The
economic and social development of rural areas
with poverty alleviation as a cornerstone is
increasingly becoming a priority for many developing
countries. Rural development history, process,
and experiences have helped bring about a broad
consensus among national and international stakeholders
on the necessity of developing rural areas as
an integral part of the overall national development
process. Since the early 1990s’, developing
countries and the donor community began translating
this consensus into joint policies and programs
that focused on integrated rural development.
These joint policies have included the provision
of rural energy services as a critical element
for poverty alleviation.
The
pivotal role of energy in sustainable rural
development is now widely acknowledged and thus
is no longer an issue to be debated. However,
Identifying and implementing country specific
approach and mechanism in financing sustainable
rural energy services is an issue, needing policy
and institutional related discussions among
stakeholders. Developing country governments
often do not have enough resources to finance
their rural energy service needs. At the same
time, it is unlikely that grant and/or confessional
support from multilateral and bilateral donors
in electrification efforts will last forever;
such supports are in fact showing a decreasing
trend, of late. Alternative ways of financing
rural energy services delivery such as the mobilization
of private sector or local communities should
be explored and enabling environment created.
Experiences elsewhere have shown that creating
a transparent legal and regulatory environment
with level paying field can be an effective
way to mobilize private resources and capital
for rural energy service delivery.
In
order to develop private markets for rural energy
services delivery, developing country governments
need to seriously focus on leveraging their
resources with multilateral and bilateral sources
of funds. To achieve this, it is essential to
put in place comprehensive rural energy and
electrification policies, enact appropriate
legal and regulatory framework, and establish
a dedicated institution to manage and finance
RE activities in order to promote efficient
private sector-led rural electrification service
markets through the design of efficient subsidy
programs.
In Nepal, where more than 85% of the population
leaves in rural areas and the access to electricity
to the rural population being as low as 5%,
the foregoing observations are equally applicable.
Increasing the current low level of rural electricity
access is an immense challenge to His Majesty’s
Government of Nepal (HMGN). Various past national
plans have set targets to provide electricity
to the rural population. However the achievements
have been less than satisfactory. A number of
factors contributed to this situation—difficult
terrain, insufficient financing, lack of generation
capacity and so on, and above all lack of comprehensive
policy for rural electrification. These and
other issues are further discussed in the sections
to follow.
In
Nepal rural electrification to date is the domain
of the government, mostly financed through regular
budgetary appropriations, and/or through loans
and grants from bilateral and multilateral donors/financers.
Lately, with the level of external support decreasing,
the government is looking for other alternative
options to finance rural electrification programs.
In this backdrop, HMGN has come up with a policy
to involve the local communities and/or private
sector as a potent vehicle for expanding RE
activities. Recently, Nepal Electricity Authority
(NEA), a public electric utility, has brought
forth Community Electricity Distribution Bye
Laws to facilitate the community participation
in rural electrification. Under this new arrangement,
the financing is still an issue, although the
Government has announced in the current year’s
budget to provide 80% subsidy to support electric
cooperatives. In addition, the Hydropower Development
Policy 3058 (2001) has proposed to establish
a REF to accelerate RE on community-managed
basis.
The
purpose of this paper is to present a view on
major design elements in establishing rural
electrification funds as a vehicle for financing
rural energy services, primarily rural electricity
services. The paper focuses initially on policy
issues concerning the establishment of dedicated
REFs, followed by discussions on key elements
for designing appropriate institutional setup
for REF operations, role of donors and private
sector in REFs capitalization, as well as subsidies
and other related issues and options. The paper
then proceeds further with the case of Nepal,
which is planning on the implementation of a
large program for rural electrification through
private sector and/ or community-led initiatives.
| 2.
