1. INTRODUCTION

What does poverty alleviation mean? This is a crucial question for all. In our view, it means the provision of resources for facilitating reasonable leaving conditions to those categorized as poor. Among many other linkages that are essential to poverty alleviation, energy is a crucial element. However, energy alone cannot bring about poverty alleviation and sustainable development.

While substantial efforts have been made worldwide to increase energy access for the poor, approximately two billion people worldwide still remain without access to affordable and reliable modern energy services. This has remained about the same in absolute numbers for the past 20-30 years. Most of these people live in rural areas which make the provision of energy services more challenging due to the nature and characteristics of rural energy needs and loads.

To substantially reduce the above number of un-served people with energy in the future, two key challenging issues must be addressed (i) how to find the best way for ranking rural energy access much higher in the list of priorities of most governments, and (ii) what the best policy and framework arrangements would be to substantially enhance the environment for increased financing of rural energy service delivery by encouraging the governments to be “brokers” and “leveragers”. While the answer to the first challenge is to find the way and consensus for making energy prominent in countries’ Poverty Reduction Strategies; the answer to the second challenge is the focus of this paper.

The objective of this paper is to bring to discussion our experience and opinions on a few alternative arrangements that have recently shown results in facilitating the environment for mobilizing private sector and consumer finance participation in the process of RESs delivery, while governments and donors are reassessing their roles toward becoming enablers and facilitators by leveraging RESs financing. This paper will illustrate the importance of rural energy for rural sustainable development, stressing the importance of dedicated policies and institutions for rural energy and rural electrification (RE), describing the traditional approach, and presenting innovative approaches to RE and RESs financing. Furthermore, it will logically tackle issues and present views on potential institutional arrangements, the “to be changed” role of subsidies, new role of various stakeholders, and a proposed integrated institutional approach for financing largescale rural electrification projects and programs. It will then be followed by examples, lessons learned, and the way forward to close the paper.

2. POLICIES AND INSTITUTIONS FOR SUSTAINABLE RURAL ENERGY SERVICES

Without modern energy services the existence of basic community services and infrastructures is questionable. Modern lighting and telecommunications, reliable health care, water supply and irrigation, and local manufacturing would all be curtailed. Investment and income generation activities would never increase at the expected levels and the poverty would never be eradicated.

2.1 Energy Alone Cannot Bring About Rural Development

Energy enhances the opportunities for learning, education, and access to information. It enables the use of tools and machinery needed to increase production. And, it facilitates the flow of essential services by removing the hardship of manual labor (especially freeing many hours every day to women and children), thus improving the quality of life in rural areas.

Energy alone is not enough. It is a tool in poverty alleviation, but by itself it cannot cause poverty alleviation. Without being coupled with other parallel infrastructures, energy supply becomes a luxury that poor people cannot afford. While we all accept that energy is a prerequisite to rural development, we recognize the need to utilize it in income generation activities first.

Economic and socially sustainable rural development must be supported by sustainable energy services. The following are the elements of sustainable energy: (i) everyone is entitled to some minimal modern energy access, (ii) economic pricing should underlie the long-term use of energy, (iii) energy production or use should be sustained by the ecosystem.

2.2 Policies to Increasing Access to Rural Energy Services

To expand access to energy services for people living in rural or remote areas, policies, institutions, and programs need to be developed and implemented. Some of the high priority actions include the following:

· Establishment of public institutions at the national and local levels – including regulations, taxation, incentive systems, legal frameworks and institutional mandates – dedicated to addressing and financing rural electrification and expanding rural energy services
· Energy services must be affordable and accessible to support rural development by increasing employment and income generation
· Expansion of electricity generation through centralized and decentralized systems using conventional or renewable energy based on the resources available locally
· Implementation of an integrated approach to the provision of rural services and “bundle” it with other rural infrastructure services – water, health, education, and etc.

Several governments in Africa and Asia are considering the need for establishing dedicated commercially-run institutions for planning and managing the rural electrification process. Various examples from Latin American countries and few from Asia have proven that these types of RE institutions are required in order for developing country governments to embark and implement large scale RE programs and leverage substantial amounts of money by donors, private sector, and rural consumers themselves. Exhibit I represents the proposed organizational structure for a rural electrification authority (REA), developed based on lessons learned and best practices worldwide.

3. FROM TRADITIONAL TOWARDS NEW APPROACHES TO SUSTAINABLE RURAL ENERGY FINANCING

Although there is no generally accepted and practical definition for sustainable rural development, there is a clear framework for assessing sustainability of finance. The framework encompasses income statements and balance sheets which show whether an energy service entity is likely to meet its operating costs and finance its investments within a financial structure which does not jeopardize its creditworthiness. These are then translated into various measures such as rate of return, debt-equity ratio, self-financing ratio, etc., which can be monitored to ensure the entity’s financial health. The bottom line of all these measures is that in the long-term, rural consumer prices should be sufficient to cover all of the capital and operating costs. The rest of the paper provides ‘food for thought’ to all of those who in some fashion are dealing with sustainable rural energy financing issues.

