rural electrification in ldcs as a tool for economic development: facts and fiction

Rural electrification in LDCs as a tool for economic

development: facts and fiction

Gunter Schramm

OVER THE LAST FEW decades, the power sector in most developing countries (LDCs) has been expanding rapidly, and practically all major cities and towns now have access to some form of electricity service. This is not true for rural areas, however, particularly in the lower-income countries (including India and China) where some 60-85 per cent of the population live. Potential access (but not neces- sarily actual connections) range from as low as six to, at most, some 20 per cent in LDCs that have active rural electrification (RE) programmes (table 1). In some others, particularly in Sub-Saharan Africa, it can be as low as two per cent. Rates of access are higher only in some of the middle-income, developing nations, or M1Cs (e.g. Thailand, Philippines, Syria and Tunisia). Rural electrification is high on the political agenda of most of these countries, and the pressure on aid and lending agencies to support such programmes is great.

Historically, the two largest outside supporters of RE programmes have been the World Bank (WB) and USAID. During the 1970s and 1980s. these two agencies lent or granted US $1.9 billion for 40 RE projects in 20 countries, accounting

The author is Adviser, Industry and Energy Development, at the World Bank, Washington DC, US. He wishes to thank Melody Mason (who headed the WB-USAID Review), Dennis Anderson, Douglas Barnes, E. Biermann. Trevor Byer, Anthony Churchill, Luis Gutierrez, Winston Hay, T h a n Herberg, David Jhirad, John Besant-Jones. Richard Jones, Krister Lonngren, Uwl Ohls, Loretta Schager, Witold Teplitz-Sembitzky, Jamil Sopher and other colleagues in the World Bank, as well as an anonymous reviewer of this journal, for their many helpful comments and suggestions. An earlier version of this paper was presented at the 30th Annual Meeting of the Western Regional Science Association, Monterey, Califor- nia, on 24-28 February 1991.

Winter 1993 0277-0180(94)E0007-J 50 1

Table 1 Population served by electricity

Year of survey

(i) Countries included in survey India - Bangladesh 1980 Thailand 198 1 Philippines 1976 Indonesia 1988 Malaysia 1980 Pakistan 1988 Egypt 1980 Yemen PDR 1978 Yemen YAR 1986 Syria 1985 Morocco 1978 Tunisia 1982 Jordan 1985 Colombia 1979 Atlantic Coast Region 1979

Brazil 1981 Minas Gerais State - ParanA State -

Bolivia 1981 Guatemala - Ivory Coast 1981

9% of urban population served by electricitp

- 19 77 32 54 85 72 65 45 86

100 60 94

100 84 74 98 - - 72

93 -

(ii) Other countries, not included in survey Turkey 1981 97 Argentina 1981 96 Chile 1981 ' 99 Costa Rica 198 1 90 Ecuador 1980 79

Central America - - Most African countries - -

Year of survey

1981 1986 1984 1987 1988 1983 1986 1980 1978 1986 1985 1978 1982 1985 1979 1979 198 1 1981 1981 1981 1976 1981

1981 1981 1981 1986 1980

1986 1985

9% of rural population served by electricity0

17h 6

40 52 1 5c 72d 22 23 6 6

76 6

25 85 13 6

19 10 17 9

10 20

50 5

42 73 13

15e 0-5

a. Sources: World Bank and USND appraisai and other reports, unless indicated otherwise. For countries included in the survey, figures mostly refer to population connected, but some figures could indicate either population connected or access to supply.

b. Based on a survey of 132 villages in four states. C. Includes villages connected by private operators. d. Source: ADB. e. Source: NRECA.

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for some 16 per cent of the actual total expenditure of $11.5 bn for these projects. Other external support came from the Asian Development Bank (ADB), the Inter- American Development Bank (IDB), the African Development Bank (AfDB) and a variety of bilateral agencies. Lending for RE decreased during the second half of the 198Os, because many LDCs were forced to cut overall expenditure for power for budgetary reasons and because of increasing doubts on the part of lending agencies that RE was either economically sound or pkticularly beneficial for the rural populations it was designed to help.