ESTABLISHING RURAL ELECTRIFICATION FUNDS
– POLICY ISSUES |
Electricity
is a critical input to almost all social and
income generation activities. This is true for
urban as well as rural areas. In the case of
rural area development efforts where poverty
alleviation through sustained economic growth
is a major challenge, provision of electricity
and other energy services becomes a top political,
economic, and social priority. As rural electrification
is a long-term undertaking that requires commitment
of significant financial resources over a sustained
period of time, it is important to have a comprehensive
RE policy in place before embarking on a large
RE program implementation. Ideally, such RE
policy should become an integral part of the
overall national energy sector policy and provide
for stakeholder-wide (donor community included)
agreed guidance and approaches in four major
areas:
(i)
Establishment of legal and regulatory framework
for rural energy provision and service delivery
(including rural electrification), so as to
create an enabling environment for the creation
of an efficient rural energy market,
(ii) Institutional arrangements
for RE policy implementation, including the
establishment of a dedicated REF to facilitate
fund raising and disbursement, and program implementation
supported by internationally accepted rules,
standards, and procedures that ensure accountability,
transparency and efficiency of the RE process,
(iii) Identification of the
role of various stakeholders, primarily, that
of the government, private sector including
technology providers, rural consumers and their
associations, as well as donors as to promote
viable rural energy markets, and
(iv) Subsidy design and delivery
— policy answers to questions as to who,
what for, why, how much, and for how long will
subsidy will be received, while ensuring equal
opportunity to environmentally friendly technologies
and their providers to compete in an open and
fair market environment. Geographic location
of the project area may also dictate subsidy
policy.
The
discussions above point to a need to establish
a pivotal institution for RE financing—
a dedicated fund to promote successful rural
electrification program. Such a fund is essential
because:
(i)
RE stakeholders having a vested interest in
REFs (both in its capitalization and utilization)
they may constitute a major source of finance
for RE programs, and
(ii) REFs can be an appropriate
institution for directing government and donor
funds in an efficient manner.
An
important policy message that comes out of the
above discussions is that the establishment
of REFs is a good option for the large RE program
implementation. Such funds should be based on
a comprehensive and widely accepted and agreed
upon RE policy. Furthermore, the policy should
be formulated in consultation with the major
RE stakeholders so that they can play a meaningful
role in the design and implementation of REF.
Additionally, successful REFs should be independent,
free of direct political influence, and be able
to operate along commercial lines.
| 3.
INSTITUTIONAL ARRANGEMENTS FOR REF MANAGEMENT
AND OPERATION |
There
is no single best model for establishing and
managing a rural electrification fund. However,
in countries with successful RE experience,
the entity responsible for implementing the
fund has a high degree of operating autonomy
and accountability.
REFs
are generally funded out of tax payers’
money, and are leveraged with funds from other
sources. The following are important issues
that need to be take in to consideration in
designing an REF management policies and operation
practices: [1]
*
REFs need to be adequately regulated in order
to provide the necessary legal basis for independence
and accountability according to the legal and
regulatory environment of each country.
* Government ministries in charge of energy
matters and, to some extent the existing Regulatory
Authorities, should assume a role and take greater
responsibility in terms of RE policy implementation,
REF Boards members’ appointment, and REF
management supervision.
* The REF Management Board should be well represented
to include representatives from all major RE
stakeholders, namely government, local consumer
associations, civil society, private sector,
regulator, local financial institutions, and
possibly major donor representatives.
* The Board of any REF should exercise supervisory
authorities and policy decision functions, and
leave the day-to-day management in the hands
of the REF Director/Manager.
* In order to ensure transparency, equality,
and accountability, as well as to be able to
attract donors’ support, REFs should be
managed and operated along commercial lines
with full transparency and accountability. This
does not, however, prevent the government from
exercising its legitimate role of policy making,
strategy development and supervision through
adequate participation in the Board.
* Rules and procedures for the management and
administration of the REFs should be based on
accepted international best practices. To achieve
this, the government may seek inputs from, donors
and consumer groups, and other private sector
financial instructions in the country. Such
an approach would help promote practical and
rational procedures for the design and implementation
of a sustainable REF.
Other key considerations that should guide the
establishment and operation of such funds are:
*
Funds should be free of political interference
and should be used only for the specific purpose
for which they are established. This can be
achieved by ensuring transparency and accountability
in the operation under the policy guidance of
the Board composed of public and private representatives.
* Governments should capitalize the fund adequately.
Sources of funds may include, among others (i)
privatization proceeds from the sale of shares
of national power utilities, (ii) government
bonds and budgets, (iii) multi- and bilateral
donor financing, (iv) commercial and private
sector financing (v) a part of the revenue proceeds
to the government from power sector licensing
and operation (vi) special tax funds, and so
on.
* It is generally advisable to keep the operational
management of the fund outside of public administration.
This is also necessary to ensure that commercial
practices are instituted in REF operations.
