C-) Private RuraX Power hiis caise stud)y is part of a Iietwoirk Enpansion U nsug an (O)utput-Based Scheme n GuatemuaDa series reviewing business modelsforprivate In 1998 the government of Guatemala privatized the two companies ronpanuei providinzg responsible for distributing electricity in rural areas. The new owner, Union infrastructure services to rural customers in Fenosa, was obliged to implement an ambitious five-year rural electrification developing countiei The program. The goal: to increase the share of households with an electricity case studies assess factors driving the pefornimance of connection from 64 percent to 90 percent by 2004. Under this output-based private companies in a scheme the two companies are paid US$650 for each eligible residential vanety of rural contexts and sectoi and under connection made. If no connections are made, no payment is made. So far the diverse legal and regulatoiy scheme has performed well-completing 022,000 new rural connections airraingementis 7This case study is based n research between May 1999 and May 2002-and is on track for the 2004 targets. bv Paul Lerwington, Economic Consulting Before Guatemala privatized electricity distribu- activites in electrification after the peace accords 45Economic Consuwlting o Associates Ltd and Carlos tion, consumers were served by one of two pub- ending the civil war were signed in 1996. Butwhile ., Wecdselicly owned entities. Those in Guatemala City the share of households with a connectioni (the Zzill, Merc(idos de Energi(a SA 7he pepnmntyfnndtiig and surrounding departments were served by electrification rate) exceeded 90 percent in for this reseaich camefrom Empresa Eectnica de Guatemala S.A., privatized Guatemala City, it was much lower in rural areas. the Public-Pnvate in 1998. The mostly riral consumers in the rest In 1998 it was estfimated that only 60 percent of - Infrastructme tAdvisoiy of the coLtitry received service from Instituto the population had access to electricity, one ofthe Facility, a multidonor Nacional de Electrificaci6n (INDE), a vertically lowest rates in the r egion. To spur rural electrifi- technical assistance fund integrated utility. In 1998 INDE's distribution cation, the government created Programa de The World Banik task tea1n business was split into two companies covering Electrificacs6n Rural (PER). And wheni it priva- foa the case studies zwras distinct regions, Distribuidora Electrica de tized DEOCSA and DEORSA, the government Alai 7ownsend, Clive Occidente (DEOCSA) and Distribuidora incorporated the scheme into the concession c3 H˘aHrns, Lorenzo Bertolinm, Electrica de Oriente (DEORSA), and privatried agreement, obliging the newowsner to implement Michael Schui, Juan with a 50-year concession to operate the distri- the extension targets of the PER. ATavas-Sabatam andJohn bution assets. Union Fenosa Internacional, S A., @© Newstead won the bid for both companies, paying US$101 Expanding access through Programa de million for an 80 percent stake in the two. Electrificaci6n Rural Rural electnfication had gotten a boost when Under the PER the government is setting aside the main Guatemalan social fund increased its US$333 million to fund expansion of the rural RURAL POWER NETWORK EXPANSION USING AN OUTPUT-BASED SCHEME IN GUATEMALA transmission and distribution networks. The _ a_ _ _ _ investments in transmission (US$151 million) will go to lines and substations. And those in dis- X tribution will connect 280,000 residential con- Connections (thousands) Electrification rate (percent) sumers in around 2,600 communities. Once, 1,00 these connections are completed in 2004, the _ r national electrification rate is expected to reach 1,000 70 90 percent. That will mean a substantial increase 2 in the customer base for the two companies, which was about 410,000 for DEOCSA at the time of privatization and about 222,000 for DEORSA. Connections The expansion plan for distribution involves 600 50 a simple incentive structure: the twvo comnpanies receive a US$650 subsidy for each verified, eligi- 400 40 ble residenitial connection the)' mnake. This 1996 1997 1998 1999 2000 2001 amount is based on the costs of past connections Source: DEOCSA DEORSA (connecuons) and Comrsi6n Nacional de Energia Electnca in INDE's rural programs as well as costs in neigh- boring countries. At present two simple criteria determine eligibility: the connection must be for tial conflicts of interest, but there is no evidence a residential dwelling, and the dwelling must be that this has been a problem in Guatemala. The more thani 200 meters from the existing network. committee approves the annLual work plan and Sector law requires distribution companies to authorizes the release of 20 percent of its esti- connect any consumer within 200 meters of the mated costs up-front. network who requests service, although the com- The techniiical committee hires independent panies may require a refundablc deposit from supervisors to verify that the connections made the consumer when they make the connectioni. by DEOCSA and DEORSA are eligible for reimn- So PERfunds are notbeing used to subsidize con- bursemen t under the PER. The supervisors visit nections within the 200-meter zone, althoughi communities to check whether the new con- Union Fenosa has argued that the contract gov- nections are outside the 200-meter zone and are erning the PER does not rule this out. in residential dwellings. They report to INDE, which