3.1 The Traditional Approach to RE Financing

Many real-life examples have proven that the above theory on the sustainable finance works out well for energy service delivery in urban areas in many countries. The problem arises in the case of rural areas where the poor (for many known reasons) simply cannot afford paying for energy at the same prices (and in many cases higher) as those in urban areas. In responding to this issue and trying to solve the above stated problem, governments and donors, during the past 30-40 years, have largely agreed and arranged for the financing of RES in the way shown in Exhibit II. This exhibit provides a general picture of the traditional approach used by governments and donors to finance RES and rural electrification (RE) projects and programs in the developing world. At first glance, we see that dedicated institutions for RES and RE financing that involve the private sector, consumers, and civil society – who in recent

Exhibit II: The Traditional Approach to RE Financing

years have become major players in the RE process – are missing. This RE financing process as proven to be unsustainable in many cases.

In the final analysis, this traditional approach has the following major implications:

* Donors and technology program financing have affected the rural energy market and discouraged other players * Governments have been paying large amounts of untargeted subsidies, which in many cases have compromised the sustainability * Governments have been heavily involved in project and program implementation with no or little commercial participation * Markets and market-driven approaches have been widely neglected – predominantly a top-down approach has been implemented, and * Economic feasibility has not been the focus.

In recent years, governments and donors have realized that the above approach cannot be sustained. They still face many challenges in the developing world, while the financial resources available cannot increase, as desired, and there are signs that they may even decrease. This new reality needs to be addressed with innovative visions and approaches.

In the following section, we will focus on innovative approaches for financing RE and RES on a macro level. This is because all micro-financing financing institutions, mechanisms, and interventions (that in recent years have been emerging successfully in the micro level) need to be part of an integrated policy and institutional arrangement that will provide for efficiency and effectiveness. This will result in the sustainability of RE process toward the final goal of establishing sustainable rural energy markets.

3.2 Towards New Approaches to Rural Energy Financing and Markets

Presently, we face the reality where power utilities (traditionally assigned by governments with a central role in delivering relatively massive rural energy and electrification programs – as shown in Exhibit II) in Southeast Asia are committed to undergo deep reform and restructuring. Most of them now operate under some form of government ownership, implementing week financial regimes. Their financial viability is the major reason behind their reform and commercialization. The goal of commercialization is moving towards financial sustainability by increasing power tariffs to levels that pay for covering operating and capital costs. Some of the countries in the region have a long way to go in that respect.

Under these circumstances of reform and commercialization, it is unlikely that national utilities would be willing to continue being involved in rural energy delivery or the electrification process. For this reason, politicians, governments, donors, private sector (technology producers and financiers), civil society institutions, and rural consumer themselves need to collaborate and identify innovative ways and means to finance massive energy service and electrification primarily in rural areas.

In recent years, we see that various forms of private participation in rural energy services delivery are flourishing in the developing world, (and some of them in the Southeast Asia region as well). These forms of private participation include (i) commercial finance – banks, (ii) commercial finance - rural saving & loans (S&L) cooperatives, (iii) rural energy investment funds, (iv) rural cooperative finance, (v) rural energy

Exhibit III: An Innovative Approach to Sustainable RE Financing

service company (RESCO), (vi) “sweat equity” participation,and (vii) suppliers credits.

In the sections above we tried to make the case on the needfor private and consumer participation in RE and the RES delivery and financing. And, governments and donors need to revise the traditional roles they have played in the RE process. While recognizing that a fully developed rural energy market is the goal and most desired option of offering RE and RES (which will take many years), we believe that transitory institutions and mechanisms need to be designed and implemented in the interim. In an attempt to keep the paper concise, we have developed Exhibit III, where roles, relationships, authorities, and responsibilities are assigned in the process of RE/RES financing, and implementation.

It has to be noted that a national rural electrification fund (NREF), run along commercial lines, is a crucial element of the whole scheme in Exhibit III, because it provides an attractive opportunity for leveraging government funding with private sector financing.

Box 1 shows Chile’s successful example of rural electrification, where the electrification fund has been used for subsidizing capital investment on a competitive basis. All RE stakeholders have played their roles and income generating activities have been the focus of the program, which has provided for the sustainability of the RE process in Chile.