It
is understandable that the way a REF is designed,
established and managed may ultimately determine
its success or failure. A poorly designed REF
may result in low or no capitalization by donors
and private sector, with little impact on the
level of rural electrification.
| 4.
ROLE OF THE GOVERNMENT, DONORS AND THE PRIVATE
SECTOR IN REFS CAPITALIZATION |
Most
RE programs are associated with REFs in one
form or another. They are effective instruments
in implementing RE programs. As discussed earlier,
in developing countries governments alone cannot
provide for RE. So resources from other sources
also need to be mobilized.
Figure
1 shows an illustration of emerging trends in
RE financing through REFs, showing the relationship
of the REFs to the government, donors, national
power utility, and the private sector stakeholders.
[1]
The
ownership structure of an REF needs to be carefully
designed in order to maximize the utility of
the fund. While complete government ownership
of such funds may provide access to a variety
of sources of soft finance, in practice most
official sources of funds prefer not to see
full government ownership of the REF. Participation
of private parties in the REF’s ownership
enhances its credibility.
Joint
financing by public and private sector entities
represent an emerging trend because of better
sharing of risks, and better flexibility in
mobilizing soft debts and equity financing.
In identifying the sources of finance, it is
essential to focus on the following:
* Maintaining a flexible REF ownership structure
to integrate the interest of all major stakeholders
in the REF.
* Ensuring support of multilateral agencies,
and regional and local development banks to
the REF.
* Enlisting the support of bilateral donors
for technical assistance to maximize fund capitalization
from the equipment suppliers in that country.
* Contacting with equipment suppliers for their
ability to provide soft trade or export financing.
* Assessing the availability of other specialized
energy funds and explore the potential for capitalizing
on these funds.
Ownership
structure is extensively intertwined with the
design of the financing structure and the management
of the RE Fund, and should be continually adapted
to ever evolving situation throughout the life
of the fund.
Community
participation in REFs is desirable as it provides
an opportunity to include the ultimate end users
in the process. All too often the structure
of government funds does not involve community
representatives thus lacking credibility in
the eyes of the rural communities. Also, they
are unable to meet the community needs as lack
of participation by the community limits the
fund manager’s ability to assess the community
needs. The essence of participation of various
stakeholders in the RE financing process is
to enlist their support in establishing a REF.
Wider stakeholder participation may support
in leveraging the REF should they feel that
their specific interests could be met in the
process. More explicitly:
*
Donors are most likely to leverage the REF when
they see that it is well designed, managed,
and operated and are, to a large measure, in
compliance with their policy objectives, guidelines,
rules and procedures, and such rules and procedures
are transparent. To enlist the support of the
donors it is advisable to involve potential
donors from the early stages of REF design and
implementation.
* Private sector players are likely to participate
in the REF when they see that: (i) they can
have a voice in the REF’s decision-making
and management process, (ii) the REF is run
along commercial lines and far from direct political
interference, (iii) a reasonable potential for
profit exist, and (iv) sustainable rural energy
markets are likely to emerge and that the government
policy supports such markets.
* Local rural communities are likely to increase
their participation in the RE activity and may
eventually be willing to participate with larger
degree of cost-sharing when they are assured
of reasonable voice in the REF administration.
This entails wider consultation during REF establishment
phase with rural communities for their possible
participation in the management of REF. Such
an arrangement is likely to result in larger
number of rural households electrified in most
cost effective manner.
| 5.
GRANTING SUBSIDIES — ISSUES |
There
are many examples of successful programs of
rural electrification fund around the world.
All of them share one thing in common —
some form of subsidy. Regardless of the characteristics
of an REF and the type and nature of subsidy,
the success of any fund depends on how it is
administered. One important element for successful
administration of an REF is the establishment
of objective criteria and process to identify
and select projects for possible financing.
Such an approach will not only ensure transparency
in the selection process but ultimately help
ensure an effective project implementation.
Subsidies
for a RE project can be grouped into the following
(i) support by providing technical assistance
and capacity building to communities, NGOs,
and local private energy service providers,
and (ii) support to finance the high upfront
initial investment needs to build the electricity
system and to connect customers. Subsidies to
meet operating costs and/or in the form of electricity
price being below the true cost are generally
undesirable as they tend to compromise the long-term
financial sustainability of the operation. Further,
such a situation while promoting higher consumption
thus harming the environment, may also distort
the energy markets resulting in under investment
in the energy sector, eventually contributing
to the deterioration of the quality and the
reliability of supply. Ultimately, this can
undermine the overall economic health of a country.
