72607 April 2012 Note Number 42 Output-Based Aid in Bangladesh: Solar Home Systems for Rural Households | Geeta Kumar and Zubair Sadeque   A renewable energy program in Bangladesh that brings solar power to rural households is one of the most successful solar home system (SHS) programs in the world. It has demonstrated an inexpensive and reliable way to bring electricity to rural households. Several OBA features have contributed to the success. Notably, the subsidy payment makes the installation of a working solar home system afford- able to poorer households, and is combined with longer-term consumer credit. This note explores the distinctive features and results of the program and draws lessons for future projects. Less than half of Bangladesh’s population of 150.6 Photo courtesy of GPOBA million has access to grid electricity; in rural areas, where most people live, the percentage is even lower. Even those Association (IDA), its arm that serves low-income coun- with access to grid electricity suffer interruptions in sup- tries like Bangladesh. By early 2011, it had reached its ply because of serious power shortages. target to support 300,000 systems a year early. Additional The Government of Bangladesh (GoB) is making IDA financing of $172 million has been approved recent- efforts to increase electricity generation capacity and to ly, and will support the installation of another 630,000 improve the efficiency of the supply system. Reliance on systems by the end of 2012. The program aims to nearly grid electricity alone, however, will not allow the govern- double installations by 2014, for a total of 2.5 million SHS. ment to realize its vision of universal access to electricity Together with the World Bank, a variety of multi- by the year 2020. Furthermore, the dispersed nature of lateral financing institutions (MFIs) are supporting the rural settlements and the many rivers that crisscross the program. The World Bank, Asia Development Bank country make grid electrification in many areas difficult (ADB), the Islamic Development Bank (IDB), and other and expensive. In this context, the least-cost solution to partners are providing credit support. Meanwhile, the providing access to electricity to millions of people in ru- Global Partnership on Output-Based Aid (GPOBA),1 the ral Bangladesh is off-grid electrification based on renew- German development institution (GIZ), and the German able energy such as solar home systems (SHS). development bank (KfW) are providing output-based aid (OBA) subsidies to reduce the cost of SHS for consumers. Donor support for the output-based solar home system scheme Implementation arrangements For the past nine years, the World Bank-financed Rural The project is implemented by the Infrastructure Electrification and Renewable Energy Development Development Company Ltd. (IDCOL), which provides (RERED) project has used an output-based approach to loans to private sector companies to support infrastruc- increase electricity access in rural Bangladesh. Starting ture projects in Bangladesh. IDCOL is owned by the with an initial target of 50,000 systems, the program had Ministry of Finance and governed by an independent installed more than 1.2 million SHS by 2011, making it one of the most successful SHS programs in the world. Geeta Kumar is a consultant with the Global Partnership on Output- The World Bank scaled up its support for the pro- based Aid. Zubair Sadeque is an Energy Finance Specialist in the gram in 2009 through the International Development World Bank’s South Asia region, in the energy and mining sector. Supporting the delivery of basic services in developing countries Figure 1. The Output-based SHS Scheme 1. Households are required to make a down payment GPOBA World Bank equivalent to at least 10 percent of the system KfW ADB cost—net of subsidy. The remaining 90 percent is IDB financed by a loan at market rates, which they obtain GTZ through the POs. Other Other 2. On receipt of the down payment, the POs enter into a sale/lease agreement with a supplier. IDCOL must approve the provisions of the agreement and the 4 systems must meet the quality specifications IDCOL approved by IDCOL’s TSC. The POs receive three months' credit from the supplier and install the systems. 3 3. After installation, the PO applies to IDCOL to refinance the loan and grant. IDCOL inspectors inspect the households to verify that the system has been installed properly. IDCOL then provides a PO grant to the PO equal to the entire amount of the subsidy. IDCOL also refinances 60 percent to 70 Supplier percent of the loan amount. On receiving the funds 1 from IDCOL, the PO pays back the credit received System from the supplier. Household 2 installation 4. IDCOL then claims the funds used for financing from the World Bank, ADB, or IDB, and the grant from GPOBA, KfW, or GTZ. Cash/grant Credit board of directors drawn from the government and Verification: IDCOL must verify the claims of POs and the private sector. make payments within 21 days of the claim. IDCOL The project uses a dealer credit model. Customers has 100 technical inspectors. They check whether use donor-supported credit to purchase the SHS from the household is in an off-grid area, verify that POs Partner Organizations (POs). IDCOL selects POs based have used certified products, and ascertain whether an on clear eligibility criteria. All POs are private