More recently, several international lending agencies, upon urgent requests from their clients, have again become involved in financing RE (with, among others, WB projects in Morocco, Pakistan, the Philippines, Indonesia and India). However, because of the lingering doubts about the economic soundness of such projects, the WE3 and USAID jointly undertook a review of some 40 previous RE projects, 26 of them WB and 14 USAID-financed, that were approved during the 1970s and 1980s. This internal review assessed past experiences and identified key issues for the success or failure of future RE projects.

This paper summarizes the findings of this review. It draws conclusions, based on these findings, but also on those of other studies undertaken by multi- lateral aid agencies, such as the Bank’s 1975 Policy Paper on Rural Electrification,I a 198 1 analysis of the IDB of 19 of its RE projects2 and a 1984 ADB survey of its RE programmes in Asia and the Pa~ i f i c .~ The paper also draws on the findings of a number of studies undertaken by others4 Finally, some ideas are developed of potentially more appropriate and economically justifiable approaches to the problem of providing rural energy services, in contrast to those that are based largely on some form of network electricity supplies.

A listing of, the most often stated objectives of RE programmes In practically all cases, the overall goal of RE is to bring about increased

economic development and higher incomes to the people living in the regions to be electrified. The general expectation is that electrification, by itself, will be a power- ful catalyst (or even the most important single catalyst) to bring about the projected growth and change. However, beyond this general expectation, it turns out that the more detailed goals and objectives as stated are frequently vague, and, as it turns out, unrealistic. Those most often stated are the following.

1. To act as catalyst for agricultural, industrial and commercial development of rural areas, including electricity for irrigation pumps.

2. To replace more costly energy sources, such as kerosene for lighting, diesel for individual motors, irrigation pumps and generators.

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3. To improve the quality of life through such means as improved quality of light and use of domestic electrical appliances (such as irons), resulting in time savings, particularly for women.

4. To improve the standard of living of the ntral poor.

5. To stem migration from rural to urban areas.

6. To improve security, political stability and/or correct regional imbal- ances.

..

7. To redress urban/rural bias.

8. To reduce deforestation by replacing firewood or charcoal.

Within this welter of objectives, it is always claimed ex ante, i.e. at project appraisal, that the economic rate of return of the proposed project would be strongly positive, with rates usually well in excess of the opportunity cost of capital. This, at least, is true for all of the reviewed projects that received World Bank financing.

Overall findings of the review Unfortunately, as it turned out, in the majority of cases, the various projec-

tions of beneficial results were far too optimistic and, in addition, often based on faulty methodologies. As a result, even the far more modest net benefits identified ex post, compared with ex ante expectations, were subject to doubt and, in several important cases, strongly negative.

However, the findings of the review (as well as those of most of the other reports cited) have to remain somewhat tentative because of the generally inadequate preparation of RE projects, lack of data and lack of proper monitoring. One major problem encountered was that most utilities do not keep separate accounts for rural and urban consumers. Therefore, since the design of these programmes was based on incomplete data, their impact on economic and social develop- ments in their respective rural areas is difficult to determine with any degree of precision. Nevertheless, there is enough evidence to reach the following, broad conclusions:

(i) Electrification by itself has not been a catalyst to economic development. In fact, what can be deduced from a comparison of the more with the less successful RE schemes is that electrification should follow, rather than attempt to lead, regional economic development.

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The impact of RE on agricultural growth is often overestimated, as it was, for example, in Thailand, Indonesia, India and Bolivia.

There is little evidence that electricity by itself will result in new agro- industries, commercial or small-scale industrial activities.

The provision of network electricity is by far the most costly form of energy supply for low-density, low-demand rural areas, compared with other options. If its real costs were charged to users, it would be unaf- fordable for most of them, unless they already had a reasonable and growing income base of their own. From that, it can be concluded that a decomposition of rural energy demands into their sub-components may we11 show that a mixture of other supply options (including a judicious, small amount of electricity from decentralized sources for highly specific and limited uses) might be far more cost-effective than RE in regions that are at a low stage of development.

RE in general does not contribute to the alleviation of poverty. It benefits mainly the higher-income groups, although in some cases lower- income groups have benefited through the simultaneous introduction of irrigation and similar income-generating measures. However, in many cases, this increased income of the rural poor was brought about only at very high cost to the rest of the economy.

