themselves are 100% owned and operated by consumers and function according to democratic principles, meaning that membership is open and voluntary and that members have the right to elect representatives which will form the board of the cooperative (NRECA, 2010b). These representatives then have the right to appoint a manager of the cooperative which, however, has to be approved by the REA. Furthermore, the day-to-day business of the cooperatives is handled by a permanent staff of 7-20 members (Barnes, 2005).
Employing this model has proven greatly beneficial for the US rural electrification effort and had led to almost complete electrification of rural areas, 99%, by 1970 which was almost entirely due to the more than 900 cooperatives operating in the country (NRECA, 2010a). Reasons for this success are multifaceted but the most important factor underlying the successful functioning of cooperatives in the US seems to be the great degree of local ownership (Box 1.1.2). Due to this success the US was also involved in the establishment of many other rural electric cooperative systems around the world and many were closely modeled according to the American predecessors, e.g. the Philippines, Bangladesh.
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Trying to explain the success of cooperatives in the United States and achieve a better understanding which factors underlie a functioning cooperative model an NRECA staff member was interviewed, presenting his insights.
1. What are the underlying success factors of the cooperative model in the United States? “The most important factor is that everyone has an investment stake in the business. Since everyone has invested and is a part-owner of the cooperative everyone also has an incentive to maintain it.”
2. What are the greatest challenges that cooperative in the US have been faced with? “Initial financing is always and generally a problem. In the US this challenge was overcome because a partnership between the federal government and the cooperatives existed making it possible for them to access sufficient funds and repay them over time.”
3. How did cooperatives achieve financial viability? “Once initial financing has been provided and a cooperative has been established the board of directors set the electric rates helping them finance their loans over time.”
4. What has the role of the state been in achieving these successes? “A good relationship with the government and strong institutional support has been the main important factor. The most important part of this relationship is for the state to provide initial financing.”
5. After the initial stages, what role does the state play today? “A number of cooperatives still borrow money from the state today to update and develop their technical equipment. A department within the agricultural ministry provides loans today which have to be repaid over time.”
6. What are the advantages of engaging cooperatives in rural electrification? “A good example to explain these advantages is Bangladesh. There the relationship between end users and the cooperative is much stronger than between end users and the utilities. Power thefts can be better avoided. The sense of responsibility towards the own community is much stronger than towards some far away business.”
7. Considering NRECA’s involvement in establishing cooperatives in many developing countries what are the most important preconditions and challenges in these countries? “At the base a cooperative is a democratic institution. So understanding democratic principles and the economic participation of all members is important. Another core issue is the need to have access to capital. In most developing countries the greatest challenge is that this understanding of democratic participation and understanding of the business model within the government is lacking. There is also a lack of access to financing and technology and people who are technology savvy enough to maintain the equipment” |
Bangladesh: An Asian Success Story
One of the first rural electrification programs to be established in Asia was the one in Bangladesh initiated in 1976 and financially supported by USAID (NRECA, 2002). Since then cooperatives had provided access to an additional 20 million customers by 2004 with a yearly average connection rate of 390000 connections. This means that more than 1000 customers were connected to the grid on a daily basis. Still by 2004 only around 15% of the population in rural Bangladesh had access to electricity and it was estimated that this number would not increase to more than 22% by 2010 despite the fact that Bangladesh had set universal electrification as its target for the year 2020 (USAID SARI, 2004).
Similarly to the US model a rural electrification agency was first established in Bangladesh called the Rural Electrification Board (REB). The REB became fully functional in 1977 and began to cooperate with rural communities in order to establish rural cooperatives, Palli Bidyut Samities (PBS). Thereby the REB identified the areas to be electrified and assisted in the initial organization of the PBSs by providing trainings for future staff. It also provided assistance in the procurement of funds as well as in liaising with the main utility and other important stakeholders. Today more than 70 PBSs employing over 16.000 people exist in Bangladesh (Cruickshank & Yadoo, 2010).
As in the US, the cooperatives function according to a democratic principle with members participating in the decision-making process through electing representatives. These representatives are elected to the board of the cooperative. Unlike in the US, however, the managers of the cooperative are appointed by the REB and not by the board of the cooperative. The REB also reserves the right to dissolve the board at any point in time. Board members are not paid and only receive a small financial remuneration for board meetings (Barnes & Foley, 2004).
