pproaches 41926 N o v e m b e r 2 0 0 7 N o t e N u m b e r 1 7 Output-based aid in Colombia Connecting poor households to natural gas service Cledan Mandri-Perrott & Dominic Patella N atural gas connections could bring substantial these consumption subsidies, collected from a surtax benefits to poor households in Colombia. Compared charged to high income strata and industrial users, with other fuels typically used for cooking, natural through monthly consumer bills. gas is safer, less expensive, and less environmentally damaging. Despite these efforts, many low-income families But even though gas is more affordable, connection fees can put still rely on dangerous and less efficient energy sources. the cost of switching to this fuel out of reach for poor families. The reason is the high cost of switching to gas-- a con- To help low-income families realize the benefits of natural gas, nection cost of more than US$370 per household. This GPOBA is collaborating with Fundación Promigas, a charitable problem is particularly acute in Colombia's Caribbean foundation established by the Colombian gas transmission and coastal area, where one-time connection fees often distribution company, Promigas. Together, they aim to bring amount to more than 220 percent of an average poor 35,000 new natural gas connections to poor households in family's monthly income. In contrast, monthly natural Colombia's Caribbean coastal and south west regions. Through gas service bills are relatively affordable--especially one-time connection subsidies, the project is providing long-term when the savings from not purchasing other fuels (such economic and welfare benefits to poor families. as wood, kerosene, and liquefied petroleum gas) are Throughout the 1980s and into the 1990s armed taken into account. conflict between guerrilla factions, government forces, The government of Colombia has previously com- and private landowners hampered development in Co- mitted to subsidizing natural gas tariff levels in order lombia. Encouragingly, reforms enabled 1.4 million peo- to ensure that poor households are able to pay their ple to move out of poverty between 2000 and 2004. But monthly bills. However, poor families can only realize while this progress is heartening, much work remains to the value of this consumption subsidy once connected be done--more than half of Colombia's population still to the distribution network. By providing the means for lives below the poverty line. Particularly troubling are new connections, GPOBA is working to ensure that a the high levels of poverty and unsatisfied needs in the greater number of poor households can benefit from Caribbean coastal area. Households in this region, typi- the governments assistance efforts. cally consisting of five to seven family members, have an average annual monthly income of less than US$168. Bringing gas to Colombia's poor One persistent lack among poor households is safe, efficient sources of energy for daily life. Yet there The situation in Colombia, with families unable to is plentiful natural gas in Colombia. Recent estimates afford connection fees but able to pay monthly gas ser- suggest that its major gas fields hold 4.2 trillion cubic vice bills, is well suited to the one-time use of output- feet of reserves. During the early 1990s the government developed an initiative aimed at increasing the number of households with gas service connections. This initia- Cledan Mandri-Perrott is a senior infrastructure specialist tive, which has reached more than 17 million people with the World Bank's Finance, Economics, and Urban (about 40 percent of the population), provides for a Department. DominicPatella was a summer intern with the system of cross subsidy whereby poor residential cus- Global Partnership on Output-Based Aid. tomers receive a 40%­50% discounted tariff for the first Special thanks to JuanPayeras IFC Principal Investment 20m3 consumed. Gas distribution companies allocate Officer for Promigas. Supporting the delivery of basic services in developing countries colombia nat gas 11-19-07.indd 1 11/19/07 10:58:16 AM pproaches 41926 measurable outputs. Making disbursement contin- gent on delivery of outputs provides incentives for eliminating waste, working efficiently, and upholding quality standards. An output-based methodology is particularly effective when supporting the delivery of basic infrastructure services, where high connection fees often make access to new services unaffordable without financial assistance. Getting the subsidy right To be eligible for a GPOBA subsidy, families must belong to one of Colombia's two poorest socio- economic strata, as classified by the Estratificación Socio-Económica (ESE) system. This system, based on Colombia's Public Utilities Services Law, which pro- vides ranking criteria for classifying households into Colombian woman using new natural gas connection with stove provided by GPOBA co-financing. one of six strata, has helped target social programs to the country's neediest areas since the mid-1960s. This precise targeting means that GPOBA funds will directly based subsidies. This concept was tested in Colombia's benefit poor households that truly need assistance to Caribbean coastal area by an earlier, small-scale pro- obtain service. In addition, the subsidy will be paid gram with funding from the Dutch government. The only if the new connections result in ongoing service. results showed that subsidized connections are effec- GPOBA's grant of US$141 for each eligible house- tive in bringing gas service to poor households. hold covers about 38 percent of the US$370 cost of a Building on this earlier success, a GPOBA grant is new connection. As many households do not have suf- applying new connection subsidies on a much larger ficient funds immediately available to cover the remain- scale. The aim is to connect an estimated 35,000 fami- ing US$229 cost per connection, regional distribution lies in the Caribbean coastal and south west areas to companies provide financing over a six year period. the nation's natural gas distribution network. Working GPOBA examined the cost to poor families of switching with Promigas, Colombia's largest gas transmission and to natural gas by comparing the household connection distribution company, the project is installing a gas con- and monthly cost of natural gas, to the cost of compet- nection and a gas stove in each participating household. ing fuels such as electricity, LPG and wood. The