99297 June 2015 Note Number 45 Output-Based Aid in Mali Rural Electrification Hybrid System Project Photo courtesy of Curt Carnemark/World Bank Developmental Challenge/Sector E lectrification can be a significant driver for improving livelihoods in rural communities. In rural Mali, where Context more than 80 percent of the country’s population lives, the electrification rate is only 15 percent. Increasing access to Mali is among the poorest countries in the world, with electricity in rural Mali is crucial for economic development, about half the population living below the poverty line of social cohesion and reconstruction following the country’s re- $1.25 per day. In 2012, a complex crisis began to unfold cent period of conflict, political instability and food insecuri- in Mali—conflict and insecurity in the north, institutional ty. This note discusses an innovative output-based aid (OBA) and political turmoil in the south, and drought-related project in rural Mali, the first such project in the energy food insecurity across the country—which eroded the sector to support development of mini-grids on a large scale. base of the country’s economy and society. However, in The project complements an innovative hybrid-system model 2013 and 2014, there were positive developments. The lib- supported by the International Development Association eration of the northern part of the country from Islamist (IDA) and Climate Investment Funds/Scaling Up Renewable militants by French, African and international forces, and Energy in Low Income Countries Program (SREP) to expand the swift adoption by the Malian authorities of a transition rural access to modern energy services and increase renew- roadmap to restore democracy and peace have allowed the able generation. international community to resume development assis- tance. Democratic presidential elections took place in the Supporting the delivery of basic services in developing countries summer of 2013 and parliamentary elections were held in The internal wiring package includes, in all cases, three December of that year. The Malian economy has proven Compact Fluorescent Lamps (CFLs) to promote efficient resilient in the face of recent shocks and the return to use of electricity and reduce monthly bills. growth that began in 2013 is forecast to continue. The contribution of the private operators is recovered The rural population in Mali remains dispersed, which through cost-reflective tariffs approved by AMADER means that the extension of the national electricity grid for mini-grids and fees-for-service for SHSs. (Operators in a financially sustainable manner is a major challenge, contribute $40 and $100, respectively, for no-pole and requiring huge investments in transmission and distribu- one-pole connections, and $116 for a SHS.) The OBA tion. The national network expansion has focused on the subsidies would also ensure affordable tariff and fee- distribution network in peri-urban/recently urbanized for-service levels for rural customers while providing areas, and on connecting isolated localities with relatively an acceptable financial rate of return for the operators. high levels of demand for the national grid, leaving out The user contribution is determined by the households’ the majority of the Malian population. For rural electri- willingness-to-pay. The willingness-to-pay of $15 per fication, a decentralized model managed by the Malian household connection and internal wiring is based on Agency for Development of Rural Electricity (AMADER) AMADER’s prior experience and evaluation of the imple- has been developed over the last decade. This bottom-up mentation of business plans for existing rural electrifica- approach to electrification, currently implemented by tion projects. more than 60 private operators—mainly diesel mini-grids The second component of the project provides techni- and Solar Home Systems (SHSs)—has proven its viability. cal assistance of $300,000 to AMADER for hiring inde- However, the price of diesel generation and high invest- pendent verification agents (IVAs) to verify outputs and ment costs for mini-grid densification, expansion, and determine operator eligibility for reimbursement of OBA internal wiring have limited scale-up of access in rural subsidies. Subsidies will be disbursed in phases. For mini- areas. In this context, the IDA/SREP Rural Electrification grids, 80 percent of the subsidy will be paid upon verifi- Hybrid System Project is designed to allow operators to cation that new metered connection and internal wiring improve their efficiency by selecting the least cost off-grid have been completed according to AMADER’s minimum access plan—mini-grid connection or SHSs—and there is technical standards, with the remaining 20 percent paid an important OBA component to this project. once the connection has functioned for three months and at least 80 percent of beneficiaries are paying for electric- Project Design ity consumption. In the case of SHSs, the disbursement schedule will see 80 percent of the subsidy paid upon new SHS installment and internal wiring, and 20 percent paid In 2013, the Global Partnership on Output-Based Aid when operating and maintenance services for SHSs have (GPOBA) approved a grant for $5 million to co-finance been provided for three months and at least 80 percent of Mali’s Rural Electrification Hybrid System Project, which consumers are paying the fee-for-service. provides incentives to private operators to increase access and make connection packages affordable to the rural poor. The OBA project targets 12,000 poor households Implementation and Financial (approximately 130,000 people) in rural, off-grid, remote Arrangements areas that have been unable to get a mini-grid/SHS con- nection due to high investment cost and that currently The grant will be managed by AMADER, which is re- rely on candles, batteries or kerosene. The project has two sponsible for selecting private operators to implement the components—subsidies for investment in off-grid solu- project. Selection is based on established criteria, which tions, and the independent verification of outputs. includes the following: potential demand and prospect Under the first component, the project grant enables for economic growth at the proposed sites; demonstrated operators to implement the least-cost electrification op- source of up-front capital; proven past performance; tech- tion. The primary option is mini-grid densification and nical, economic and financial viability of the sub-project; internal wiring, which is expected to enable access for clearly defined outputs; and balanced geographical repre- 9,600 households. The total unit