Electricity does replace more costly energy sources in some cases; however, this is only so because in almost all cases electricity is heavily subsidized, while the alternatives generally are not. One result of this subsidi- zation is that observed demand growth is more rapid than it would be otherwise, making RE projects in physical terms (i.e. number of connections) appear relatively more successful than they would be without subsidies.

The large subsidies for RE in most countries impose a heavy financial burden on the utilities (or their other customers through cross-subsidies), even in those cases in which projects are justified economically. RE tariffs rarely cover more than 15-30 per cent of estimated costs of supply.

(viii) Real costs of electricity supplied through RE projects are very high, averaging around 20 cents (US) per kilowatt hour, in addition, in most cases, these costs are still underestimated because of the low RE load

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factors, large distribution losses and the additional burden imposed during peak demand periods which, in supply-constrained systems such as in India or Pakistan, contribute heavily to power rationing and outages. Such outage costs to other users are close to $l/kWh or more, in many cases.

(ix) RE improves the perceived quality of life for those able to afford it.

(x) There is no impact of RE on stemming migration from rural to urban areas; indeed, the opposite could well be true, largely because the increased access to information points to greater opportunities elsewhere.

(xi) The impact of RE on improving security, stability and urbadrural bias is difficult to measure and therefore inconclusive.

(xii) RE does not contribute to the conservation of fuelwood because electricity is rarely used for cooking or heating; where it is (by a few higher- income households), its use would probably be substantially reduced if tariffs were adjusted to cover the actual costs of electricity supply.

Economic analysis of RE projects Since few, if any of the claimed, non-economic benefits of RE appear to be

real, it must be concluded that the main criterion for judging the desirability of an RE investment is the economic rate of return (ERR); most of the other alleged beneficial effects must be either disregarded or viewed with great scepticism.

Concentrating on the economic benefits of the WB and USAID projects reviewed, the majority of them were projected at appraisal to yield an average ERR of 14.5 per cent (with a range of 4-30 per cent). However, of the 11 projects for which ex posr calculations of rates of return could be found, only one had achieved a higher rate. All others had lower ones, with three of them negative, and those with positive ones averaging ten per cent. However, there is doubt about the validity of some of these ex post audits. For two major projects in Asia, for example, the audits claimed an ERR of ten per cent; closer inspection showed, however, that the real rates were strongly negative, so that the final, internal audit report had to conclude: "This re-evaluation: (a) concludes rural electrification as currently practiced ... to be unsustainable and a financial and economic burden; and (b) highlights the potential for improving its economic viability and reducing its financial burden on the state electricity boards with load management, realistic pricing and electricity conservation in agricultural pumping, the main load of rural electrification schemes . . ."5

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The results of the audit reviews are suspect for a number of reasons. They are suspect, because, in the majority of cases:

(i) Network supply costs to RE schemes were generally based on system- wide average, long-run marginal costs (LRMC), which were calculated on the basis of annual system load factors that, in most cases, were in excess of 60 per cent; RE projects, by contrast, have load factors of less than ten per cent to, at the most, 25 per cent, thereby imposing high, additional peak-load costs on generation and transmission facilities that are not accounted for.

(ii) RE’S peak-load demand profile contributed directly to the high costs of system outages and power rationing in supply-constrained systems (e.g. Pakistan6 and India’).

(iii) High distribution losses of RE sub-systems, often in excess of 20 per cent, were usually not accounted for.

(iv) There was confusion between financial and economic costs.

(v) Benefits were frequently double-counted.

(vi) Future demand, particularly for commercial and industrial use, was overestimated.

(vii) The life expectancy of RE systems was overestimated because of poor performance and inappropriate operating and maintenance practices.*

The economic cost of rural electrification Most RE projects were designed to connect rural areas to a central grid and

therefore included only the capital costs of the distribution system. Among the projects reviewed, only two included some transmission costs, and two others the costs of diesel generators for areas not connected to the grid. The average cost per connection (1987 prices) was $750, varying from an estimated $200-220 for two projects in the Philippines (which had a large urban share) and Bangladesh (which apparently was underestimated), to $2,300 in PDR Yemen.