With regard to the tasks of the cooperatives, each of them is responsible for their area which is separated from other areas by the REB. Within these areas every cooperative has the freedom to draw up their own electrification plan suited to the needs of their respective area (Cruickshank & Yadoo, 2010).
Financially, the PBSs are not as independent as the US cooperatives receiving long-term low interest loans from the REB. Usually these loans are provided over a 30 year period with a five year grace period regarding the repayment and low interests of 3% over the repayment period itself. The cooperatives do not retain or control the operating margins but immediately transfer any profits to the REB for the repayment of their loans (Barnes & Foley, 2004). In order to ease the repayment of loans households have to contribute a membership fee upon joining the cooperative, pay a security deposit and bear the costs for the wiring of their own house in addition to their monthly electricity bills (USAID SARI, 2004).
Apart from providing the loans the REB also supervises the financial management of each PBS by approving the tariffs, which are set individually by each PBS. Thereby it allows for the existence of cross-subsidies (Cruickshank & Yadoo, 2010). These cross-subsidies are usually based on higher costs being charged to industrial and commercial consumers to lower the costs for agricultural and domestic consumers. The principle of “cross-subsidization” also exists on a larger scale in the form of a revolving fund to which financially better off cooperatives contribute to subsidize those that perform weakly (USAID SARI, 2004). In order to monitor the effectiveness of these measures and establish which cooperative belongs to what category the REB more generally monitors the financial sustainability and management effectiveness of the PBSs. While this is not supposed to compromise the autonomy of the PBSs it still provides the REB with a means of holding PBSs accountable. Accountability is also achieved using other measures, e.g. annual performance targets. These commit cooperatives to increase their revenues and decrease their system losses by certain rates as well as to increase the number of new connections. PBSs will then be penalized in case of not meeting the targets or rewarded for the opposite (Cruickshank & Yadoo, 2010). Generally, bonuses can be as high as a 15% salary increase if all the targets are met while penalties amount to a deduction of at most 1% from existing salaries (USAID SARI, 2004).
In the case of Bangladesh cooperatives are increasingly becoming more financially independent due to an increased reduction of operating costs as well as a reduction of subsidies provided by the REB (subsidies are provided by the REB to help attract more consumers and thereby increase the financial viability of cooperatives). Moreover, distribution assets owned and operated by the state-owned utilities are increasingly being transferred to the cooperatives with great success (Cruickshank & Yadoo, 2010; NRECA, 2002).
The cooperative model in Bangladesh has shown great successes increasing the amount of electrified villages, obtaining high collection rates (96%) and reducing distribution losses (16% while the national utility has losses of 30-35%) (Cruickshank & Yadoo, 2010). More needs to be done, however, in further reducing the large amount of people in rural areas that are still without electricity.
Nepal: Pursuing a successful bottom-up approach
In 2002 the Rural Electrification Agency in Nepal (NEA) first encountered problems realizing that it was not possible for them to mobilize capital for rural electrification as well as control the theft of electricity. Therefore, the community electricity byelaw was passed in 2003 which allowed for rural groups to buy electricity in bulk from the utilities and retail it amongst their own users (Cruickshank & Yadoo, 2010).
Differently from the approaches pursued in Bangladesh and the US, the NEA does not define areas in which electrification would be viable and assists in the establishment of rural cooperatives in these areas. Instead the rural communities first need to establish legal entities on their own which have to be registered at district level and then have to apply for governmental financial assistance. Only after this process has been finalized will it be the task of the Community Rural Electrification Department (CRED), which is part of NEA, to initiate a survey as well as develop a cost estimate for grid extension (Bodenbender, 2010).
The government of Nepal also only covers 80% of the costs regarding grid extension and the communities finance the remaining 20%. This 80% government contribution will only be provided once the 20% community contribution has been transferred. In many cases, however, it is not possible for communities to provide this contribution making the assistance of international donors imperative (EnDev, 2010).
Donors also support the NEA in providing trainings which equip community members with the necessary knowledge to operate and maintain as well as financially manage a local cooperative. A problem that has hereby been noted, however, is that in many cases community members participate in trainings provided by the NEA to acquire technical knowledge which they can then use to find better paid jobs in the city (Cruickshank & Yadoo, 2010). While this is detrimental to the development of a functioning cooperative the side benefit of increased education and improved job opportunities for individuals remains.
