39607 M a r c h 2 0 0 7 N o t e N u m b e r 1 2 B olivia is implementing an innovative public-private ap- proach to increase rural electricity access to extremely remote areas via Solar Home Systems (SHS). Novel Medium-term Service Contracts (MSCs) balance the Govern- ment's wish for sustainable service and maximum control with providers' aim for minimal risk exposure. In 2005, 14 MSCs were successfully bid out to private service providers to minimize the subsidies paid against an ambitious set of provider obliga- tions. The tender resulted in a 25-percent gain in number of new users. Although private participation in Bolivian infrastruc- ture declined sharply in 2006, the SHS service model enjoys continued support by government and private providers alike. Bolivia, South America's poorest country, is a land of stark contrasts. Beyond the illuminated homes of ur- ban dwellers, 90 percent of which are electrified, many rural residents remain in the dark. Nationwide electric- ity coverage has reached 65 percent, but rural access is below one-third, the second lowest in Latin America and the Caribbean, after Nicaragua. As a product of its highly scattered, low-income and information and communications technologies population--GNI per capita was only US$1,010 in (ICT) via decentralized public-private partnerships that 2005--Bolivia has by far the lowest density of economic benefit from performance-based subsidies, or output- activity in South America. As a result, the costs of ex- based aid (OBA). tending infrastructure services, particularly in difficult- The first US$20-million phase of this three-phase to-reach rural areas, are extremely high. program, started in 2004, has a goal of at least 15,000 Most of Bolivia's non-electrified households live in SHS--reaching more than 50,000 rural people in 14 highly dispersed, rural settings; more than one-third target areas. To increase impact and sustainability of are too remote from the national grid to permit an the new energy access, complementary services are economically justifiable grid extension. They include extended to these same target areas, including (i) cell some of the country's poorest people. Thus, their phone, radio, and television signal; (ii) business de- electrification calls for innovative off-grid technologies velopment services for productive energy uses in rural and supply schemes that match demand in a flexible, cost-effective manner. For many of these households, single-user Solar Home Systems (SHS) offer the most Kilian Reiche has been Main Transaction Advisor for the IDTR SHS promising solution. component. He is Head of iiDevelopment, a German consulting firm. Dana Rysankova is Senior Energy Specialist with the World Bank's In response to this challenge, the World Bank, in Africa Region and former Task Team Leader for the IDTR program. 2003, approved the 10-year, US$60 million Decentral- Susan Goldmark manages the Energy cluster of the World Bank's ized Infrastructure for Rural Transformation (IDTR) Latin America Region and was Task Team Leader of the IDTR program, aimed at increasing rural access to electricity program at inception. enterprises; and (iii) ICT equipment and training for maintained general interest over time, leading to 14 rural schools and health posts. consortia requesting prequalification. After an initial delay, implementation started in July 2006, and more than 1,000 SHS were installed by December. Both providers maintained their original In 2005, 14 service contracts--varying in size from 350 targets despite changes in Bolivia's investment climate to 2,200 future SHS users--were successfully bid out in and shortages of SHS equipment supply in the region. a one-stage, multi-lot simultaneous tender. To mini- The successful tender award achieved signifi- mize subsidies that the Government must pay private cant efficiency gains. The winning bids exceeded the providers, each area was awarded to the qualified Government's user-per-area target by 25 percent on bidder promising to service the largest number of users average (table 1), and unit subsidies were lower than at a given total subsidy per area, with well-defined and for comparable previous projects in Bolivia. The total ambitious performance indicators. Price caps were subsidy amount of about US$10 million corresponds set to prevent monopoly pricing, while minimum user to an efficiency gain worth about US$ 2.5 million, requirements per area were fixed to prevent excessive compared to about US$500,000 in overall costs of ten- unit subsidies. der preparation and process. These efficiency gains are In other countries, SHS concession tenders have passed on directly via the Government (which pays the often failed for lack of interested bidders or because lower resulting unit subsidies) to the rural users (as 25 of major re-negotiations before implementation. Thus, percent more users will receive subsidized SHS). 2006 marked a milestone for Bolivia's IDTR program: Gains per area varied between 1 percent and 35 The SHS tender was successfully awarded to two bid- percent, confirming the OBA assumption that bidders ders out of 11 pre-qualified consortia, and subsidy know the local markets better than government. One of contracts for all 14 service areas were signed. An inten- the two winning bidders was a consortium led by an in- sive road show in 2005 was key to attracting enough ternational photovoltaic (PV) module manufacturer with bidders. Of the more than 200 firms contacted, half strategic interests in the region. This cost advantage re- sulted in the consortium winning 10 project areas. More bidders would have been preferable for benchmarking Time will tell whether the two winners have overes- Table 1. SHS bidding: Summary results timated local users' willingness to pay. If so, they would Area Minimum No. Winning Efficiency have to reduce end-user prices, causing profits to shrink. SHS bids bid gain (%) 1 1,401 3 1,822 30 All elements of the IDTR program's balanced tender 2 1,228 2 1,536 25 design seek to ensure the long-term sustainability of 3 1,590 3 2,147 35 service provided to Bolivia's highly dispersed rural population, while avoiding an excessive assignment of 4 399 2 421 6 risks to providers. 