pproaches 39609 M a r c h 2 0 0 7 N o t e N u m b e r 1 4 OBA in Senegal ­ Designing Technology-Neutral Concessions for Rural Electrification by Christophe de Gouvello and Geeta Kumar S enegal has sustained historically high GDP To support private participation, the government growth of 5 percent a year, and real GDP per undertook comprehensive power sector reform in capita growth of 2.5 percent a year, since 1994. 1997. It broke the nationwide monopoly of Senelec Yet the country faces big economic and social challeng- (Société Nationale d'Electricité du Sénégal), allowing es. The economic growth over the past decade has had private producers to generate and distribute electricity only a small impact on poverty reduction, especially in rural areas not served by the national utility. It also in rural areas. In 2001 an estimated 57 percent of the established an independent regulatory authority, CRSE national--and 65.2 percent of the rural--population (Commission de Regulation du Secteur Electricité), was considered to be below the poverty line.1 and an autonomous agency with sole responsibility for Nationwide, only 30 percent of households in Sene- managing rural electrification programs, ASER (Agence gal have access to electricity. Rural electrification is even Sénégalaise d'Electrification Rurale). Under this new lower at 12.5 percent of households, and limited to ar- regulatory regime CRSE sets maximum tariffs for rural eas around large population centers and some tertiary areas, and ASER develops minimum service standards. centers. Once connected, most rural households would New rural electrification strategy likely be willing and able to pay for their electricity use: most already spend $2­24 per month on kerosene and The traditional approach to rural electrification in dry cell batteries to meet their lighting and small power Africa, including Senegal, has entailed public utilities needs. But the up-front investment and connection preparing technical feasibility studies for conventional costs are out of reach for the typical household. grid extension for a preset number of connections and then procuring equipment and works. Customers are The government has made rural electrification a required to pay both high connection fees and internal priority, recognizing its importance in reducing poverty installation costs. This approach has often failed be- and redressing development imbalances. Early efforts cause of public utilities' inadequate financial capacity achieved limited results. A new program that combines and potential customers' limited ability to pay. output-based aid (OBA) subsidies with technology- neutral competitive bidding is seen as more promising. In 2003, assisted by the World Bank, the govern- This program has the potential to align private incen- ment adopted the Rural Electrification Priority Pro- tives with public sector objectives of maximizing the gram (PPER) to address the challenges posed by the number of rural households served under a sustainable traditional approach. PPER combines privately operat- commercial scheme. ed concessions with output-based subsidies to leverage private financial resources and overcome the barrier of Public-private partnership high up-front connection costs, while ensuring quality Seeking to bridge the rural-urban energy divide, the connections. government launched pilot projects in the 1990s to develop decentralized, renewable energy systems. 1 Despite some positive results, these limited pilots Senegal, Ministry of the Economy and Finance, "Poverty were not scaled up. The country lacked the legal and Reduction Strategy Paper: Second Annual Progress Report" (Dakar, 2006). institutional setup for large-scale rural electrification programs. And with public resources in short supply, the government concluded that private participation Christophe de Gouvello is a senior energy specialist with the World Bank. Geeta Kumar works for the Global Partnership would be key. on Output-Based Aid. Supporting the delivery of basic services in developing countries pproaches Under PPER, the country is divided into 18 rural Figure 1. Monthly substitutable energy expenditures in electrification concessions.2 These concessions are de- rural Senegal (2002) signed to be compact and yet large enough to attract large private players. Each concession has a potential of at least 30,000 connections--the estimated number of non-electrified rural households. The concession agreement gives the concessionaire the right to gener- ate and distribute electricity throughout the conces- sion area for 25 years. This right is exclusive when the concessionaire chooses grid extension technology, but not otherwise. In addition to the 18 primary concessions, the program includes multisector energy projects (Pro- grammes Energétiques Multisectoriels, or PREM) aimed at improving small business productivity and social service delivery. These PREMs link PPER with other sector programs whose results have been limited Note: Based on survey results for 860 households in the Dagana-Podor, due to lack of access to electricity. Mbour, and Kolda-Velingara concession areas. Source: World Bank 2004. Tariff Regime CRSE introduced a new tariff