Apart from providing trainings the NEA also plays a significant role as the owner of the distribution assets which are consequently leased by the community organization. It also provides technical support by upgrading overloaded transformers and testing meters. This means a great extent of dependence upon the NEA which is further demonstrated by its key role in monitoring the performance of cooperatives. These have to report once a year to the NEA with the cooperative which has achieved the best results throughout the year being rewarded by the NEA (Barnes & Foley, 2004).
While the NEA therefore also wields a larger degree of power over the functioning of cooperatives than government agencies in the US, the cooperatives have also carved out a path to assert political influence through the foundation of the National Association of Community Electricity Users (NACEUN) which, despite providing support to its members, also focuses on national level policy advocacy (Box 1.1.3) (Bodenbender, 2010).
Institutionally, the cooperatives in Nepal are run in a similar way to those in Bangladesh. Generally, the board of the cooperative is again democratically elected. The board of the cooperative only has a few members, however. Taking one of the largest cooperatives in Nepal, a cooperative in South Lalipur, as an example, the board can be seen to consist of four members only; a chairman, a vice-chairman, a treasury and a secretary who is the only full-time paid employee of the cooperative. In addition, an engineer, two overseers and a variety of technicians as well as one social mobilizer are further employed. The social mobiliser is mainly responsible for the collection of payments as well as consulting the customers on how timely payment can be achieved. While in the majority of cases timely payment is hardly ever achieved, the cooperative still has a much higher fee collection rate than the NEA and has proven significantly more efficient in this regard (Cruickshank & Yadoo, 2010).
Overall, there are more than 200 cooperatives in Nepal and the concept has proven to be similarly successful as in Bangladesh. Cooperatives in Nepal have achieved similar results ranging from speeding up access to electricity and other services due to the proximity of technicians leading to a higher fee collection rate as well as reducing system losses by reducing thefts and improving the productive use of electricity (NACEUN, 2011; Cruickshank & Yadoo, 2010).
Productive use which is important for utilities to balance demand during the daytime and in the evening and further increases the income of cooperatives since higher tariffs are charged for commercial applications is supported by the cooperatives through the extension of their portfolio of services to further provide micro-finance loans (Cruickshank & Yadoo, 2010).
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Explaining the success of cooperatives in Nepal similar factors as in the United States seemed to have contributed to making them a successful model for rural electrification. According to a staff member of NACEUN “investments by the community make them feel responsible for cooperatives and their equipment and ensure that they will look after it. As a result national utilities report electricity losses of 30-40% whereas cooperatives only report losses of 10-15%.” NACEUN and local rural leaders play an important role in making this success happen. “Initially leaders in the community take the initiative to get villages electrified and educate people about the possibilities of establishing a cooperative. Although their motives are mainly political they play an important role in motivating and educating communities since there is no information from the government regarding their opportunities and everything happens through mouth-to-mouth propaganda. Motivation on the community side is also important. If this motivation is there it really does not matter if cooperatives are established through top-down or bottom-up procedures.”
“Once these initial steps have been taken NACEUN plays a very important role in explaining the rules to people and assisting them, e.g. with financial applications. NACEUN also lobbies for the cooperatives. One example of when lobbying was necessary was when poles made of wood were used in some villages which had to be replaced after 10 years due to the material. The NEA then did not want to invest 80% of the initial costs again but lobbying by NACEUN convinced them to do so in the end. Lobbying is also important since virtually no relationship exists between cooperatives and the NEA. The head office of the NEA is in the capital and only few rural offices exist. It takes too much time and money for people to come all the way to Kathmandu if they need to complain about something. So NACEUN lobbies for them. Recently the NEA has tried to improve its service though and wants to open more branch offices in rural areas but there have been many delays in setting up these offices.” In spite of the support of NACEUN and attempts by the NEA to improve existing conditions cooperatives in Nepal still face many challenges. “The greatest difficulties cooperatives in Nepal face are a lack of public awareness, for instance. People have limited knowledge about what cooperatives do and are therefore very skeptical about them. There are also many legal issues and constant government changes. Different governments have different ideas so there are no consistent policies. On top of that economic and geographical issues exist. People in rural areas are very poor so it is difficult for cooperatives to come up with the initial 20% investment. This also makes sustaining them harder since the industry is not very well established in these areas and household consumption is not high enough. Geographically, Nepal is a very mountainous country and getting connections to communities far away in the mountains is very challenging. Still grid extension has so far been the best option since off-grid solutions are very expensive in Nepal. But recently first projects with off-grid models have also started.” |
The Philippines: Learning a lesson about the effects of pervasive political interference
The rural cooperative program in the Philippines was Asia’s first and largest cooperative electrification program which was initiated in 1968 with the help of USAID. Similarly to the programs established later on in other Asian countries it was based on the US model and was established with the assistance of NRECA, the association of rural cooperatives in the US (NRECA, 2002). In the early stages of the program the electrification rates of the entire country were considerably low with only 18% of the entire population having access to electricity. In rural areas this figure was even lower at around 8% (Barnes, 2005).