Key
factors that should be explicitly addressed
concerning subsidy while designing REFs include
the following: [1]
* Competition in Use of Funds: Subsidies may
be competitively given to the private entrepreneurs
or community groups who offer to electrify an
area with the minimum amount of subsidy. Competition
for subsidies can help minimize RE program costs
and promote better customer satisfaction.
* Targeted subsidies: Where resources are limited,
selective targeting of subsidies is always preferable.
By and large, the people who can not afford
to have electricity connections are the poor
and indigenous communities. The subsidy based
on the average cost of connections while administratively
expeditious, will provide subsidy across the
board for all connections. Targeting subsidies
to specific groups or geographic locations,
on the other hand, may complicate administration
and planning. Initially, the Government may
try to target subsidies by specifying a list
of target communities and the expected number
of connections in each community to be electrified
under a particular RE project. Linking payment
of the subsidy to certain performance criteria
would afford objective verification of achievement
or lack of it. At the same time it would also
greatly increase the complexity and burden of
monitoring.
* Incentives to the Private Sector: Incentives
available to the private energy providers should
be clearly articulated and well publicized.
In addition, penalties for failing to complete
the program should be included in all contracts
awarded under the fund. For example, larger
and more attractive subsidies may be provided
to those providers who agree to connect more
distant communities and those from the poorer
sections of the rural population.
* Recovery of Cost of Service: While the regulator
should ensure adequate level of competition
for financing through the REF, it should at
the same time ensure that the service providers
are able to recover the costs and some reasonable
amount of profit/surplus.
In
summary, the most desirable situation is when
subsides are: (i) for financing capital investment,
(i) targeted to those most in need, (iii) transparent,
(iv) granted through competition among energy
service providers, and (v) measurable in terms
performance targets.
| 6.
HMGN’S PLANS AND PROGRAMS FOR RURAL
ELECTRIFICATION |
Rural
electrification has figured prominently in Nepal’s
national development planning since the mid-1970s.
In the Fifth and Sixth National Development
Plans (1975-1980 and 1980-1985), rural
electrification was recognized as a tool to
contribute to the development of rural industry
and agriculture. The Seventh Plan (1985-1990)
dealt more extensively with rural electrification,
and set goals for both small hydro and grid
extension to “develop and expand agriculture
development and cottage and small scale industries.”
Under the Eighth Plan (1992-1997) rural electrification
was to be carried out through the extension
of the national grid as far as practical. The
Ninth Plan (1997-2002) also emphasized the need
to continue rural electrification “as
a driving wheel of rural development.”
Significantly, the Ninth Plan focused on poverty
as its number one priority.
The
Tenth Plan (2003-2008) is even more firmly focused
on reducing poverty and improving the rural
economy. Its target is to reduce poverty to
30 percent of the population. The target set
for access to electricity is also 30 percent.
In
2001, a new Hydropower Policy had also highlighted
rural electrification, specifically calling
for the creation of a central rural electrification
fund to support development of rural electric
supply. This idea is incorporated into the Tenth
Plan (2003-2008), which makes rural electrification
one of HMGN’s highest development priorities.
The Tenth Plan specifically calls for creation
of a central entity with the mandate of developing
rural electricity supply.
Since
electricity services in urban areas are relatively
adequate, but lacking in rural areas, during
the Tenth Plan emphasis will be given to rural
electrification. Ninety-five percent of the
sector’s budget for distribution is to
be used for rural electrification.
During
the period of the Tenth Plan, from 2003-2008,
more than 17,000 kilometers of transmission
and distribution lines are to be added. These
will bring the national grid to an additional
1,050 Village Development Committees, encompassing
some 705,600 people.
Implementing
such general plans, however, has proven difficult
in the past. It is widely perceived that a clear
and consistent strategy for developing rural
energy is lacking. While there are obvious complementarities
between rural energy development and the development
of agriculture and forestry sectors, and each
of these sectors relates to national programs
for poverty alleviation as well as for decentralization
and village development services, there has
been little coordination of effort across sectors.