However, cost per connection, while often used, is not a good comparator of projects costs because of the different mix of customers who are being served (e.g. households, irrigation pumps and industries). A better measure is the average in- cremental economic cost (.AIC) per k W h of sales, because it takes into account the time-value of costs and consumption over the life of the project. Average distribution capital costs for all projects amounted to 9g/kWh, ranging from a low of less than

Winter 1993 507

3!t/kWh to over 25$/kWh. The lower costs were generally the result of high load densities (or a large share of urban connections) and a high proportion of consumption for productive use. Capital costs were highest in the Middle Eastern and North African countries, largely because of their scattered populations.

Total costs, which include capital costs of distribution, the long-run marginal cost (LRMC) of energy supplied and operating and maintenance costs, amounted to an average of 2O$/kWh, ranging from a low of 8.4$/kWh to 35$/kWh. It should be noted, however, that in most cases the LRMC of energy supplied was underestimated because it did not take into account low load factors or high losses (see dis- cussion above).

Operating performance Inadequate operation and maintenance, overloaded lines and transformers,

poor line connections, cracked insulators, theft, meter tampering and poor billing procedures have resulted in the sub-standard performance of the majority of projects. One of the results was that technical and non-technical losses were high. In all but two projects, total losses ranged from 15 per cent to more than 25 per cent, instead of the 10-13 per cent forecast at appraisal.

Financial performance Most RE projects operated at a financial loss. Generally the distribution capi-

tal costs cannot be recovered from consumers, and in at least 40 per cent of the projects even the operating and maintenance costs were not covered. Major contributing factors to this poor record were over-optimistic forecasts at appraisal with respect to actual construction time and costs, connection rates, sales and losses; others were the insistence by governments on maintaining uniform tariffs between urban and rural areas (although supply costs for the latter are much higher), the lack of metering, the imposition of unrealistically low, fixed charges for irrigation pumpsets, and the failure to adjust tariffs in a timely fashion to reflect cost changes due to inflation. In about 75 per cent of the cases, financial projections made at appraisal were not met.

The use of uniform, country-wide tariffs in most countries means that rural systems are being operated at even greater financial losses than urban system^.^ In many cases, tariffs have been kept deliberately low because of the belief that rural consumers, particularly irrigation farmers and residential consumers, are unable (or unwilling) to pay more. In most cases, tariff levels for different consumer cate- gories were not determined by economic cost considerations, and often agricultural tariffs were kept deliberately low so as to encourage the adoption of electric pumps. For example, it has recently been estimated that, in the Sate of Kerala. India, an irrigator with a 2kW pump is paying $0.70 per month for electricity compared with the.actua1 LRMC of $8.70/m, i.e. less than ten per cent of marginal

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costs. Additional costs are incurred when irrigation pumps are operated during peak-load periods, since there are usually no peak-load tariffs and, in many cases, only flat charges based on pumpset capacity (which means that marginal costs are zero). Consequently, utilities either have to install additional generating and transmission capacity, or there is load shedding, which results in considerable costs to other users (see footnotes 6 and 7). According to the ADB Review, irrigation tariffs only recovered 15-30 per cent of the economic costs of RE. Household tariffs were next with 3 0 4 0 per cent, while industrial tariffs generally recovered between 50 and 90 per cent.

The findings of the review on which this paper is based were simiiar. Even at appraisal, most project documents estimated that only 50-80 per cent of total costs would be covered (three projects estimated cost recovery of less than 50 per cent). Actual performance after project completion was generally much worse. Only one project, in Thailand, was projected to recover more than 100 per cent of economic, and almost all of its financial, costs. One half of the projects for which ex post evaluations were available were projected to recover less than 50 per cent of economic, and much less of financial, costs.

These results are at variance with the WB’s explicit pricing policy for the power sector, which insists that, in general, tariffs should reflect the economic costs of the resources used in supplying energy, and should be adjusted only to allow for ease of implementation and for meeting financial rate of return criteria (in which case, they would have to be higher than the tariff based on economic costs). lo USAID, on the other hand, does not seem to have had an explicit pricing policy in the past, although it has always been concerned with the affordability of electricity supplies to lower-income consumers, suggesting that subsidies for RE projects were considered to be expected.