schedule for the conces- sions based on a "fee for service"3 approach that incor- There is therefore a need for subsidies. OBA-type capi- porates a prefinancing mechanism aimed at easing the tal subsidies offer an effective way to connect house- burden of connection and installation costs and ensur- holds that otherwise would not be.4 ing consistency with rural households' ability to pay. To avoid the high up-front capital financing require- Based on a detailed demand analysis (figure 1), CRSE ment that private operators would not be willing to defined four levels of electricity service and correspond- accept without a much larger subsidy, the program will ing flat-fee monthly tariffs for three of them (table 1). disburse the OBA subsidy in tranches as the service Besides the tariff, the monthly customer bill includes a provider reaches milestones (table 2). To ensure com- "payment facility" for spreading out the capital costs pletion of the project, the program will pay the final 40 of connection, internal wiring, and efficient fluorescent percent of the subsidy only after the connections--in- lamps--making these far more affordable for even the cluding internal installations--are made. If the service poorest. provider should fail to meet the targets set out in the The model business plan developed for the conces- contract after 36 months, the final tranche will be sions shows that customers' monthly payments will reduced accordingly. In addition, the service provider is cover not only the costs of operation and maintenance, required to submit a performance guarantee that will service delivery, and system replacement, but also at be forfeited if it fails to meet its obligations. least 20 percent of initial investment costs. The conces- The OBA subsidy is targeted at all households sion agreement therefore requires the concessionaire to in the concession area since two thirds of the rural contribute the commensurate initial investment costs as would be recovered through the tariff. This financial commitment will ensure service delivery throughout the term of the concession because the concessionaire 2In addition, some small-scale, village-based electrification earns a return on its investment only through custom- projects will be implemented in parallel. This second track, ers' monthly payments over the concession period. called ERIL, gives dynamic, fast-developing communities reluctant to wait for the PPER a faster route to electrification. The OBA subsidy design 3"Fee for service" is the traditional utility approach to Although the payment facility included in the tariff providing service whereby customers pay against the delivery covers some of the connection costs, operators cannot of a service rather than to acquire equipment. 4The 18 rural concessions are output based, but other recover their full investment through tariffs over time. components of the program, ERIL and PREM, are not. Supporting the delivery of basic services in developing countries pproaches Table 1. Tariffs set by CRSE for Dagana-Podor concession Flat-fee clients Non-flat-fee clients Service level Service 1 Service 2 Service 3 Service 4 Power available, or P (watts) P 50 50 < P 90 90 < P 180 P > 180 Maximum tariff (US$) Per month 3.90 7.20 13.50 n.a. Per kilowatt-hour n.a. n.a. n.a. 0.20 Maximum payment facility (US$/month) 3.10 3.90 6.20 8.00 n.a. Not applicable. population is considered below the absolute pov- tion among technical options. However, to level the erty threshold of 2,400 calories per adult equivalent playing field for renewable technologies, the govern- (per day). Further, to ensure electrification of more ment is using a grant from the Global Environment remote households, which are typically the poorest, Facility (GEF) to subsidize these technologies. the concessionaire is required to make a minimum number of connections beyond 20 kilometers from Funding sources the grid. The total estimated cost of Senegal's PPER is $300 million. The World Bank, through the International The bidding process Development Association (IDA), will provide support Chosen through two-stage international competitive through a $100 million Adaptable Program Credit to bidding, the winning bidder for each concession will be distributed in three phases spanning 12 years. be the firm offering to provide the most connections in IDA Phase I will finance three concessions--Da- the first three years given the predetermined subsidy. gana-Podor, Mbour, and Kolda-Velingara--along with This criterion for awarding the concessions maximizes a few PREMs. This phase also focuses on institutional private investment and efficiency. Bidders are motivat- strengthening, capacity building, and technical assis- ed to both increase their contribution and seek lower tance for the institutions involved in rural electrifica- unit costs so as to serve more customers--because tion--ASER, CRSE, and the Ministry of Energy. IDA more customers mean greater returns. phases II and III will finance six more concessions. Winning bidders are free to choose any technology Out of the total Phase I cost of $50 million, IDA will to achieve the quantitative goals they propose in their contribute $29.9 million ($15 million as