1. INTRODUCTION (PREVAILING SITUATION AND REALIZATION)

The pivotal role of energy in sustainable rural development is no longer an issue. Identifying and implementing countryby- country tailored ways and adequate mechanisms in financing sustainable rural energy services is an issue, h owever, that needs policy and institutional discussions among stakeholders in Southern African Development Community (SADC) Countries. The fact is that SADC country governments do not have enough budgetary resources to finance all the needs for rural energy services. On the other hand, it is unlikely that grant and/or concessional support from multilateral and bilateral donors for energizing rural areas will last forever. So, other ways of financing rural energy services delivery, such as the mobilization of private sector money, should be explore d and the environment for activating them should be enabled. The donors and recepient countries have been jointly focusing on Growth Poverty Reduction Strategies (GPRS). They have been trying to include the provision of increased and modern
energy services as a critical element for sustainabled evelopment. But, in several GPRS we don’t see a clear articulation of the role of increased rural energy services (RES) as a key component of the integrated rural development for poverty alleviation. Because of this, many developing countries are still missing comprehensive rural electrification policies, strategies, institutions, and appropriate and adequate financing mechanisms for RES. In filling this gap, a new and very comprehensive initiative was launched on August 31, 2002 at the World Summit on Sustainable Development (WSSD) in Johannesburg, South Afri c a . It is named the Global Village Energy Partnership (GVEP), and represents the newest global rural energy initiative. GVEP is intended to assist the developing countries through support in developing policies and action plans that involve and engage the whole spectrum of stakeholders in thedevelopment and provision of RES, as well as providing a comprehensive knowledge exchange environment for all of those with an interest and stake in this process. The Partnership will help achieve the internationally recognized Millennium Development Goals. Worldwide experience has, in ma ny cases, shown that open and fair markets are an efficient and effective way for mobilizing private resources and capital in any development endeavor. Although in principal this is applicable to rural markets, we have to carefully consider these market specifics. In the transitory period towards well developed private markets for rural energy services delivery, developing country governments need to seriously focus on leveraging more of their budget allocations for rural energy and rural electrification with multilateral and bilateral grant and concessional funds available for this purpose. In achieving this, these governments need to put in place comprehensive rural energy and electrification policies, enact an appropriate legal and regulatory framework, and establish dedicated institutions to manage and finance this process without distorting emerging rural energy service markets by implementing wrong subsidy mechanisms and programs.
These areas of RE policy focus are related in various ways to one focal and major RE institution, which is a dedicated fund for rural electrification. Thisistrue because:

(i) Most countries, before embarking on the RE process in a well-org anized and coordinated wa y, need a legal and regulatory basis in place, which designates institutions like rural energy authorities that manage REFs to finance and implement rural electrification programs,

(ii) Comprehensive REFs represent an objective and, to a great extent, an independent institution with the potential to ensure accountability and efficiency when designed and run along with commercial lines and principles, at arms length from unreasonable political influence,

(iii) All RE stakeholders have a vested interest in REFs (both in its capitalization and utilization), because it represents a major source of finance for RE programs, and

(iv) REFs represent the main channel for directing government and donor subsidies appropriately and adequately in a market-oriented environment.
It is important to add that 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 specific element of this is the criteria and process that is used for identifying and selecting projects for financing and implementation. Any proposed rural electrification project needs to undergo a technical and economic evaluation before a pproval. This imposes the need for establishing a transparent approach to the selection of projects that not only meet the overall Government policy objectives, but also ensures the success of the projects in terms of consumer satisfaction and
rural development for poverty alleviation. In other words, the social benefits of the projects should also be estimated in addition to the economic benefits.
Based on its long and extensive experience with rural energy and electrification issues in the developing world, CORE International has developed its own overall approach for this important area. Schematically this approach is summarized in the following Exhibit 1, which is designed and filled in such a way as to answer most of the questions and issues surrounding policy, funding, management, operation, and stakeholder p a rticipation in rural energy delivery, prima rily rural electrification.
In summa ry, we may conclude that the way a country establishes, manages, and mandates to operate its REF is of great importance and has a major impact on its success or failure . A poorly designed and institutionalized REF may result in low or no capitalization by donors and the private sector, which has major impacts on the level of rural electrification in the given developing country. Almost all RE programs are associated with Rural Electrification Funds (REFs) in one form or another. They are the basic instruments that governments use in implementing their RE plans and programs. Today it is clear that governments alone cannot provide all the funds required to achieve their objectives for RE, and so other resources need to be harnessed and mobilized. The potential sources of RE financing may be summarized as follows: (i) national funds for economic and/or rural development, (ii) government budget, (iii) national development banks, (iv) international development institutions such as the World Bank (WB) and African Development Bank (AfDB), (v) bilateral cooperation, (vi) levies charged on consumers that use electricity, (vii) foundations and priva t e business donations, (viii) private sector investors, (ix) consumers, and (x) special tax funds. Important key factors that should be explicitly addressed in the area of subsidy when designing

· Use Competition for Funds: Competition for subsidies can help minimize RE program costs and promote good customer service. This may be achieved by increasing the number of org anizations that could access the REF.