Box 1: Chile Rural Electrification Program of 1994 Chile launched a new RE program in the mid 1990s. A Special Fund for rural electrification was established in 1994. The RE program was designed to be compatible with the government’s overall reform program for the electricity sector. The program was designed to reach 75% of the rural population by 2000. It was estimated that the central government would need to provide US $150 million in subsidies to allow for the electrification of about 110,000 dwellings. Subsidies were allocated competitively as one-time direct subsidy to provide distribution companies to cover capital costs of grid extension. The operating costs were to be covered by tariffs set by the regulatory authority. Competition, private investment, and decentralized decision making have been the drivers of this program. The use of a subsidy has made rural electrification an attractive business opportunity. Government share of investment in the program declined from 70% in 1992 to 61% in 1999. The program increased the coverage of electricity in rural areas from 53% in 1992 to 75% by 2000.

3.3 Public Private Partnerships – Why?

A Public Private Partnership (PPP) – a partnership between the public and private sector for the purpose of delivering rural energy services – represents a process of recognition that both the public sector and the private sector have certain advantages relative to the other in the provision of rural energy services in the most economically efficient manner by allowing each partner/sector to do what it does best. Private sector innovation and technological, financial, and management
expertise can be gained only through using a PPP approach to programs such as rural energy delivery, which traditionallyhas been within the sphere of local authorities.

While public actors (domestic) are needed to create the appropriate environment for action through policies and incentives, energy service delivery to the smaller, poorer rural consumer needs a host of private actors for: (i) innovation and efficient delivery (e.g. private companies, entrepreneurs), (ii) local institutional support (e.g. NGOs), (iii) flexible financing (e.g. private credit institutions, international financial institutions), and (iv) consolidation of lessons learned (e.g. NGOs, bilateral & multilateral organizations, research institutions) among others. Bilateral & multilateral organizations are crucial partners at the early stages, especially for mobilizing soft term finance, building human capacity through technology transfer and knowledge exchange, and
supporting interventions at the rural level. Exhibit IV summarizes the role of each partner in the PPP.

Opportunities for establishing new and sustained market oriented partnerships between the public and private sector for financing RES do exist. Civil society can also play catalyzing role in this process, both at the project and the program level. As shown in Exhibit IV, the identified types of civil society institutions should contribute to both sides of any successful public private partnership – cooperatives and trade unions need to buy in and be partners in the private sector family, while universities and local governments can play an important role as partners of the public sector.

The Global Village Energy Partnership (GVEP) represents the very last worldwide – partnership of partnerships program – agreement for collaboration between multilateral institutions, bilateral donors, non-governmental organizations and developing countries public institutions. The GVEP supports policy dialogue, capacity building, and financing mechanisms to expand access to energy services in rural areas, especially through support for the provision of electricity and cleaner fuels. We have begun work on this Presidential Initiative in Brazil, Mexico, Sri Lanka, and Zambia.

3.4 Rural Energy Market Realities

Two billion un-served customers represent a huge energy market worldwide.. The problem is that this market has the following disadvantageous characteristics: (i) it is dispersed, (ii) it is disadvantageously located – imposing difficulties to deal in it, and (iii) it has limited demand and income resources to make the market attractive. Because of these disadvantages, the private sector has been reluctant to enter this market.

Another reality is that many ‘best case’ programs and projects in rural energy services – worldwide, including the South Asia Region – have shown that people are willing to pay for energy. The poor spend up to 1/3 of their disposable cash income on poor quality lighting mostly. In many cases they have surprisingly proved their ability to pay for energy services and contribute their time and local resources when they are empowered to be part of the process.

As in all types of markets, ‘what the rural energy market wants’ is a critical element of its design. The characteristics of this market should drive its design process. Taking a bottom-up approach in the designing process will increase the potential for building a sustainable rural energy market for. Some of the critical design elements of this market are:

*	Energy service should be offered and provided first to income generation activities. It would be best to integrate it with other programs supporting rural agriculture and other production activities
*	The poor need, and can afford paying for predictable energy service, which will let them adjust the consumption pattern, both in terms of quantity and timing, when the energy service is available
*	Energy tariffs should be such that the poor can pay. Furthermore, the payment for energy should be scheduled flexibly allowing for matching them with their cash receipt cycles
*	Decentralization, empowerment, and rural consumer ownership will support efforts for expanding this type of market by mobilizing local and rural financial resources.

Although all the above elements are critical and need special attention, there exists another element without which rural energy markets cannot emerge. This is the issue of “subsidy”, a word that the world has been struggling with for quite some time.

