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close this bookRural Energy and Development: Improving Energy Supply for Two Billion People (WB, 1996, 132 p.)
close this folderChapter seven - The role of the world bank group
View the document(introduction...)
View the documentPolicies and operations since the 1970s
View the documentRural electrification
View the documentThe sustainable in a production and use of wood-fuels
View the documentRenewable energy
View the documentProject innovations and advisory services
View the documentThe way forward: a renewed commitment by the world bank group
View the documentBroadening the scope of energy sector reform
View the documentInvestments
View the documentOpportunities for partnerships

Rural electrification

The World Bank's 1975 policy paper set the stage for Bank involvement in financing rural electrification projects. The paper reviewed the developing countries experiences with rural electrification in the 1960s and examined the costs and benefits of such investments. The paper's main findings and recommendations were as follows:

· Economically justifiable investments in rural electrification could be found in large regions of the developing world. The situation varied from one province to another depending on the enabling conditions for development - in particular' for the growth of agriculture. rural businesses, and rural incomes - and on load density. Load densities were greatest in villages and rural towns. which often also had significant demands for electricity from small enterprises. Investments would thus need to be selective. favoring areas where prospective uses of electricity justified expenditures.

· The Bank should base its investments on the rate-of-return criterion. The initial fixed costs of extending service were high' although average costs declined steeply in areas with good load growth. All the significant benefits of electrification were directly related to the uses to which it was put and to the costs of alternative sources of power and energy. Thus Bank staff considered the economic rate of return to investment to be an appropriate criterion for investment. It would encourage cost-effectiveness and help focus investments in areas where they would be most likely to be beneficial. In other areas. Bank staff often found that the alternatives were cheaper and had higher returns than grid extension. At that time the main alternative for motive power individual supplies, or to support microgrids was diesel engines. which are still commonly used.

· Cost recovery over the long term should be encouraged. Specifically. prices should be such that over some twenty to thirty years the present value of expected revenues equals the present value of the expected costs of service, less a small provision for lifeline rates if desired. The latter would take the form of a low kilowatt-hour charge for low levels of consumption A cost-recovery policy of this kind would increase the rate at which service could be expanded: it would help finance the high initial fixed costs of extending service and the costs of new connections. without undetermining the utility's financial position.

Figure 7.1 World Bank Commitments for Rural Electrification, 1976-95

These findings and recommendations are still valid, and are a good basis for future projects and policies. but need to be expanded given the advent of new technologies and institutional reforms in the electric power sector.

Lending Activities. From 1975 to 1984 the Bank lent a total of US$ 1.4 billion for rural electrification, but the level of activity dipped substantially in the mid- to late 1980s before picking up again in the 1990s (figure 7.1!. Overall lending since 1980 has amounted to about US$2.7 billion for thirty eight projects in twenty-two countries. More than 75 percent of this lending went to Asia. about 13 percent to Latin America, and less than 3 percent to Sub-Saharan Africa. In Sub-Saharan Africa the Bank has not lent for standable rural electrification projects since 1980. although it has supported several projects that have extended grid supplies to regional cities and towns in agricultural provinces-for example, the northern grid extension project in Ghana. In addition, a number of electrification projects had rural electrification components.

The dip in lending for rural electrification in the mid- 1980s was probably caused by the sharp deterioration in the finances of - and in the quality of service provided by - the electricity industry in numerous countries during this period. As a consequence, the Bank's attention turned to restoring price and managerial efficiency to put the industry on a commercial footing Since the publication of the Bank's policy papers on power sector reform and energy efficiency (World Bank 1993 a.b). it now views measures to promote private investment and finance and less intrusive forms of regulation as central to achieving a financially sound and more efficient industry, and the indications are that progress is being made in the areas of financial and institutional reform. (See box 4.5 for a summary of the general directions of the policies supported by the Bank and comments on progress.) The large increases in lending in 1990 and 1995 reflect more than $900 million of lending to rural electrification projects in Indonesia. The scene is therefore set for a renewed effort by the Bank to support its member countries' efforts to extend electricity to the huge numbers of people without service.

Evaluations of Experience. The Bank's experience with rural electrification is inseparably linked to that of the forty or so countries in which it has financed projects, and many other countries in which it has provided policy advice and finance for electrification programs more generally. As this experience was reviewed at length in chapters 3 and 4, a brief summary will suffice here.