subsidy amount was set such that the customer's contribution Structuring the project to the new connection (amortized monthly over a six Fundación Promigas, a charitable foundation, estab- year period) plus the monthly cost of natural gas was lished by Promigas, is helping to implement the project roughly equivalent to the monthly cost of competing along with Promigas' regional distribution compa- fuels. The GPOBA subsidy is designed to make each nies. These regional companies provide the resources, connection economically feasible while still requiring household financing, and technical know-how needed beneficiary families to make a substantial financial to make the new connections. Fundación Promigas contribution. Getting the subsidy level right is critical to oversees the work and make certain that new connec- ensuring that GPOBA funds reach more families, and tions have been properly made. GPOBA provides the encourages a sense of ownership among beneficiaries. subsidy financing and project oversight to ensure that Colombia's poor receive the maximum benefit from Providing service--four steps each dollar spent. The project follows four steps to bring service to Because GPOBA grants apply output-based new households (figure 1): criteria to the disbursement of funds, grant recipi- ents--in this case Promigas' regional gas distribution Local municipalities identify the recipient house- companies--do not receive payment until they achieve hold as belonging to strata 1 or 2, the poorest, ac- Supporting the delivery of basic services in developing countries colombia nat gas 11-19-07.indd 2 11/19/07 10:58:24 AM pproaches 41926 cording to the rules of the Public Utilities Services Making sure good work is done well Law, thereafter Fundación Promigas directs re- To ensure that money spent delivers tangible benefits gional distribution companies to make new natural to those in need, GPOBA has made funding contingent gas connections at each qualifying household. on three primary criteria: After making the specified connections and com- mencing new gas service, regional distribution Proof that each newly connected household be- companies document that new connections meet longs to one of Colombia's two poorest socioeco- quality standards and that households have suc- nomic strata. cessfully paid three months of billing. Certification and inspection of new connections, Fundación Promigas (through an independent which must be able to support a natural gas stove agent) reviews each connection and performs (to be provided to each eligible family at no ad- random technical audits to ensure that project ditional cost). criteria are met. Proof that newly connected households have GPOBA reviews the verifications of outputs by obtained (and paid for) service for at least three Fundación Promigas and disburses funds into a months. designated account from which the regional distri- bution companies are compensated for each new Fundación Promigas will evaluate the impact service connection. of the project annually, monitoring average house- Figure 1 Flow of funds and accountability in the project GPOBA 4. Disbursement 5. Subsidy application disbursement 3(b). Verification of and opinion Fundación on outputs Promigas delivered 3(c). Invoices for new connections after three months of service Regional Distribution Independent companies verification agent 1. New service Target population connections (members of Colombia's two 2. Technical audits poorest economic strata) to ensure quality 3(a). Monthly tariff payments Supporting the delivery of basic services in developing countries colombia nat gas 11-19-07.indd 3 11/19/07 10:58:31 AM pproaches hold consumption of natural gas, savings resulting each year. And it will enable them to avoid the dangers from the new in-home connection, and satisfaction associated with using other fuels in the home. with the service. In addition, Fundación Promigas will engage an Independent Verification Agent (IVA) Conclusion comprised of technical consultants to audit project expenditures and randomly inspect the quality of new The project serves as a pilot program, demonstrat- connections. ing a model that regional gas distribution companies can replicate throughout Colombia to speed access to Assessing results piped natural gas for poor households. By transferring performance risks to privately held regional distribu- By June 2007, 16,632 new natural gas connections had tion companies, GPOBA's output-based subsidy ap- been constructed, verified, and successfully billed for proach provides incentives for quality work and timely three months--representing more than US$2 million in project completion. GPOBA's effort in Colombia is an GPOBA subsidies that are benefiting poor families in example of how output-based aid can increase ac- Colombia's Caribbean coastal and south west regions. countability and leverage the strengths of private firms GPOBA expects the remaining 18,368 connections to produce tangible results. to be completed before the end of 2008, to reach the project's goal of 35,000 new connections. Upon the completion of this project, GPOBA will have contrib- References uted US$4.9 million in one-off subsidies. World Bank. 2004. "Colombia: Recent Economic Because the project clearly targets poor households Developments in Infrastructure (REDI)--Balancing and delays payment until measurable outputs are real- Social and Productive Needs for Infrastructure." ized, each GPOBA-sponsored connection represents an Vol. 2, "Main Report." World Bank, Latin America efficient and effective use of funds. Moreover, because and the Caribbean Region, Finance, Private Sector, families make significant contributions to the new ser- and Infrastructure Unit, Washington, DC. vice, ownership of the project's achievements remain at Yepes, Luis Augusto. 2004. "Colombia: Recent Eco- the local level. nomic Developments in Infrastructure--Sectoral Some benefits are even more tangible. The switch Report on Gas" (in Spanish). World Bank, Latin to natural gas for cooking purposes will enable partici- America and the Caribbean Region, Finance, Private pating families to save about half a month's income Sector, and Infrastructure Unit, Washington, DC. About OBApproaches 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. To find out more, visit www.gpoba.org The Global Partnership on Output-Based Aid Supporting the delivery of basic services in developing countries colombia nat gas 11-19-07.indd 4 11/19/07 10:58:34 AM