What must be concluded is that most RE programmes have not been able to cover their economic andtor financial costs, even in those cases in which govern- ment or outside donors have financed the initial capital costs. In almost half the cases reviewed, tariffs have been insufficient to cover operating and maintenance expenses. But even if tariffs had been set high enough to cover the economic costs of RE projects, power utilities would generally incur financial losses for the first 10-15 years, given the high capital costs and the slow load build-up of RE projects over time. These financial losses have been a major contributing factor to the poor financial and, ultimately, poor operating performance of many utility companies in the developing world.

Suggested evaluation criteria for rural electrification projects Electrification of rural towns and villages, in principle, is a desirable form of

basic infrastructure investment throughout the developing world. However, as past experience shows convincingly, electrification by itself does not bring about

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economic development and the creation of new income sources. Without such an economic base, either existing or clearly developing, electrification, particularly network electrification, generally is premature, representing an extremely high-cost response to satisfy the basic human needs for energy.

To satisfy these needs, electricity represents but one of many possible options. It is apparently an attractive one: once it is made available, it can easily supply a variety of energy needs: light of superior quality (compared with other sources), heating and cooling, refrigeration, energy for cooking, mechanical energy to drive water pumps, grain mills, power tools, etc. It is this versatility and the relatively low cost and reliability of electric appliances which make the use of electricity so attractive. However, all these energy needs can be satisfied from sources other than electricity. And electricity, particularly if it is not required in massive amounts and at high utilization rates, is by far the most expensive source of energy among all of them.

Throughout the developing world, power utilities (and the governments supporting them) are hard pressed to satisfy their basic capital needs;ll for many of them, the inability to do so has contributed greatly to the frequent power shortages that are so costly to their existing customers who have become dependent on the supply of electricity. Adding premature, and, therefore, heavily subsidized RE schemes, greatly aggravates these problems. Neither the World Bank, nor other multi- or bilateral financing agencies, do these utilities and countries a favour by providing partial financing for them. Given past performance records, new schemes for rural electrification must be evaluated with great caution.

In assessing the economic viability of proposed RE schemes, the basic question to be asked is not whether to electrify or not. Instead, it is: how to satisfy the variety of energy needs of the population of a given area over a given period of time most efficiently and at least cost. Electrification, and particularly network electrification, should be considered as only one of the available options to satisfy these needs. Only if the probiem is analyzed in this way, and only if all supply options, sub-divided into their respective sub-components (i.e. for cooking, for light, for shaft-power, etc), have been fully evaluated, will it be possible to decide whether electrification, now or at some later stage of regional development, is. or will be, the least-cost alternative. In many cases, it may well be found that a combination of supply responses, e.g. photovoltaics for highquality light and refrigeration. kerosenelcandles for ordinary lighting, wood, charcoal, coal, kerosene or liquefied petroleum gas for cooking and heating, windmills or small gasoline or diesel units for water pumping and grain milling, may well satisfy basic demands at much lower costs, until such time that local income growth and energy demands can support the massive investment needed for network electrification.

Because of the high up-front capital costs of RE schemes and the resulting economies of scale, the question of economic viability, even in rapidly developing

5 10 OPEC Review

regions, is often one of optimal timing. 12 In the beginning, as demands for the various types of energy services are still small, individual, self-contained units, e.g. diesel pump sets, photovoltaic units, windmills and gasoline or diesel-driven gen- erator sets, may provide the most cost-effective solutions, even though their unit costs might be high compared to average unit costs from a fully developed, high- demand, high-density electric power network. l 3 As demand grows, however, there may come a time when, first, local network distribution, perhaps based on diesel power sets or mini-hydroplants, will turn into the lowest-cost source of supply, ultimately to be followed by full-scale network distribution. Whenever proposed RE projects are being appraised, a careful analysis of these potential options and their appropriate timing must be undertaken to identify the least-cost solution for satis- fying energy demands over space and time.

Economic criteria The main criterion for an economically desirable RE investment remains the

ERR. The methods of calculating the ERR for RE have been set out in a number of documents, including the Bank’s original RE policy paper, and are straightforward. In sum, the approach consists of the following steps.

(i) An assessment of the prospective power and energy demands in the region in question. These demands include those of domestic consumers, agricultural and non-agricultural activities. Given the long lifetimes of RE investments and the changing local conditions, a fairly long look is required (15-20 years or more).