3.5 Central Role of Subsidies

There is a wide consensus on the belief that subsidies are essential to expand rural energy services and rural electrification. The problem is to avoid life-time and untargeted subsidies by designing, developing, and implementing types of subsidy programs that do not compromise the long-term sustainability of RES and RE programs, which they are dedicated to. The use of “Smart” subsidies seems to be the solution to this problem. Some important elements for designing such subsidy programs are the following:

*	Design targeted subsidies to create intended markets, while achieving social goals and not distorting rural energy markets by providing for a more level paying field among all market actors
*	Encourage least-cost options by (i) introducing competition for subsidies, and (ii) providing for the implementation of ‘lighter’ and unconventional RE system design and construction
*	Provide best – most efficient, effective, and transparent – system for subsidy delivery
*	Build prior consensus and awareness – between politicians, consumers, and other stakeholders – on objectives, targets, and duration of subsidy programs

In summary, a good subsidy program should have clear target market, and support only upfront one-time capital costs (e.g. cost of connection). This type of subsidy, when designed and allocated appropriately, will, at least initially, bring the energy rates and prices to levels affordable by the rural poor.

Several positive examples of “Smart” subsidy schemes, such as subsidies for capital investment and performance-based subsidy schemes and programs, do exist in Southeast Asia Region. More are emerging and/or are under consideration by governments and international donor community. We have encountered them in various forms and models in Sri Lanka, India, Nepal, and Bangladesh. These schemes need to be enhanced and enlarged in order to support the achievement of each country’s goals in rural energy and rural electrification. Box 2 shows the example of Bangladesh’s performance-based
subsidy scheme for rural electric cooperatives.

Box 2: Performance-Based Subsidies Scheme in Bangladesh

Bangladesh is using cooperatives for rural electrification, based on the principles of the U.S. model. It pplies performance-based schemes for delivering subsidies. The cooperatives have to meet 21 specified targets. Payout of subsidies to the cooperatives depends on their achieving the annually negotiated targets, such as reducing system losses, increasing sales, meeting customer connection targets, improving collection rates, and repaying loans. Targets are also the basis for annual bonuses to cooperative management and staff. The cooperatives’ performance has been mixed. While some have been able to achieve most of the targets, others are suffering financial losses.

4. LESSONS LEARNED AND WAY FORWARD

There are many lessons learned in the area of sustainable RES and RE financing. What we believe is important to be noted are summarized as the following:

*	It is clear that governments and donors alone cannot raise enough funds to meet the challenges on RES and RE. Furthermore, power sectors are undergoing reform and restructuring towards commercialization and open markets; and, under these circumstances, the traditional approaches – engaging national power utilities in massive subsidized rural electrification processes – cannot be sustained in the future. Therefore, other players and stakeholders have to come on board with substantial financing for RE programs. These stakeholders include, at first, the private sector and rural consumers themselves.
*	The power sector restructuring and reform events and the challenging goals on rural energy and electrification set by the governments in Southeast Asia pose major implications requiring change in the philosophy, perception, conception, design, development, implementation, management and operation, and ownership of the whole RE process. New approaches should be implemented in addressing institutional and financing issues for RES and RE. The implementation of bottom up approaches and the inclusion of all stakeholders in the process of RE and RES financing and management is crucial to sustainability and poverty alleviation. RES institutions and funds at the national levels have proven to be effective instruments in delivering well coordinated and large scale electrification and energy service programs.
*	Various forms of partnerships for RE development and financing should be explored. All of them have to assign a specific role for civil society institutions. Partnerships roles and relations, as well as financing approaches to the RE and RES should be developed in an open and fair market environment for rural energy services. These markets should be designed based on their specific characteristics without being distorted by subsidies. Smart subsidy programs need to be designed appropriately in order to avoid negatively impacting rural energy markets.

Way forward – There are numerous areas that will have to be focused and improved upon, for the future, which include (i) broadening the range of energy delivery mechanisms and bring new players in the scene, (ii) ensuring that rural energy markets be open to competition and let the private sector and consumers to be the major players in it, (iii) ensuring that all grant, concession, and other subsidized interventions do not distort the emerging markets and maximize the benefits
of all types of subsidization, (iv) enhancing coordination among all RE stakeholders, including donors and direct their interventions towards market oriented forms of RES delivery, and (v) having governments play the leading role on facilitating the establishment of the right environment for RES and RE development.

BIBLIOGRAPHY

1	CORE International, Inc., (2003). “Issues and Option for Rural Electrification in SAPP Member Countries and Rural Electrification in Lesotho”
2	CORE International, Inc., (2003). “Assistance in Rural Electrification Planning to the Government of the Republic of Zambia”
3	CORE International, Inc., (2003). “Overall Action Plan for Rural Electrification in Lesotho”
4	Vinod K. Shrivastava, (2003). “Role of Micro-Financing in Promoting RETs in Rural Areas for Sustainable Development and Poverty Alleviation”
5	Tony del Rosario, Chairman, WEC, (2002). Alleviating Poverty by Sustaining Energy Development Accessibility Issues and Innovative Financing”
6	Roundtable Declaration – Brussels, Belgium, (2002). “UNDP Global Roundtable on Energy for Sustainable Development”
7	Ray Tomkins, (2002). Extending Rural Electrification – A survey of Innovative Schemes”