Rural electrification and alternative energy
development projects have been administered
by numerous government and donor-funded programs.
There is no one organization that oversees and
coordinates efforts to develop the sector.
The
NEA currently has a mandate for developing rural
electric supply via extension of the national
grid. But off-grid microhydro and solar photovoltaic
projects are channeled through the Alternative
Energy Promotion Center (AEPC), which was established
in 1996 under the Ministry of Science and Technology.
Various donor-funded programs are implemented
either through these channels or independently
by the donor organizations themselves. [5]
| 7.
CHALLENGES TO RURAL ELECTRIFICATION IN NEPAL |
The
need to extend the benefits of electric power
beyond the 5 percent of rural Nepalese who resently
have access to it is clear enough. But there
are also obvious challenges to providing electric
power nationwide in Nepal. Of the total land
areas more than a third consists of steep foothills,
and another third is rugged mountain terrain.
These hills and mountains, together with monsoon
rains give Nepal some of the greatest hydroelectric
potential in the world. But the slopes also
isolate communities and make any kind of transportation
– especially roads and railways –
difficult and expensive.
Rural
electrification in Nepal, just as elsewhere
in the world, has expanded outward from the
centers of demand and supply. This has worked
well enough for the Kathmandu Valley and much
of the lowland Terai. But for most of the country
the mountainous terrain and remoteness of prime
sites for largescale hydroelectric power generation
are formidable physical constraints to developing
an integrated grid system.
The
socio-economic barriers are also formidable.
Terrain, distance, and isolation make the costs
of normal grid connection prohibitively expensive.
Where line extensions are installed in rural
areas, they are characterized by poor reliability
and low per customer utilization. Demand per
household is likely to be very modest –
a few light bulbs and perhaps a television or
other appliance. At the same time, NEA is expected
to perform as a private utility, leading eventually
to full privatization. For NEA and for most
private power companies, efforts to electrify
remote rural areas are costly distractions from
their efforts at efficiency and profitability.
[5]
| 8.
TIME TO ESTABLISH A COMPREHENSIVE REF IN
NEPAL |
The
major challenge facing Nepal in promoting rural
access to energy service is to overcome the
above barriers. To this end the government through
policy initiatives has advanced the concept
of partnership with the local people in promoting
rural energy delivery. It is expected that this
initiative will promote access to affordable
electricity to the rural consumers. Given the
energy resource endowment profile of Nepal,
renewable energy resources (primarily hydro
and solar) seems the most feasible solution
to meet energy needs in remote rural areas in
Nepal.
The
type of terrain and accessibility determine
the settlement density and hence the demand
for energy services. Thus, given Nepal’s
difficult terrain with varied settlement density—highest
in the Southern plain decreasing as we go north—there
is no single technology that would suit all
the rural settings and applications, and hence
the demand characteristics. In the plains and
the mid-hills where the population settlement
is relatively high and opportunity for economic
activity is good and the national grids are
in place, grid-based electrification is most
suited. In the hilly areas
where the settlement is not dense, mini-grid
may be the most suited option. Similarly, in
the high mountains were the settlement is sparse,
off-grid technology such as microhydro and PV
solar are most appropriate options. Accordingly,
the degree of subsidy may also vary—highest
in the high mountains, with little or none in
the plains— so will the type of rural
electrification delivery institutions. While
electric utility, private electric service company
or community groups may be best suited for RE
in areas where electric grids exist, in mid-hills
mini-grids may be operated by a
Community or private providers. Similarly, in
the high mountains the institutional option
may be community or individual households depending
upon micro-hydro or PV option. Accordingly,
the level of subsidy to be provided to those
areas will also vary.
A
number of Government documents have noted the
need the need to establish rural electrification
fund in Nepal. Notable of which is the Hydropower
Development Policy 2058. Further Community Electric
Distribution Bye Law 2060 also mentions about
crating Community Rural Electrification Fund
to cater to the expansion of the distribution
system within a Distribution Institution. The
Bye Laws allows for any community groups or
private companies to apply for setting up distribution
institution to provide electricity service.
One element which is conspicuous by its absence
is the criteria against which the schemes with
be judged as being viable to qualify for subsidy.