(ii) An assessment of the least-cost means of meeting these demands from the grid, with due allowance for the possibilities of reducing costs by reducing network reliability. l4

(iii) A comparison with the costs of meeting these demands by other means - diesels, auto-generators and a possible combination of solar, micro hydro or wind energy facilities.15

(iv) Calculating the present worth of the difference in the cost streams between (iii) and (ii) [i.e. (iii) - (ii)] to arrive at the ERR or cost-benefit ratio. The cost streams need to be evaluated in terms of social opportunity costs.

(v) An analysis of the optimal timing of producing grid supplies to a given region by holding projected demand growth constant and shifting the supply responses (ii) versus (iii) over time (i.e. continuing with (iii)

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options on a year-by-year basis, until the present value (PV) of switching to network supplies is lower than the PV of continuing for one more year with the (iii) options).

Financial/pricing policy While the ERR is the main criterion for assessing the economic desirability

of a project, it was always agreed that this was a necessary, but not a sufficient, condition for undertaking a project. The various Public Utility Papers published by the WB in the 1970s (indeed, before) always drew attention to the importance of pricing policy and obtaining good financial rates of return. The underlying review has shown this has not been achieved in most RE programmes. For well-known reasons, it is desirable to achieve a better financial performance. The following points may be worth recalling.

First, RE has large fixed costs and all types of equipment -lines, transformers, switchgear, sub-stations and other - show appreciable economies of scale in the demand ranges usually encountered. Thus marginal costs are appreciably below average costs. Hence, on economic grounds, it is difficult to support a policy in which RE must have the same financial returns as are currently available in urban areas. However, even MC-pricing should, on a good scheme, amply cover all O&M costs (not achieved in 40 per cent of the cases reviewed) and earn a reasonable return on capital - certainly enough to provide for the financing of subse- quent ‘backfill’ projects. Further, taken over a long time horizon, the financial net present value of revenue minus total financial cost should be positive.16

Secondly, there are the usual financial arguments for pricing above MC to fa- cilitate expansion.

Thirdly, income distribution considerations may justify low first blocks in the tariff structure, but not blanket subsidizations to huge areas and to farmers and industries who, very often, are in the higher, and not the lower, income groups.

Fourthly, wherever possible, peak-load tariffs should be used for heavier loads such as water pumping (irrigation as well as water supply) or grain milling, because the marginal costs of peak-load supplies are from 40 per cent to 80 per cent higher than average long-run marginal costs. Where this is impractical because of the high costs of metering, separate distribution feeder systems connecting these loads should be installed so that they could be disconnected during peak-load periods, thereby substantially reducing the costs of RE supplies.

Information requirements The information requirements for designing a rural energy programme, of

which an RE programme may be a sub-component, follow from the above. There is often a tendency to concentrate on the costs of RE and its substitutes almost exclusively, without looking at the leading forces behind an area’s development

5 12 OPEC Review

and its derived demands for supporting services, including electricity. Analysis of substitutes is necessary, as noted for ERR analysis, but a broader look at an area, and of how prevailing policies are affecting it, is necessary for a better understand- ing of demands and of prospective costs of service. In broad outline, information needs to be gathered on the following:

(i) The region's agriculture. Farming systems, crops, livestock and agro- industries; population engaged; how agriculture is being affected by prevailing pricing and infrastructure policies; technical changes taking place. Assessment of output and income growth in the region.

.

(ii) Non-farm businesses. Linkages with agriculture; population engaged; and extent, scales and growth of non-farm businesses. Technical changes in these businesses, and an assessment of employment and income growth in them.

(iii) Villages and rural towns. General demographic trends. Assessment of development of local urban and near-urban infrastructure, including growth of local villages and towns.

(iv) Specific energy andlor electricity demands. Translation of findings of (i), (ii) and (iii) into demands for power and energy.

(v) Economic analysis. Comparison of costs of meeting demands via grid electricity with the other options, including non-electric ones, as de- scribed above. Assessment of pricing policies is required, also as noted above.