In order to drastically increase these figures, an approach similar to the US rural electrification program was developed starting with the passing of the National Electrification Administration Act which set as the national policy objective for the Philippines to achieve universal electrification through the use of electricity cooperatives (Barnes, 2005). To achieve this objective, a rural electrification agency, the National Electrification Administration (NEA), which became responsible for the development of the cooperative program, was established. Unlike in the US, therefore, cooperatives were the sole implementing institution and the NEA only provided funding to the latter rather than to other businesses as well (Foley, 1992b).
Today there are 119 cooperatives in the Philippines. Their boards are democratically elected and managers are appointed by the NEA as in the majority of other cases.
Financially, the cooperatives in the Philippines are also dependent on the support of the NEA. Despite providing loans, the NEA also assumes responsibility for ensuring that cooperatives can cover their loans by constantly monitoring and supervising their performance. In the past it has thereby decisively responded to problems, e.g. in rapidly suspending managers that had embezzled cooperative funds (Barnes & Foley, 2004; Barnes, 2005). While this is consistent with the tasks of rural electrification agencies in other Asian countries, the tariff setting process in the Philippines differs greatly by neither involving the NEA nor the cooperatives. Tariffs are set by the electrification commission which operates independently of both of them and also sets the service standards (Grewal et al., 2006). This complete absence of cooperative involvement in setting the tariffs has often been criticized as one of the factors contributing to the relatively poor financial performance of cooperatives in the Philippines. Yet, other factors have also contributed to impeding the successful function of the cooperative model.
Historically cooperatives have had to deal with many problems including a lack of political independence and corruption. A World Bank audit performed in the 1980’s found that the performance of the cooperatives in the Philippines had worsened due to an increasing degree of corruption within the NEA and the cooperatives as well as weakening oversight by the NEA. Many also saw the cooperatives as a stepping stone to higher political offices and were selected to become managers based on this foresight. During this period fee collection rates dropped to 52% (NRECA, 2002).
Apart from illustrating the importance of the political independence of cooperatives and the NEA the historical experience of cooperatives in the Philippines has also demonstrated the importance of strong leadership within the cooperatives as well as the importance of the NEA to also fulfill the role of a supervisory body with regard to the cooperatives. Strong leadership has thereby played a prominent role due to 22 out of the 119 cooperatives in the Philippines that still remained functional despite thriving in an environment of political corruption which was largely attributed to the professionalism of their management personnel.
To remedy the worsening situation of cooperatives donors like the World Bank and USAID pushed for reforms of the NEA and the restoration of professionalism within the cooperatives which led to the restoration of the cooperative system as such as well as the renewed improvement of the performance of the cooperatives (NRECA, 2002). To avoid such pitfalls in the future the NEA also decided to increasingly provide trainings to board and staff members of the cooperatives emphasizing the “ethic of the public service” in order to counteract possible corruption within the cooperatives. In cases where this is suitable it integrates religious leaders into the trainings in order to re-enforce its message (Barnes, 2005).
Despite these improvements, however, many cooperatives still suffer from poor operational performance and a general lack of capital (IFC, 2009). With more than half of all cooperatives in the Philippines today experiencing financial difficulties this results in unstable electricity supply in many rural areas (ADB, 2009; IFC, 2009). Unlike in many other Asian countries cooperatives have also not been able to increase collection efficiency or reduce theft significantly and are lagging behind private companies which have also become engaged in the rural electrification business. Reasons for this are manifold and include, as mentioned, the absence of cooperative involvement in the tariff setting process as well as the general lack of funding available to both the NEA and rural electric cooperatives. An additional factor that also takes its toll on the performance of cooperatives is the general lack of ownership. While the physical assets installed by the NEA are transferred into the ownership of cooperatives once loans have been repaid cooperative members do not fully own their own cooperatives. This is due to a current policy which limits the amount of shares consumer members can hold in their own cooperatives turning cooperatives into a quasi-NEA owned entity and resulting in cooperatives working like public service entities rather than private businesses (ADB, 2009).