· Target subsidies: Where resources are limited, selective targeting of subsidies is always pre ferre d . By and larg e , the people who do not have electricity connections are the poor and indigenous communities. The subsidy, based on the average cost of connections, may allow for an a pparent average profit on each connection. Targeting subsidies to specific groups or locations, however, ma y complicate administration and planning. Initially, the
Government may try to targ et subsidies, attaching to the RE plans a list of communities and the expected number of connections in each community. Linking payment of the subsidy to a measure of service or connection would reduce the risk of poor service. It would also greatly increase the complexity and burden of monitoring. While connections are not a perfect measure, they do
have the benefit of being easily verifiable and are therefore useful.

· Provide Incentives to the Private Sector: Any 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 from the fund. For example, larger and more attractive subsidies may be provided to those providers that agree to connect more distant communities and especially poor sections of the rural population.

· Covering the Cost of Service: The regulator should ensure adequate level of competition for financing through the REF. Also, in the absence of a real market, the regulator should set prices that the consumers can be charged.
A primary conclusion of this section is that it is best when subsides are: (i) for capital investment, (i) targeted to those most in need, (iii) transparent, (iv) granted through competition among energy service providers, and (v) measurable in terms of what they are made against.

II. TIME TO ESTABLISH REFS IN THE SADC
A main objective of the energy sector policy in almost all SADC countries is to create an environmentally and financially sustainable energy sector that will provide cost-effective energy access to the entire population, thereby enabling poverty reduction and sustainable growth, and greater private sector participation. More over, further integration into the Southern African Power Pool (SAPP) is another region-wide policy objective which will increasingly contribute to more efficient use of the energy resources while increasing energy reliability and security in the whole region.
Access to modern rural energy services and affordability to ensure that poor and rural areas benefit from reforms are important elements of rural energy policy in the region. Governments aim at improving energy equity issues so that the populations that live in rural areas and below the poverty line will be able to have minimal access to modern energy sourc e s. The rural electrification can be undertaken by increasing grid connections for appropriately located villages and/or by developing primarily hydro energy systems minigrids where appropriate. Use of solar PV represents another viable option for individual households in various remote rural are a s. All these models and options need to be translated into programs and projects. And, programs and projects need not only to be designed and prepared, but also financed. The later can be facilitated only through appropriate institutions like REAs that manage REFs. Examples from Zambia and Lesotho indicate that the region is moving in this direction. While examples from South Africa show that local funds are operational in the Southern African Region. Box 1 summarizes such type of fund operating in South Africa.

III. CONCLUSIONS AND RECOMMENDATIONS
It is clear that rural electrification in ma ny Southern African countries is becoming a top priority for the governments. It

is a long-term process that requires not only a strong political commitment, but also very large amounts of funding, which governments are unlikely to be able to mobilize from their own budgets only. Based on the messages summarized and conclusions derived at the end of each section of this paper, we would like to make the following recommendations:

1. Based on our analysis and the best experience from other parts of the world, it is recommendable that the countries of South Asia should consider the establishment of dedicated REFs as an important policy issue for decision before designing and embarking on large RE program implementation.
2. In order to ensure success and sustainability in financing RE processes with REFs – ensuring REFs’ donor and private sector leveraging-they should be established as independent entities under government supervision, managed and operated along commercial lines, and provide for accountability and transparency.

3. The role of various stakeholders in the RE process financing is of critical importance. Stakeholder groups such as donors, private sector, and consumer associations will participate and leverage REFs established and seedmoney financed by governments only when they will see that their specific interests can be met in these REFs.Involving all these stakeholder groups from the early stages of REFs design and establishment 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 a ny RE program. The issue is what type of subsidy and how to deliver it. REFs represent an appropriate instrument for delivering subsidies without distorting the emerging rural energy service delivery markets. Furthermore, a clear and socially fair subsidy policy and
program is a precondition to sustainability, effectiveness, and efficiency. This subsidy policy and program should ensure that subsidies are delivered: (i) to initial capital investment alleviation, (i) to those most in need, (iii) transparently, (iv) through competition among energ y service providers, and (v) against measurable results.

REFERENCES
1. CORE International, Inc., (2003). “Issues and Option for Rural Electrification in SAPP Member Countries and Rural Electrification in Lesotho”
2. Vinod K. Shrivastava , (2004). “Innovative Approaches for Financing Rural Energy Services – An Overview”
3. NER Website, (2003). “Local Government Electrification
Fund in South Africa”