One effective way may be to base the project
approval process on economic criteria, or award
the fund on competitive basis to those providers
who offer to electrify a certain area with least
amount of subsidy. Further in the current fiscal
year, the Government has announced that it will
provide a subsidy up to 80% for community groups
to construct RE systems. In the absence of an
objective framework to base the screening of
distribution institutions’ proposals for
financial support, the ward process my become
adhoc with potential for being ineffective.
Currently,
NEA is undergoing through a phase of reform
to commercialize its operations. Consequently,
it may not be possible for NEA to continue in
future with rural electrification without being
in a position to recover the full cost. Under
these circumstances, the formation of a separate
Rural Electrification Authority (REA) to implement
RE and especially an independent National Rural
Electrification Fund (NREF) to provide funding
support covering grid as well as off-grid RE
options has emerged as necessity.
The
proposed institutions such as REA and NREF together
will be responsible for rural electrification
planning, financing and providing technical
support to all RE stakeholders, community groups
or private service providers. The task of managing
rural electrification process can be entrusted
to these institutions and their branches at
the district and municipal levels, with the
bulk power supply coming from the NEA or IPPs.
However, with 95% of the rural population yet
to be electrified this task cannot be accomplished
without the government, donor, and the private
sector support.
There
are various institutional models for providing
sustainable rural energy services to rural areas.
A typical approach suitable for Nepal is illustrated
in Figure 2. The recently implemented NEA “Community
Electricity Distribution Bye Laws 2060”
[2] in principle allows for the implementation
of this generic model.
In
summary, we conclude that it is time for the
HMGN to consider the establishing a national
REF in Nepal along the line of the best practices
discussed in the previous sections of this paper,
in order to accelerate the rural electrification
plans as envisaged in the various national plan
documents.
| 9.
CONCLUSIONS AND RECOMMENDATIONS |
RE
is a long-term process requiring not only a
strong political commitment, but also very large
amounts of funding, which governments alone
are unlikely to be able to mobilize from their
own resources. Based on the conclusions drawn
at the end of each section of this paper, we
would like to conclude as follows:
1.
Based on our analysis and experiences from other
parts of the world a dedicated REF should be
an essential element to accelerate RE efforts.
2. In order to ensure success
and sustainability in financing of RE activities
by REFs they should be established as independent
entities under government supervision,managed
and operated along commercial lines. Also, to
ensure leveraging of the fund by donors and
private sector, full accountability in the operation
and transparency in rules and regulations is
essential. Consumers Service Provider
3. The role of various stakeholders
in the RE financing is of critical importance.
Stakeholder groups such as donors, private sector,
and consumer associations can potentially leverage
government financed REFs only when they see
that their specific interests can be met by
these REFs. Involving all these stakeholder
groups from the early stage of REFs design is
the best way to ensure their commitment and
participation in the REFs.
4. It is clear that some form
of subsidy will be required in any RE program.
The issue is what type of subsidy and how to
deliver it. REFs should design an appropriate
mechanism for delivering subsidies without distorting
the rural energy service delivery market. Furthermore,
a transparent and socially equitable subsidy
policy and program are a precondition to ensuring
sustainability, effectiveness, and efficiency.
Such a subsidy policy and program should ensure
that subsidies are delivered (i) to meet part
of initial capital investment, (ii) to those
most in need, in a most transparent manner through
competition among energy service providers,
and against measurable performance targets.
5. Nepal is getting ready to
embark in a wide-scale RE program. In the medium
term, HMGN needs to consider establishment of
a REA and probably of a dedicated REF for rural
electrification for cover both the grid- based
as well a the off-grid options. HMGN should
consider involving the donor community, private
sector, and consumer associations in designing
and establishing these institutions.
1. CORE International, Inc.,
(2003). “Issues and Option for Rural Electrification
in SAPP Member Countries and Rural Electrification
in Lesotho”
2. Nepal Electricity Authority
(2060). “Community Electricity Distribution
Bye Laws”
3. The World Bank, (April 25,
2003). “Project Appraisal Document –
Nepal Power Development Project”
4. His Majesty’s Government
of Nepal, Ministry of Water Resources (2001)
“Hydropower Development Policy 2058 (2001)”.
5. Nexant Inc. and Core International
(2003), “Energy for All of Nepal: A Strategy
for Accelerating the Development of Nepal’s
Rural Energy Services”
6. Nepal Electricity Authority,
FY 2002/03—A Year in Review