organiza- installation is consistent with technical requirements tions (mostly nongovernmental organizations, NGOs) and is fully operational. The subsidy and refinancing is with a strong base in microfinance, ranging from very not released until the PO fixes any problems. IDCOL small organizations operating in specific locales to maintains a call center to receive customer complaints. well-known renewable energy providers like Grameen Shakti. The POs obtain the SHS from equipment sup- Financing structure: The overall financing structure pliers, in compliance with the technical standards set by of the SHS scheme is shown in table 1, using a 50Wp an independent Technical Standards Committee (TSC) SHS for illustration.2 of IDCOL, which also reviews product credentials and approves/certifies eligible equipment. Results The four steps of the model are shown in figure 1. The SHS have greatly improved the quality of life for Targeting: The SHS scheme targets poor Bangladeshis rural households and productivity and profitability living in remote areas where grid electricity is not of local businesses (see box 1). SHS installations of expected to reach in the foreseeable future. The POs 500,000 per year currently far exceed those of grid offer a range of product sizes from 10 watts to 135 connections. The rapid growth of this demand-driven watts, so poorer customers can choose smaller sys- program demonstrates the high value that the house- tems that cost less. The project provides a fixed level holds place on getting off grid electricity services. of OBA subsidy (currently $28) for all sizes of SHS. Meanwhile, this off-grid option reduces pressure on Thus smaller systems, which are typically more af- government budget for grid expansion. fordable to the poorest, receive a higher percentage of The number of POs involved in the SHS program subsidies compared to larger systems (see table 1).The has grown from 5 to 29, and they compete vigorously subsidy is small compared to the subsidies for grid to provide attractive credit packages to consumers. The extensions and the SHS programs in other countries. POs conduct their own due diligence to extend loans To encourage a commercially oriented SHS market in to households. The implementation mechanism of the the country, the subsidy is being gradually reduced. IDCOL approach has proved sustainable. POs have an April 2012 Note Number 42 Table 1. Financing Structure of Different Sizes of Solar Home Systems (US dollars except where indicated) 20Wp 40Wp 50Wp 65Wp System cost Cost 175 317 396 486 OBA subsidy Fixed at $28 28 28 28 28 System cost net of grant Cost of system after capital buy-down using 147 289 368 458 GPOBA grant Household down payment 10 percent of system cost net of grant 15 29 37 46 Credit from PO The remaining system cost is financed by 40 78 99 124 microcredit: 20–30 percent by PO and 60–70 percent by IDCOL IDCOL refinancing 70 percent of microcredit financed by IDCOL is 93 182 232 289 provided by IDA Impact of OBA subsidy Percentage of system cost reduced by grant 16 9 7 6 average loan collection efficiency of about 96 percent, Box 1. Three Case Studies: How SHS while fully servicing their debts to IDCOL on time. Has Improved Quality of Life for Project Beneficiaries Lessons learned Mujib, a 32 year-old shopkeeper, has seen his • Overcoming the affordability barrier for households income increased by 1,000 Tk/month and his eve- ning business grow since his system was installed has resulted in widespread adoption of SHS. This two years ago. Customers enjoy the TV and the is addressed by a combination of the OBA subsidy music from the CD player powered by the SHS. Pre- and longer-term consumer credit from the POs/ viously, he used candles and kerosene for lighting. multilateral financing institutions. The price of kerosene kept rising, he suffered from • Fostering a sense of ownership by consumers has bouts of bronchitis because of the fumes, and sup- helped to ensure proper maintenance and upkeep of pliers would sometimes adulterate the kerosene with the SHS systems. Other approaches such as renting/ petrol. The SHS eliminated those problems for him. Since Hajra, a mother of four, received the SHS two leasing of SHS were tried but proved to be ineffective, years ago, she has been able to power five lights, a as the customers were not dedicated to the upkeep of TV, and a mobile phone charger. Previously, she used the SHS. POs provide free training to customers so kerosene, and still remembers the fumes that filled her they can carry out routine maintenance and repairs. house. Now her children can study in the evenings and • Long-term access to finance for POs and households: she can charge her mobile phone to keep in touch with The refinancing facility allows the POs to refinance3 her husband, a laborer in southwest Asia. 70 percent of the loans made to consumers from Mustafa, who owns a barber shop, used to borrow power from his neighbor’s side connec- IDCOL at a 6 percent interest rate, with a 10-year tion. He paid 200Tk/month but had no control over repayment period, including a grace period of 2 how much power he would receive, for how long, years (terms are tougher for larger POs). This refi- or when. The SHS, installed 13 months ago, has nancing mechanism provides POs with long-term changed his quality of life and his business for the access to finance and liquidity. It