subsidy), while bids. This technology neutrality allows bidders to fully GEF will give a $5 million grant ($3 million as subsidy). exploit any comparative advantage they may have in a The government is required to contribute counterpart particular technology and thus ensures fair competi- funds for Phase I estimated at $10.3 million. Table 2. Schedule for disbursing the subsidy Milestone Share of subsidy to be paid (percent) A commercial bank certifies that the capital has been deposited in full and against the 30 provision of a bank guarantee covering the same amount. The guarantee will be released only when 50% of households are electrified. An independent body certifies the integrity of the equipment and its conformance 30a with specifications. The rural electrification agency (ASER) verifies the number of customers connected and 40b certifies that minimum technical standards as stipulated in the contract have been met. a.To be paid progressively upon verification that corresponding share of villages have been connected. b.Adjusted to percentage of contractual targets achieved. Source: World Bank 2004. Supporting the delivery of basic services in developing countries pproaches For the IDA-funded concessions, a rural electrifica- expected and could lower the incremental GEF subsidy tion fund has been established to channel the subsidies to only $1.03 per watt peak.5 These results show that from the donors and the national budget. The fund's combining technology neutral competitive bidding management is hosted in ASER and overseen by an with OBA can leverage significant private resources and independent board. potentially deliver far better results than the traditional Results so far and next steps approach to rural electrification. PPER has also generated significant donor interest. The bidding process for the first concession, Dagana- The African Development Bank (AfDB) and the Ger- Podor, was launched in early June 2006 by ASER. man Development Bank (KfW) have committed 14 mil- IDA will provide a $5.58 million subsidy, including lion euros and 6 million euros respectively, to finance $350,000 for PREMs, and GEF will provide a $1.1 mil- two additional concessions each. lion subsidy. The tender generated substantial interest. Eight firms (four local and four international) applied Senegal's PPER aims to improve access to electric- for prequalification on their own or as part of a consor- ity in rural areas from the 2003 level of 12.5 percent tium, resulting in four formal applications. Two of the of households to 62 percent by 2022. It is too early four applications were prequalified and final bids were to know how far PPER will go towards achieving this received from both--(i) Office National de l'Electricité ambitious goal. But results so far have been very prom- or ONE (Morocco) and (ii) the consortium of Electrici- ising: the first concession could increase access to elec- té de France (France) and Total Energie Développement tricity from around 4 percent of rural households in the (France), and CSI-Matforce (Senegal). ONE made the concession area to around 40 percent in three years. winning bid with 21,800 connections. Contract negoti- References ations between ONE and ASER are currently underway World Bank. 2004. "Project Appraisal Document for and are expected to be completed soon. Electricity Services for Rural Areas Project, First The winning bidder has proposed to more than Phase of the Electricity Services for Rural Areas Pro- double the minimum number of connections set in gram, in the Republic of Senegal." Report 29769- the tender--from 8,500 to 21,800. To achieve this, the SN. Washington, D.C. winner is bringing in $9.6 million in private financing, which constitutes about 60 percent of the total financ- ing. This is far larger than the 20 percent minimum private financing requirement under the tender. The 5The following subsidy ceilings were applied for renewables: average cost for a connection is estimated at $725, and $2.60 per watt peak for photovoltaic, $0.65 per watt for the average subsidy at around $286. Around a fourth micro-hydro and biomass, and $1.30 per watt for windmills. of all connections are expected to be made through Watt peak is the direct current (DC) watt output of a solar individual photovoltaic systems which is far more than module as measured by an industry standard light test. About OBApproaches OBApproaches is a forum for discussing and dis- The case studies have been chosen and presented seminating recent experiences and innovations by the authors in agreement with the GPOBA for supporting the delivery of basic services to the management team, and are not to be attributed to poor. The series will focus on the provision of water, GPOBA's donors, the World Bank or any other af- energy, telecommunications, transport, health and filiated organizations. Nor do any of the conclusions education in developing countries, in particular represent official policy of the GPOBA, World Bank, through output, or performance,-based approaches. or the countries they represent. To find out more, visit www.gpoba.org The Global Partnership on Output-Based Aid Supporting the delivery of basic services in developing countries