The numbers confirm these problems. Cooperatives in the Philippines accomplished the provision of electricity to an additional 4.5 million Filipinos within 35 years since their foundation (Barnes, 2005). While this is not a small number it only represents a tiny fraction of the over 100 million large Filipino population and is not comparable to results achieved in the US or Bangladesh.
India: Diverse approaches, diverse experiences
Differently to the Philippines rural electrification in India is carried out by a multitude of bodies including the state electricity board, privately owned utility companies, state owned utility companies as well as cooperatives. The cooperative model is not a universal model applied in the majority of rural areas in India but has only been adopted by some states. Due to the size of the country state authorities rather than the national government have assumed a prominent role in furthering the rural electrification effort and selecting to which institutions funding should be provided (USAID SARI, 2004). In most rural areas in which no cooperatives operate the public utilities engage in electrifying rural areas (REC, 2011).
Apart from only constituting one out of several actors to engage in rural electrification, however, the Indian model shares many commonalities with the Filipino model. The first pilot cooperatives in India were founded in the 1960’s and started operating in 1969. The financial means for the start-up were provided in the form of loans from the Rural Electrification Corporation (REC). Loans were generally given at low interest rates of 3% and long repayment periods of 25 years were agreed. This, however, changed over time and today the REC charges more than double the amount of interest, 7%, and repayment periods have been shortened to 10 years (USAID SARI, 2004).
Many of the cooperatives in India have not been able to pay these loans and have either faced complete bankruptcy or are showing signs of financial trouble. Out of the originally established and licensed 41 cooperatives only 33 are still in operation and many others have also encountered financial difficulties (Kalra et al., 2007). One reason is that, similar to the Philippines, cooperatives in India are entirely excluded from the setting of tariffs. In most states State Electricity Regulatory Commissions (SERCs) have been set up setting tariffs in accordance with the National Tariff Policy that argues that tariffs should be set based on economic principles (World Bank, 2010b). Mostly tariffs are not economically feasible and high enough to ensure that cooperatives remain financially viable (Kalra et al., 2007).
Financial difficulties are not the only problem some of the cooperatives face. Political interference is another factor that has impeded the success of cooperatives in some Indian states. Already the establishment of cooperatives is coined by top-down procedures rather than a bottom-up approach which is essential in ensuring community involvement and ownership, the core of the cooperative model (NRECA, 2002). Political influence is also present during the operation phase of the cooperative, e.g. by not cutting off consumers despite defaulting on payments in return for election favors. This factor contributed significantly to the unsuccessfulness of Cooperative Electric Societies in Madhya Pradesh (Ernst & Young, 2007).
Another problem with regard to rural electrification in India was the fact that in order for rural electrification to be successful, the areas in which the latter is implemented already need to be economically developed to a certain degree since there will otherwise be a lack in demand. In India, however, this logic was disregarded and many villages were electrified, yet, no one was connected to the grid in the end due to non-existing demand (Foley, 1992a).
Employing a bottom-up rather than a top-down approach could have prevented this failure since the bottom-up approach ensures the existence of demand by relying on the initiative of the community.
Yet, also in India the cooperative model has generated some success stories. The Anakapalle Rural Electric Society in Andha Pradesh is one widely cited example. It was founded in 1974 and took over distribution operations and maintenance from the state electricity board in 1976. Within 30 years after the start of its operations it had achieved 100% electrification in the areas for which it was responsible, was debt free and its operations were profitable (Kalra et al., 2007). One important reason for this was the great degree of community ownership which was promoted from the beginning onwards by requiring the cooperative to provide 30% of the initial costs for distribution assets (Karekezi et al., 2006). A supportive government framework including provision of sufficient loans by the government to acquire distribution assets and disciplined debt financing also contributed to this success. After the acquisition of existing assets from the state electricity board full ownership remained with the cooperatives (Kalra et al., 2007).