also allows POs to better. His hours are flexible, and he can close the provide loans with longer repayment terms of up to shop as late as 9 pm. three years (as opposed to the usual loans of up to six months from micro finance institutions), which IDCOL’s efforts to establish a market for SHS reduces consumers’ monthly payment for SHS and systems and support efforts to manage the quality of increases affordability. the growing program. • Sustained technical assistance: Successful off-grid • Leverage POs’ existing microfinance network and ex- electrification projects require substantial technical pertise: The program taps existing NGO/MFI opera- assistance, both for the transaction and supervi- tors in rural Bangladesh to operate as SHS vendors. sion. Technical assistance resources from various These NGO/micro finance institutions already have donors (including GEF and GPOBA) has aided credibility with the rural population, which increases customer readiness to try the SHS systems. Further, a way for the government to leverage the capacities the institutional set-up of the NGO/micro finance of the private sector and NGOs to deliver electricity institutions enables them to reach remote customers faster and reduce the huge burden on government in a cost-effective and efficient manner. The challenge resources on grid expansion. was to ensure that the NGOs could gain proficiency The greatest scale-up constraint remains afford- in the new SHS market. This was addressed by ability. Thus POs will need to be creative about how substantial technical assistance from donors to build to size and finance the systems. Efforts are underway, the capacity of POs with respect to SHS systems, and POs are targeting households demanding smaller and conduct business with equipment suppliers and systems. IDCOL also plans to test the feasibility of customers, particularly after-sales support. introducing low-cost mobile systems (such as solar • Effective implementing agency and client ownership: lanterns) for the poorest segment of the market. The implementing agency, IDCOL, has a strong With the rapid growth of the program, demand sense of dedication to and ownership in the pro- for verification resources is increasing. Technical gram, as well as a professional management with assistance funds from GPOBA (including recently strong oversight by a competent board. IDCOL approved IDA financing) are being used to increase introduced processes that assure customers of high the inspection, monitoring, and training required to quality products, provide recourse if they have prob- ensure the quality of the growing program. However, lems, and make sure problems are fixed quickly. the need remains for additional resources to continue • Shifting performance risk to POs and suppliers: The with the growth of this successful program. project design shifts most of the project risks to the POs and suppliers, which increases the sustain- References ability of the project and mitigates some of the governance and corruption risk. When a SHS does GPOBA (Global Partnership on Output-based Aid) – not perform properly, households can stop paying Project Commitment Document. their installments until the problem is resolved. IDCOL (Infrastructure Development Company Ltd.) IDCOL’s TSC certifies the products that can be – Project Operations Manual. used and suppliers of SHS equipment are required Ratnayake, Chris. 2005. “Bangladesh: Solar Home to provide a warranty to the POs, which extend Program on Credit Sales. A Case Study for the a similar warranty to customers (20 years for the Renewable Energy Project Toolkit for World Bank solar module, five years for the battery, and three Task Managers.� Washington: World Bank years for the charge controller and lamp circuit). World Bank, RERED (Rural Electrification and Re- During the warranty period, POs and suppliers are newable Energy Development) project. Additional responsible for replacing the defective equipment. financing project papers dated July 6, 2009 and August 28, 2011. Next steps 1 GPOBA funding was provided in two tranches: $7.2 million in For many rural residents, off-grid electrification must August 2010, and $6.75 million in May 2011. 2 At the exchange rate of 72 taka (Tk)/US$. be considered the sole option and not merely an 3 The cost of funds for the POs under the RERED project is com- interim solution until the grid arrives. It also offers parable with other sources of financing in Bangladesh. Thus, no significant market distortions are created. About OBApproaches OBApproaches is a forum for discussing and disseminat- case studies have been chosen and presented by the authors in ing recent experiences and innovations in supporting the agreement with the GPOBA management team and are not to delivery of basic services to the poor. The series focuses on be attributed to GPOBA’s donors, the World Bank, or any other the provision of water, energy, telecommunications, transport, affiliated organizations. Nor do any of the conclusions represent health, and education in developing countries, in particu- official policy of GPOBA, the World Bank, or the countries they lar through output- or performance-based approaches. The represent. To find out more, visit www.gpoba.org e Global e Partnership on Global Partnership Output-Based Aid on Output-Based Aid Supporting the delivery of basic services in developing countries