sometimes per-for-mis additional checks. Managing the fund and verifying results INDE then submits a final report to the techni- A trust fund was established for the PER scheme cal committee, which authorizes paymenit of the to ensur-e that funds are not diverted to other other 80 percent. uses. Banco Agricola Mercantil de Guatemala administers the fund, while the Bank of New Reaching the targets York holds the funds offshore. The government The PER is on track to reach the target of 280,000 capitalized the fund with more than US$100 connections by 2004 (figure 1). Between May million of privatization proceeds from the sale 1999, when the program began, and May 2002 of shares in DEOCSA and DEORSA, which later PER funding was verified for 122,000 connec- added more than US$50 million in government tions in 1,100 communities. Anotlher 12,000 con- bonds. The balance needed, around US$180 nections were made but not certified as eligible million, is being sought from different sources. for funding, most because they turned out to be The fund is managed by a technlical commit- inside the 200-meter zone. The two companies tee consisting of representatives of the Ministoy have also made about 200,000 connections of Energy and Mines (presently, the energy mim- (incliding regularization of unofficial connec- ister), INDE (the vice minister for energy), and tions) outside the PER. An advantage of the PER the two companies. In some countries leaving design is the apparent efficiency of concentrat- control of the funding mechanism withini the ing the program in essentially one company. ministry might be tindesirable because of poten- Evidence suggests that bulk purchases of equip- menit have reduced costs below those in earlier before-because even a nontargeted programi rulal programs in Guatemala. will 1benefit thcsc groups if it leads to a stiffi- Meanwhile, the transmission expansion plans ciently large increase in connections (Foster of the two companies have fallen behind sched- and Araujo 2001). That is wvhat happened in tlle. Difficulties in obtaininig the right-of-way for 1996-99, and it is reasoniabic to expect a similar lines are cited as the main reason for the delays. result tinder- the I'ER. The subsidy has led to some perceptions of Using competition for funds unfair-ness, because it allows user-s connectecd Competition for subsidies can help minimize under the PER to pay a deposit of only US$10. programil costs and promilote good customer ser- So while a community within the 200-meter- zone vice. Does the PER incLitde any elemilent of'con- may have to pay sizable refundable deposits petition? Its ftinds are reserved for expanding (reportedly as high as US$3,000 per hotiselhold the networks of DEOCSA and DEORSA. So in some cases), a community a short clistance mutnicipally owined electricity companies, whichi away outside the zone-whiicih could be wealth- account for less than 10 perceit ofsales and coni- ier thani the fi-st-gets conniectionis virtually nections in Guatemala, have no chance to com- free. The progr-am couldl have made the subsidy pete for the PER funds. Nor do self-help groups available to all inservecl consumer-s while requir- or social funds. The government intr-oduced ing that they pay a nonireftindable coninectioni competition at the outset-for the right to cha-ge. But While this option might have implemilenit the program and to operate the reIcuced the perccptionis of unfairness, it might existing networks-by bundlinig the construc- also have led to fewer coninectionis outside the tion of the 280,000 coninections with the privati- 200-meter zone for poor people uliable to raise zation of the networks, a higher ip-fi-ollt coniectioni chargc. Alternatively, the government coLild have The subsidy, based on the average cost of delinked grid expansion from operation and connections, has allowed Unioni Fcnosa an perhaps broken the expansioni clown into apparent average profit of arotincl 7 p'eret smaller connection projects that cotild have on each conilection. But Unioni Fenosa proj- been bid out separately. BLit increasing the ects that the costs of coninections will probably number- of organizations that could access the rise in the last two years of the programi as it funid would have made implementation more extends to more remilote comImlunlities. WAill complex and increased the administrative bur- DEOCSA and DEORSA be willing to make den on the government, particularly by requir- those higher-cost connectionis? How strong the ing it to let a series of contr-acts. The present incentives will be f'or doing so is not yet clear, approach places the bLtrden of contr-actinig and because the conitr-act governing the PER seemils impliiieimtation on DEOCSA and DEORSA. to have no clear penalties for failing to com- plete the programi. "Sculptinig" the coninection Targeting the subsidies payment, by paying larger subsidies for con- WArhere resotirces are limited, selective targetinig necting more distant communiities, might pro- of subsidies is always preferable. While the PER vide better incentives. Btit the infor-milationi does not explicitly target its subsidies to the available at the time the contract was signecl pooI, it probably benefits the poor. According might not have permitted a reasonable esti- to DEOCSA ancl DEORSA, households coI1- mate of the relationship between cost and clis- nected under the PER consuime only a very basic tance from the network. Moreover, targeting