Other successful examples of Indian cooperatives include the Singur Haripal Rural Electric Cooperative Society and cooperatives in the state of Orissa (Ernst & Young, 2007; Harper, 2000).
| Institutional set-up |
Degree of autonomy of cooperatives |
Ownership of assets |
Technical Implementation |
Tariffs |
Financing |
Training | |
|---|---|---|---|---|---|---|---|
| United States |
• Establishment of REA as central lender • Cooperatives were set up by communities and emerged as main borrower • Board of the cooperative is democratically elected by consumer |
• Politically independent • Financial independence from government since formation of Rural Utilities Cooperative Finance Cooperation |
• REA provides expertise • Poorer members of the cooperatives undertake the physical construction of the distribution lines under the REA’s experts supervision |
• Tariffs set by board of directors of the cooperatives |
• Loans initially provided by REA • Loans to be repaid in 25 years • Almost no subsidies |
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| Bangladesh |
• Establishment of REB • Palli Bidyut Samities (PBS) established through cooperation of REB and community • Board is democratically elected by consumers • REB appoints managers |
• PBSs supposed to act as independent entities and are privately owned • Financially monitored and held accountable for actions by REB • Financially dependent on REB |
• Distribution assets initially owned by state-owned utilities • Ownership increasingly being transferred to cooperatives with great success |
• Implementation by state-owned utilities |
• Each PBS individually sets tariffs • Approval by REB |
• 30 years loans at 3% interest by REB • PBS have to cover O&M costs • REB monitors financial viability of PBS • Allow for the use of cross-subsidies |
• Initial training for potential future staff provided by REB |
| Nepal |
• Establishment of NEA • Cooperatives founded upon community initiative only • Board of the cooperative is democratically elected |
• Financial dependence on NEA • No direct political control seems to have been asserted on the cooperatives • Cooperatives have formed their own association (NACEUN) to advocate their policy interests on the national level |
• NEA owns distribution assets |
• After 20% contribution have been received NEA calls for tenders • Distribution assets installed by independent contractor |
• NEA establishes maximum tariff • Cooperatives set own tariff within limits of maximum tariff |
• Government finances 80% of costs of grid extension • Community has to finance remaining 20% • International donors often subsidize 20% share of communities |
• NEA provides trainings which are partly funded through donor assistance |
| Philippines |
• Establishment of NEA • NEA developed cooperative programme and funds cooperatives • Board of cooperatives is democratically elected • NEA appoints the managers of the cooperative |
• In the 1980’s political dependence and corruption within the NEA affected performance of cooperatives • Reforms led to increasing political independence • Today cooperatives are only financially dependent |
•Cooperatives own all assets • Lack of ownership of cooperatives |
• NEA built initial distribution grid |
• Tariffs set by Electri-fication Commission • No involvement of cooperatives |
•Cooperatives receive loans from NEA |
• NEA provides trainings |
| India |
• Cooperative model only applied in some Indian states • REC funds cooperatives |
• Cooperatives are founded employing a top-down approach • High degree of political dependence |
• Once loans have been repaid ownership of assets is transferred to cooperatives |
• Equipment installed by State Electricity Boards (state utilities) |
• State Electricity Regulatory Commission sets tariff •Cooperatives are entirely excluded from decision-making process |
• REC initially provided 25 years loans at 3% interest rate • Today 10 year loans at 7% interest rate |
Putting Cooperatives into Perspective: Advantages and Disadvantages of the Cooperative Approach
Key Messages
1. Cooperatives have proven to be very effective in extending the scope of electrification, improving efficiency and improving service quality for consumers.