cost of a metered con- sentation. The selection process places particular emphasis nection with no electric pole is $282; a subsidy of $227 is on the pre-financing capacity of potential operators, as provided to make the connection package affordable to the operators will be required to fund the off-grid connections poor. Metered connections requiring one pole cost $959 and internal wiring before receiving subsidies. Sources per unit and the subsidy per household is $844. Where the of pre-financing include revenues from energy and other extension of a mini-grid is not economically justifiable, activities, and commercial loans. the grant supports the installation of SHSs (50–135 watt It is expected that the project subsidy will contribute peak) and internal wiring for 2,400 households. The unit to an acceptable rate of return for participating private cost per SHS with wiring is $717 and the subsidy is $586. operators. In cases of full payment of the subsidy, the rate June 2015 Note Number 45 wlablack/Shutterstock.com Henk Paul/Shutterstock.com of return for new connections to mini-grids and SHSs has fee-for-service model, which has been piloted success- been estimated at 12.7 percent and 18.5 percent respec- fully by some operators in Mali, is expected to ensure tively. The relatively lower rate of return for mini-grids appropriate incentives for operators to provide high- would be acceptable to operators in light of the wider quality equipment and continuous maintenance services. support to their operations through hybridization under 2. Countries or regions in conflict-affected or fragile the Rural Electrification Hybrid System Project. The OBA situations tend to undergo many institutional chang- subsidies would therefore make new connections finan- es and a loss of institutional capacity; it is therefore cially viable for operators, while the bulk of the economic crucial that implementation support and capacity benefits (and the subsidy) go to the poor households that building are included in project design. Due to job are connected. insecurity during the conflict in Mali, essential execu- Aside from selecting operators and overseeing the pay- tive and specialized staff left AMADER, which delayed ment of subsidies following output verification, AMADER project implementation. In order to avoid similar set- will also be responsible for outreach and promotion of backs, strong support, supervision and guidance for the program, hiring and supervising IVAs, overseeing both implementing agencies and service providers is project implementation to ensure quality and timely prog- required, particularly with regard to OBA mechanisms, ress, and implementing the monitoring and evaluation technical capacity, procurement, safeguards, monitor- arrangements. ing and evaluation. 3. In remote areas, there are challenges to consistent Lessons Learned and Reflected in the and clear communication. However, in order that Project Design program requirements and responsibilities are clear to all parties, it is critical that the implementing This project builds on experience gained in previ- agency maintain an ongoing dialogue with service ous World Bank-supported projects in Mali, especially providers, and that service providers communicate the Household Energy and Universal Access Project effectively with residents receiving services. This is (HEURA), concluded in 2012. Lessons from HEURA were particularly important as residents or providers may incorporated in the project design. Additional lessons not be accustomed in the way responsibilities are dis- have been learned since the project’s inception. tributed within the project. In this project, for instance, internal wiring—usually the responsibility of the house- 1. Shifting performance risks to operators can increase holds—is included as part of the connection package access. Under the HEURA project, private operators supplied by the service providers. Open discussions be- benefited from AMADER’s subsidy (70–80% of total tween AMADER and service providers concerning the project cost) for generation, transmission, distribution level of demand for new connections and the ability of and mini-grid access. However, although significant poor households to pay for consumption have also been progress was achieved with regard to generation, ac- important, and AMADER has encouraged operators to cess targets sometimes remained unmet. The GPOBA pursue their own market due diligence. Moreover, the grant will encourage improved performance among project technical design for the SHS component has private operators regarding access, as the subsidy is been slightly adjusted (from the original 50 Wp to the disbursed only after the connections and internal wiring range 50–135 Wp) based on market demand, while the are completed and verified. With regard to SHSs, the subsidy level remained constant. Conclusion/Sustainability of private operators’ performance will help increase and diffuse local technical expertise. Hybridization of systems An off-grid approach driven by the private sector will is crucial, as this reduces the volatility of operating costs continue to be a central part of Mali’s rural electrification for rural providers and contributes to more regular cash- strategy, as the national grid expansion is unlikely to con- flows, creating incentives for investment in access expan- nect large numbers of dispersed, low income populations. sion through off-grid solutions, while facilitating access An integrated strategy needs to include investments in to credit for operators. This OBA project, especially when increased access, renewable energy, and energy efficiency; linked with clean energy activities supported by IDA and effective public-private partnerships; and capacity building SREP and working closely with local partners, is expected of stakeholders. The strengthening of AMADER’s oversight to support a sustainable increase in access for the poor. About OBApproaches OBApproaches is a forum for discussing and disseminating have been chosen and presented by the authors in agreement recent experiences and innovations in supporting the delivery with the GPOBA management team and are not to be attribut- of basic services to the poor. The series focuses on the provi- ed to GPOBA’s donors, the World Bank, or any other affiliated sion of water, energy, telecommunications, transport, health, organizations. Nor do any of the conclusions represent official and education in developing countries, in particular through policy of GPOBA, the World Bank, or the countries they output- or performance-based approaches. The case studies 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