The information sources for these items are varied. Many countries under- take regional surveys of agriculture and industry which would throw light on (i) and (ii), while sector studies should provide insights on recent history and policy. Population and labour force surveys are often available to provide background on (iii). Another important infomation source, especially when turning to (iv), consists of the records of existing RE schemes in comparable areas, and, very impor- t-antly, the extent to which diesels and autdgenerators are already being used in an area. This also provides information on costs, reliability of service and existing demands. However, an important caveat must be noted. Records of existing RE may be quite misleading, if power tariffs in these existing regions are heavily subsidized (as most of them are). In this case, observed demands cannot be used as guidelines for estimating the economically justified demands.

If such information on an area is not available, two things can be inferred: first, the necessary survey work for an area's development has not been done; and,

Winter 1993 513

secondly, it needs to be commissioned. The costs of such surveys are generally only a very small percentage of the of costs of prospective investment. The information is fundamental for programme preparation and design.

Effects of subsidized tariffs A major reason why electrification is politically so popular in so many coun-

tries is the fact that tariffs are very heavily subsidized, as, for example, in India, where imgation farmers barely cover ten per cent of LRMC. These subsidies not only grossly distort estimates of the actual demand for electricity that may be economically justified; they also grossly distort the choices between different energy supply options, since the latter usually are not subsidized (or may even be heavily taxed, e.g. gasoline and diesel fuels). A further major problem is that these subsidies lead to wasteful electricity consumption through the operation of inefficient equipment (a major problem in both India and Pakistan in the imgation sector). For all these reasons, subsidies are economically wasteful and should be elimin- ated. As a minimum, where this cannot be done (or cannot be done immediately), similar subsidies should be made available for other potential options (i.e. diesel irrigation pumps).

Conclusions Rural electrification is potentially a desirable investment in many countries.

There are still many areas and populations not electrified, and others where service is minimal and demand growth justifies extension and reinforcement of existing networks. But there are many other areas where RE would be premature, costly and therefore not the main priority, so selection of the right areas is crucial if waste is to be avoided.

The emphasis has been placed above on the importance of concentrating on areas where agricultural development is taking place - and is being supported by prevailing macroeconomic, pricing and infrastructure policies. Broadly-based agricultural development is not only the main basis for per capita income growth in rural areas (without which the demands for RE cannot grow), but also stimulates the development of non-farm manufacturing, commercial, construction and service activities in local villages and towns, and indeed in regional urban centres. In favourable situations, this increases the demand for, reduces the unit costs of, and increases the returns to RE.

Rural towns in agricultural provinces should be considered as part of RE. as they are often important demand centres and sources of growth. It is also unreason- able to exclude them on the basis ‘of arbitrary demographic definitions of ‘urban’ and ‘rural’. Hitherto villages often develop into towns and sometimes urban centres of some economic importance; RE should support this process of rural-urban transition.

5 14 OPEC Review

The ERR continues to be the most reliable guide to the desirability of a project. It requires a rigorous and properly surveyed comparison of the proposed scheme with the non-grid energy supply options. The principles of ERR analysis are well known. In an economically developing rural region (including towns), the comparisons will often favour RE, though not always, depending on demand and cost. A favourable comparison will also be facilitated, of course, by searching for low-cost electrification designs and sometimes by a cost/quality-of-service trade- off. The question of the optimal timing of electrification schemes must be explicitly addressed.

Projects with good ERRS can, as in other sectors, be undermined by poor pricing policies. The principles and aims of cost-reflecting pricing policies have been set out in World Bank and other documents many times, and remain as valid as they are important for successful investment.

Rural electrification projects (or other distribution expansion projects) should never be considered for financing in systems which are severely supply constrained on the generation and transmission side, so that power rationing or outages are common. In such situations, it will always be economically more efficient and beneficial to the economy at large to invest, first and foremost, in measures to reduce these supply constraints, given the very high cost of outages to existing users of electricity, as discussed above. Exceptions should be considered only if the RE scheme includes sufficient funding to increase generation and transmission capa- cities at similar or higher levels than the projected peak-load and energy demands of the RE scheme under consideration.