5 1,112 2 1,501 35 6 1,440 3 1,872 30 7 921 2 1,198 30 The Medium-term Service Contract (MSC) is a new model 8 1,323 2 1,786 35 for PV market development that balances providers' wish 9 712 2 962 35 to minimize risk exposure with the government's desire 10 2,281 1 2,311 1 to maximize control. In all service areas, exclusive access 11 353 3 477 35 to project subsidies ends four years after installation, at which time users and suppliers may "graduate" to open 12 351 3 474 35 competition. This approach stands between the traditional 13 597 1 696 17 concession (of longer duration) and the dominant SHS 14 537 1 588 9 dealer or credit-line model (competition in the market 14,245 17,791 25 without exclusive areas). The new MSC model fits Bolivia's market conditions, where increasingly difficult rural mar- is expected that current local production of equipment kets in extremely remote areas must be reached on the way will expand significantly, with a view toward exporting to universal access. to neighboring country markets. Following the Gov- ernment's request, an ex-post subsidy bonus of up to 5 percent was defined for locally-produced parts. In high-cost, low-return off-grid markets like Bolivia, attracting enough private companies is often problem- atic. But having enough interested bidders is key to an IDTR sought to pay as much subsidy as possible late efficient bidding process and reducing risk of pre-bid- in the game (to maximize the incentive for improved ding collusion. IDTR's public-private partnership ap- performance) without overly increasing providers' risk proach succeeded, in large part, because of its strong exposure and financing costs (and thus subsidy needs). focus on transaction marketing and a well-balanced Local MSMEs, whose access to financing is more business proposal for the private sector. difficult, are especially sensitive to this issue. By com- According to a poll among participants, pre-quali- paring bidder requests with the predicted cash flow of fied consortia explicitly valued the balanced design of hypothetical providers using various business models, the tender and the project's track record of transpar- a balanced subsidy disbursement schedule was devel- ency and reliability during tender preparation. oped (box 1). Given the early stage of Latin America's SHS service market, and to address the resulting information gaps, In light of the high transaction costs of Bolivia's remote IDTR took special care to balance provider creativity rural areas, IDTR delegated a set of additional local with input control: On the one hand, providers were project tasks typically performed by consultants to the allowed to define their preferred business model, and service providers. This decentralization of local market were left enough room to decide how best to reach the development and data collection for monitoring and required outputs. On the other hand, several clearly- evaluation is expected to reduce costs (as less visits to defined inputs (minimum experience, equipment the remote areas are needed) and increase account- specifications, and overall system performance) were ability (by assigning obligations to the party with the required for qualification to reflect past lessons on SHS appropriate incentives). sustainability. The consultation process with potential Contracts create incentives for service providers to bidders helped to strike the right balance between out- establish cooperation with microfinance institutions put and input requirements. (MFIs) by requiring providers to offer users various The new SHS users choose from a broad yet man- payment options, including credit. One of the winning ageable menu of options for system size and financing consortia includes a MFI, while the other subcontracts options. Providers' performance in informing users to a local MFI. about their options and rights is checked continuously as part of the providers' service obligations. Box 1. Subsidy disbursement schedule Selecting service-area sizes small enough for micro, 15% Against promotion, acceptance of prototypes, and small, and medium enterprises (MSMEs) to participate training of technicians. and yet large enough to interest international bidders 68% Against installations on a quarterly basis. has helped to increase the pool of potential bidders. Both winning consortia included an alliance between 12% Against annual visits over 4 years and local market domestic and international players. The IDTR webpage development. (www.idtr.gov.bo) contained a list of interested local and 5% At the end of contract, upon compliance with all international players to facilitate such alliances. obligations. As the new tender significantly increases the local Note: Providers can request an additional advance of up to 15 percent SHS market, roughly doubling the installed capacity, it against a full bank guarantee (on top of usual performance guarantees). Because SHS services are not regulated in Bolivia, The overall success of the MSC approach to bidding a technical monitoring entity was set up inside the out SHS services can only be judged at a later stage, as Government's project implementing unit to monitor installations have only just begun. The successful ten- the broad set of providers' service obligations against der award and the efficiency gains achieved show that which subsidies are disbursed. Using a combination this new model merits closer analysis. of random external audits and ongoing Government Bolivian public perception of private participation audits, product quality, technical service quality, in infrastructure (PPI) has deteriorated in recent years, and commercial service quality are monitored. If the resulting in a series of severe conflicts revolving around predefined targets are not met, subsidy payments are the water and energy sectors. Against this backdrop of withheld or fines imposed as defined in the subsidy instability, the SHS tender has been welcomed by both contracts. the private sector and a series of changing governments. The current administration has taken the underly- A combination of measures has been used to achieve ing public-private approach as a cornerstone of its new poverty targeting of subsidies. Users can select SHS universal access policy for the electricity sector; based sizes, allowing for differing service levels and thus wid- on the project, it is planning to scale up with new ening the range of systems sold in Bolivia toward the funding from GPOBA. The ability of this output-based, low-cost end below 50 watts peak (Wp). The absolute public-private approach to receive continued support unit subsidy is constant for all systems above 40 Wp throughout several administrations is testament to a for a progressive subsidy scheme. The rural target areas balanced and realistic subsidy. cover some of Bolivia's poorest residents. By subsidiz- ing new access (as opposed to service), target users are IDTR. 2004. "Bolivia IDTR SHS Tender Document." on average poorer than is the case for social tariffs. PV Vice Ministry for Electricity, Alternative Energies schools and health posts in each target area will serve and Telecommunication. La Paz: IDTR. as anchor clients and will benefit the poorest house- holds, for whom individual subsidized systems may be Kilian Reiche, Dana Rysankova, and Susan Goldmark. beyond reach. Forthcoming. Output-based Subsidies for Access: Early Lessons from Off-grid Electrification Projects in Latin America. ESMAP Report. World Bank, Washington, DC. 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. The Global Partnership on Output-Based Aid