service at around 30-40 kilowatt-hours (kMlh) a subsidies to specific groups or locations would monti. By antd large the people who do not complicate administration and planniig. have coninections are the poor and indigenotis Initially, the government did tiy to target sulb- commuLnities. The expansion of the network sidies, attaching to the plan a list ofcoitmunities duL-inig 1996-99 meant that these previously and the expectecl number- of coniectionis in excluded groups were twice as likely to receive each. But wheln DEOCSA and DEORSA began an electricity connection as they had been work, they discovered that abotit a thirdcl of these RURAL POWER NETWORK EXPANSION USING AN OUTPUT-BASED SCHEME IN GUATEMALA communities already had an electrlcity connec- definition of output would include factors relat- tioll or had one under constructioni. The coiiI- ing to the service consumers receive. Under the panies have therefore had to identify substitLite present scheme, if consumers receive poor- communities, which they have done through quality service after their connection is made, wveekly meetings with INDE. This process has the company could be penalized under general viewpoint been fairly efficient. Perhaps even more efficient, quality of service obligations but would not have p thotigh, would be to rely on the companies to to refund any of the connection subsidy. identify communities based on clear eligibility Linking payment of the subsidy to a measure of is an open forum to criteria, possibly with binding targets in different service or throughput would reduce the risk of encourage dissemination of zones. That approach might raise concerns that poor service. But it would also greatly increase public policy innovations for the companies would make only the lowest-cost the complexity and burden of monitoring. So private sector-led and eligible connections. But it is not clear that the while connections are not a perfect measure, market-based solutions for commtnities INDE has proposed are in more they do have the benefit of being easily verifi- development. The views remote or less populated areas than those that able and therefore useful in a large-scale pro- published are those of the DEOCSA and DEORSA have proposed. gram such as the PER. authors and should not be attributed to the World Covering the cost of service Reaching the rest Bank or any other affiliated The sector regLulator, Comisi6n Nacional de When the PER is completed in 2004, the gov- organizations. Nor do any of Energia Electrica, regulates the prices that ernment expects that around 90 percent of the conclusions represent DEOCSA and DEORSA can charge their cus- Guatemalan households vill have access to elec- official policy of the World tomers. At presenit the prices for residential con- tricity. I-low can it extend access to the other 10 Bank or of its Executive sumers using less thain 300 kWh a month are percent? That may require different appr-oaches Directors or the countries subsidized through a social tariff. Although retail to providing subsidies, depending on the reason they represent. tariffs for "social tariff customers" are lower, the for lack of access. Evidence suggests that around companies do not bear the cost because the gov- a third of households without electricity live next To order additional copies ernment reduces the generation price. So this to a household that does have a connection contact Suzanne Smith, subsidy does not provide a disincentive to servinig (Foster and Araujo 2001). So for some of the managing editor, social tariff customers connected under the PER. unconnected households, inability to pay the Room 19-009, But the subsidy in the social tariff is poorly tar- deposit for a connection may be the explana- The World Bank, geted, benefiting more than 80 percent of rural tion. Among rural households, those that lack 1818 H Street, NW, constImers. The average consumption of those connections will be in increasingly isolated Washington, DC 20433. connected uinder the PER, around 30-40 kWhl a areas. Connecting these households may Telephone: month, might be a more appropriate consump- require subsidies for off-grid approaches or, in 00 202 458 7281 tion level for the social tariff. some cases, for municipal companies not now Fax: The regulator allows DEOCSA and DEORSA eligible for PER funding. 00 l 202 522 3181 to charge consumers eligible for the social tar- Email: iff a fixed charge of about 90 cents a month and ssmith7(worldbank.org a variable charge of about 7.4 cents per kWh. So a customer using 40 kWh a month pays arouind Reference Copyedited and produced by US$4 a month. Given the low consumption by Foster, Vivien, and Caridad Ai-aujo. 2001. "Does Communications these customers, DEOCSA and DEORSA have Infrastri-cture Reform Work for the Poor? A Casc Study Development Inc. argtied for increasing the fixed charge, because from Guatemala." World Bank, Litini America and the it is difficult for them to recover the fixed costs Caribbeani Region, Finanice, Private Sector, and Printed on recycled paper of serving consumer-s (including billing and Infi astructure Department, Washington, D.C. metering). The fixed charge may be increased PUBLIC-PRIVATE at the next regulatory review I NFRASTRUCTURE Are connections a good measure of output? While the scheme bases payment on the "out- put" of completed connections, a more ideal This Note is available online: www.worldbank.org/viewpointl