First, on the positive side, rural electrification is an economically important area of investment capable of generating good economic rates of return. (In Asia. ten out of eleven Bank-financed rural electrification projects recently evaluated have had a satisfactory rating according to the audits of the Operations Evaluation Department.) With the huge populations still without service and with economic growth, further major investments, amounting to perhaps about 10 percent of total investment in electricity supply. will be needed for the next several decades. Grid extension is expensive, however. and needs good load densities and load growth to justify the investment, as the 1975 policy paper had argued. The best investment opportunities continue to be in villages and towns, which can be centers of new business opportunities. in-migration, and non-farm employment (and thus of load growth) as agricultural provinces develop. Where load densities are low, alternatives such as diesel generators and small-scale supplies from renewable energy sources were shown to be more cost-effective.

But experience has also shown that grid extension can have poor economic and financial returns, and this has happened in some Bank projects. The obvious case is when supplies are extended to areas at much expense when load densities are low. there are few demands from agriculture and agro-industries, and household use is minimal and the alternatives would have been better. Yet even where demands are high. in theory sufficient to justify the investments from an economic point of view. poor returns have sometimes resulted in practice for reasons that are now all too familiar: poor pricing and financial policies that undermined the quality of service and wasted energy and capital. The review of experience has not unearthed any evidence of a need for massive subsidies for rural electrification except. perhaps, for the very low levels of subsidy in support of lifeline rates for low levels of household consumption. As the various evaluations reported in chapters 3 and 4 have found. subsidies have widely proved to be counterproductive and to undermine the utilities' financial position and their ability to extend service.

By strengthening the finances and managerial position of the industry, the reforms now taking place to put it on a more commercial tooting provide a new opportunity for electricity services to be more widely and efficiently provided. They will, however. need to be complemented by some form of public leadership The uptake by the private sector in electricity distribution. where privatization has been taking place in developing countries, has so far been quite limited. and there has been a natural (and understandable) tendency for private investors to concentrate on investments in generation and in the more lucrative. higher growth, and higher-income end of urban markets. Thus policymakets and regulators will have to be vigilant on the matter of service extension if programs of sector reform and privatization are not to be undetermined by a discontented public lacking service. Options for policy (noted in chapter 4) include tax incentives. perhaps coupled with a regulatory requirement for distribution franchises to extend service: continued public involvement in distribution. but on commercial principles; joint public private ventures; electricity cooperatives: and the encouragement of the development of micro-grids

Two recent reviews by the Bank's Operations Evaluation Department (OED) (World Bank 1994b, 1995a) have also contained findings pertinent to this paper, one on lending for electric power in Sub-Saharan Africa and the other on rural electrification in Asia.

Only 2 percent of the components of the projects reviewed in Africa dealt with rural electrification directly, even though about 90 percent of Africa's rural population lacks access to electricity The QED's recommendations included (a! increasing the focus on decentralized. community-based power supply options; (b) placing greater reliance on private investment and management (c) instituting a vigorous push for sector reform; and (d) placing more emphasis on renewable energy

As noted. the review of experience in Asia found that nine of the ten projects had performed satisfactorily: however. only tour had achieved economic rates of return in excess of l(i) percent. and none were financially self-sufficient having depended on cross subsidies from general tariffs. In some countries, even where the investments were economically justified, the utility's poor financial performance had often been further undetermined by rural electrification subsidies. which ultimately undermined the electrification programs themselves. The disparities between the economic and financial returns were due to deficient pricing policies: none of the countries had adopted cost reflecting pricing policies for rural service

The review concluded that rural electrification projects can, and often did, have significant economic benefits. Its summary of the conditions uncle' which investments were likely to succeed echoed those of the Bank's 1975 policy paper. Among other things. it emphasized cost recovery in tariff policies and the need to pay greater attention to the economic rate of return when selecting investments. The most successful projects in Asia took into account the great variations in economic conditions and growth rates among rural areas (World Bank 1994b) and maximized benefits by selecting subprojects where a high rate of demand growth could be expected and the net economic returns would be the highest In general, these were in regions where the "productivity of agriculture was rising and supporting service industries are growing. ' On commenting on the report, the Bank Board's Joint Audit Committee further emphasized the need for having more local participation and for ensuring access for low-income consumes.

Thus the OED studies arrived at conclusions fully consistent with those of many others involved with rural electrification over the past twenty-five years, as reviewed in chapters 4 and 5. Once again, they emphasized the need for financial sustainability and cost-effectiveness and the need to recognize that alternative sources of energy and power are often available when loads are small.