2. The largest disadvantages that cooperatives face are their lack of revenue and their difficulty to remain autonomous.
| Advantages |
Disadvantages | |
|---|---|---|
| Scope of electrification |
• Often absence of motivated agents to engage in rural electrification since returns are low in rural areas Cooperatives provide a viable alternative since they are willing to contribute to projects improving local living conditions despite marginal revenues (NRECA, 2002) • Widen scope of electrification by providing an alternative institutional arrangement to engage in rural electrification for areas that might otherwise never be considered for electrification efforts (Foley, 1992b) |
|
| Efficiency |
• Progress on electrification is much faster due to the involvement of customers who are eager to be connected to the electricity grid (NRECA, 2002) • Most successful in improving distribution efficiency (mostly be preventing theft of electricity) (Cruickshank & Yadoo, 2010) |
|
| Costs and Financial Viability |
• Reduce costs and bureaucracy (Foley, 1992b) |
• Poor revenue and profitability indicators due to low consumer density and low average electricity use • Small businesses which have poor economies of scale • Financially tied to growth level and economic viability of their surroundings (NRECA, 2002) • Over-ambitious programs due to political pressure and poor financial control often result in financial difficulties, e.g. in the Philippines (Foley, 1992b) |
| Service Provision and Customer Relations |
• Service quality provided by cooperatives is often better than that of public utilities since management can more easily be held accountable and consumers are generally better informed about their rights (NRECA, 2002) |
• Fees collected for maintenance are often diverted to more pressing issues within the village if saved in village fund obstructs maintenance effort and thereby provision of services to consumer (Foley, 1992b) |
| Overall Economic Development |
• Keep money and jobs within the local community, thereby adding to overall economic progress • Empower the community leading them to get involved in other projects apart from energy as well (NRECA, 2002) |
|
| Other |
• Often are managed top-down and consumer participation is low leading to same problems that utilities face, e.g. corruption, low revenue collection, poor service quality (NRECA, 2002) • A large amount of factors need to be present simultaneously to ensure the success of cooperatives, e.g. a sufficient degree of autonomy and freedom from political interests, strong leadership |
Making Cooperatives Work: Lessons Learned from Successful Programs
Key Messages
1. Many preconditions have to be fulfilled simultaneously for cooperatives to be functional. These preconditions are partly relevant to all rural electrification programs in general and partly to the cooperative model in particular.
2. Precondition relate to the policy and economic level.
As the case studies have illustrated cooperatives can be a well-functioning and cost effective mechanism to drive rural electrification. Yet, countries in which less salient results have been achieved with the model, e.g. the Philippines or some states in India, have shown that many conditions have to be fulfilled simultaneously to ensure that the optimal results can be achieved when employing a cooperative model. Generally these conditions fall into two broad categories with one category outlining general economic and policy factors being essential to any rural electrification approach and the other describing factors particularly important to the cooperative approach. Among the factors indispensable to any successful rural electrification approach are:
• Policy Preconditions
• Institutional set-up
• Autonomy
• Financing: Subsidies and Tariffs.
Having leaders who are dedicated to the cause of rural electrification and can commit themselves to this cause on a long-term basis is an important policy precondition (Barnes, 2005). Considering that rural electrification is a long-lasting process institutions need to be ensured the appropriate policy and financial support in order to engage in it. One way of doing so is by establishing an institutional set-up in which one agency fully dedicates its financial and human resources to the cause of rural electrification. This agency also has to be able to act autonomously and politically independent (Foley, 1992b). In addition to that the agency also needs to provide sufficient financing as a start-up capital for cooperatives but should simultaneously ensure that subsidies are well-targeted. Tariffs are also important with regard to financing. In many countries, however, tariffs are set by institutions independent from the rural electrification process and orienting towards pleasing political constituencies making them far too low for cooperatives or utilities to cover their operating costs (AEI, 2009; Barnes & Foley, 2004). In order to avoid such problems institutions undertaking rural electrification should be involved in the setting of tariffs.
All of these conditions also need to be fulfilled when employing a cooperative approach. Additionally, institutional set-up and autonomy are two factors particular to the cooperative approach as well since not only the supporting agency needs to be ensured autonomy but also the cooperatives. This is especially important since in many countries cooperatives are often viewed as political stepping stones, using cooperative funds to finance political campaigns. Institutional set-up in this case refers to the set-up of the cooperative. It is essential for cooperatives to be based on democratic principles with members electing their boards democratically and being fully involved in decision-making processes (NRECA, 2002). Other success factors particular to a cooperative approach are:
• Local ownership
• Leadership
• Capacity Building.
Local ownership is an important characteristic of successful cooperatives on two levels. Members of the cooperative need to be involved in the cooperative on a financial level providing a certain percentage of initial investment as an incentive to ensure the functioning of the cooperative. Members also need to be involved in the daily routines and O&M of the cooperative to perceive as sense of ownership as the case of Burkina Faso has shown (Nygaard, 2009). In order to do capacity building is important since in many rural areas residents often do not possess the necessary skills to run a cooperative. As a result constant trainings need to be provided at the staff and management level (Abdallah, 2007). Increasing the professionalism of management through training also aids in ensuring that cooperatives are under strong leadership. As the case of the Philippines has shown strong leadership is of great importance and can secure the survival and thriving of cooperatives even in corrupt political environments (NRECA, 2002).
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