Footnotes

1. World Bank internal document.

2. Inter-American Development Bank, “Summary of ex post Evaluations of Rural Electri- fication Projects.” 1981.

3. Asian Development Bank, “Regional Rural Electrification Survey, 1984.”

4. Among them, to cite a few, were: Douglas F. Barnes, Electric Power for Rural Growth, Westview Press, Boulder, 1988; Mohan Munasinghe, Rural Electrification for Develop- ment, Westview Press, Boulder, 1987; Gerald Foley, Electricity for Rural People, The Panos Institute. London, UK, 1989; Alfonso Carrasco, V., Kimmo M. Juvas and Maija Seppo, Electrification and Rural Development, Department of Geography, University of Helsinki, Finland, 1990; V. Ranganathan, “Rural Electrification Revisited.” Energy Policy, February 1993; GTZ, Energy Division, Rural Energy Supply, Eschborn, Sep- tember 1992.

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Internal World Bank document. 5.

6.

7.

8.

9.

For Pakistan, the power outage costs to industry in 198526 have been estimated to amount to 6Si)lkWh not supplied. In the aggregate, these losses were calculated to have resulted in a reduction of the country's GDP by 1.8 per cent. From H A . Pasha, A. Ghaus and S. Malik: "The Economic Cost of Power Outages in the Industrial Sector of Pakistan," Energy Economics, Vol. 11, No. 4, October 1989.

For India, it has been estimated that power outage costs result in a reduction of GDP of at least one per cent per year, or close to 20 per cent of actual GDP growth in the 1980-90 period. From Arun P. Sanghvi,"lmpacts of Power Supply Inadequacy in De- veloping Countries," presentation at the Training Programme on Planning in the Power Sector, sponsored by the Tata Energy Research Institute and the Central Elec- tricity Authoriry, Simla, India. 19-25 September 1988, p.20.

For example, a recent study of the RE systems in an Asian country concluded that 71 (or 61 per cent) of the total I I 7 RE cooperatives "... either have a pronounced need for substantial remedial action, or are considered beyond rescue."

For a review of the deterioratingfinancial performance of power utilities, see: M. Muna- singhe, J . Gilling and M . Mason, A Review of World Bank Lending for Electric Power, World Bank Industry and Energy Department Working Paper, Energy Series No. 2, 1988.

I O . This view has been reinforced recently by a multi-agency investigation into the causes of the deteriorating performance of LDC power systems. See: Central Project Team: "Proposed Guidelines for the Improvement of Electric Power Utility Efficiency," World Bank, Industry and Energy Department, Working Paper, Washington, 1993 Cforthcoming); for a summary of the findings and recommendations, see also: Gunter Schramm, "Improving Power Utility Per$ormance in Developing Countries." Utility Policies, January I993 .p~. 51-56.

I I . Gunter Schramm. "Electric Power in Developing Countries: Status, Problems, Pros- pects," Annual Review of Energy, 1990, Annual Reviews Inc. Palo Alto, California, 15: 307-33.

12. For a detailed methodology addressing the issue of optimal timing, see: Gunter Schramm, "Optimal Timing of Transmission Line Investments," Energy Economics, July 1 9 8 9 , ~ ~ . 181,188.

13. For example, the Pakistan Rural Electrification Masterplan has come to the conclu- sion that a switchover from diesel-driven to electric network-supplied irrigarion pumps is economic only i f the pumps are operated well in excess of the current, average 1,000 operating hours per year, i f load management were to be practised (i.e. off-peak operation only) and if costs of electric systems could be reduced.

14. See also Mohan Munosinghe, Rural ElectriFcation for Development, Westview Press, Boulder, Colorado, 1987.

15. For example, photovoltaic installations in rural areas have recently come of age. In Sri Lanka, for example, a private, non-subsidized company has succes$ully supplied SCY-

era1 tbousand sets that supply electric light as well as black and white television power requirements. See: Neville Williams, "Solar Serendipiv: Photovoltaic Rural Electrifi-

516 OPEC Review

cation in Sri Lank," Solar Today, NovemberlDecember 1991, pp. 22-24. For a detailed cost comparison of solar with other options, see: GTZ Energy Division, Fact Sheets of Selected Photovoltaic Applications, GZZ GmbH, Eschborn, Germany, 1991,

16. See also the proposal of using 'discounted unit cost' in Ralph Turvey, Dennis Ander- son, Electricity Economics, The World Bank, Johns Hopkins University Press. Balti- more, 1977, pp. 66 ff.

Winter 1993 5 17

rural electrification in ldcs as a tool for economic development: facts and fiction

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