93837 NOTE NUMBER 6 October 2014 LESSONS LEARNED e Global Partnership on Output-Based Aid Challenges in Formalizing the Supply of Electricity in Mumbai’s Slums DEVELOPMENT CHALLENGE RIL was responsible for providing the upfront financing. GPOBA subsidized $56 of the overall cost of $103 per Indian cities have large populations of urban slum connection, and users contributed $47. The aid was dwellers who lack access to basic services from tied to outputs, payable once the targeted consumers utility providers. Approximately 65 million people, obtained access to electricity connections and met or 17 percent of India’s urban population, live in the wiring requirements. RIL was required to pay for slums. In Mumbai, slums accommodate 5.2 million upstream network investment costs, estimated at $110 people—41 percent of the city’s population.1 Many per connection, recoverable through the tariff. To households obtain access to electricity through illegal participate in the project, the slum dwellers had to connections, which can be unsafe and contribute to provide the necessary proof of ownership or tenancy commercial distribution losses at utilities. To address of the dwelling units, apply to RIL for legal connections, this challenge, the Indian Electricity Act of 2003 use licensed contractors to install new safe internal introduced a provision to increase formal access by wiring or update existing illegal wiring, and pay their requiring electric utilities to connect and supply any utility bills on time. customer who can provide proof of residency. THE PROJECT AND ITS PARTNERS In 2009, the Global Partnership on Output-Based RESULTS ACHIEVED OBA Lessons Learned Aid (GPOBA) approved a pilot project for $1.652 The project closed in June 2013, connecting only Series is a forum million with the objective of increasing access to safe 15 households under the output-based aid (OBA) for discussing and electricity supply in Indian slums through targeted subsidy scheme. Although early awareness campaigns disseminating project output-based subsides. The pilot focused on selected generated about 750 applications, many of them were insights at the conclusion urban slum areas of Mumbai, but had potential for found to be ineligible once the proof of residency of projects in supporting scale-up in other communities in Mumbai and across documents required for a legal connection were the delivery of basic India if successfully implemented. scrutinized. Residents were unwilling to change the services to the poor. existing internal wiring and pay a higher amount for The project was implemented by Reliance GPOBA is a partnership the safe wiring using standard quality material required Infrastructure Limited (RIL), a private sector utility, established in 2003 under the project. The Slum Rehabilitation Society and the sole distributor of electricity in the suburbs by the UK (DFID) and reported that many households expressed willingness of Mumbai. As designed, it aimed to provide 26,500 the World Bank. Its to connect under the project, but were unwilling to poor households with legal electricity connections other donors are the pay the required end-user contribution. During the life and safe internal wiring, starting with the Shivaji International Finance of the project, RIL made about 7,000 new connections Nagar slum. The wiring had to comply with Indian Corporation (IFC), the in Shivaji Nagar (outside of the OBA subsidy scheme); government standards, which would also meet Netherlands (DGIS), households used local electricians to install wiring that the basic customer needs of 4.5 points of supply, Australia (DFAT), did not necessarily conform with the technical standards or enough energy to run two lights, one fan, one and Sweden (Sida). required by the project but cost significantly less. television set, and one spare plug. The project For more information benefited from a community outreach and an visit www.gpoba.org education program supported by the U.S. Agency for 1 Census India 2011; Government of India and presentation by Dr C. or email us at International Development (USAID) and implemented Chandramouli, Registrar General and Census Commissioner, India. gpoba@worldbank.org. by the Slum Rehabilitation Society (SRS). 2 All monetary amounts are in US$ unless stated otherwise. Supporting the delivery of basic services in developing countries Lessons Learned services to the poor in Africa, Asia, and Latin America, and have succeeded in equipping households with legal connections 1 By not adequately compensating consumers for the and reducing the commercial losses of distribution companies. additional cost of wiring, the subsidy failed to create Such approaches could extend access to the poor, especially if demand for safe electricity supply. subsidies create incentives for them to connect legally; however, Cost escalations during implementation increased the end-user it is essential to analyze the reality of local political dynamics to contribution to $72, which was 56 percent of the revised cost design a workable project. Regulation would also need to be of $128. This was too costly for the target households, many strengthened to penalize the illegal tapping of electricity supply. 3 of which opted to pay the full connection fee of $34 to RIL The subsidy was too small to incentivize the service and organize their own wiring through local contractors—even provider to implement the project as designed. though it was deemed to be of substandard quality. Splitting RIL is one of India’s largest private sector companies, with more the limited subsidy between the connection cost and wiring did than $2 billion in annual revenues. In this context, there was not help; the subsidy paid for 25 percent of the RIL connection little incentive for the company to implement a $1.6 million fee and 50 percent of wiring from the distribution point and pro-poor subsidy scheme in India’s financial capital, where the internally within the household. It was not enough to either company’s core market is industrial and residential consumers. stimulate demand for safe wiring or encourage the utility to Such subsidy schemes should be designed with clear incentives connect new consumers to their network under the project. for service providers to implement them. For example, OBA The project demonstrated that in very poor areas schemes could support utilities to meet pro-poor access targets where consumers have limited disposable income, there is that they are legally obligated to attain, or support a corporate little willingness to pay for anything beyond basic access to social responsibility agenda to which a company is committed. electricity. Hence if subsidies are to incentivize access to safe It is also important to ensure that the service provider is not energy, they need to respond to the target population’s needs incurring a financial loss by connecting low-income consumers and willingness to pay. Adjusting the subsidy level in response to the system. Connection and usage costs should be covered to low uptake could have allowed the project to test whether through a combination of user fees, subsidies, and tariffs. In higher subsidies actually encourage households in urban slums cases in which lenders are partially financing projects, there to acquire safe electricity and stay legally connected over the should be enough revenue generated to repay loans. medium to long term. 2 Failure to manage the strong informal network hampered efforts to connect consumers to the utility network. 4 The project was designed in such a way that the utility company, RIL, took financial risk without return; even though the amounts were minor, it was an additional There is a strong informal network of service providers in Mumbai deterrent to implementing the project. slums that provide a range of services to residents, including RIL was responsible for financing and implementing the overall electricity. These providers tap into the distributor’s network and project but, like most electric utilities, does not have the charge households a flat monthly rate of $2–$4 per month for mandate to carry out any wiring beyond the meter. Hence RIL three to four points of electricity, which would cost $7–$10 for engaged licensed electrical contractors to carry out the internal 50–100 kilowatt hours from the utility. The lower cost of service wiring, and made upfront payments for the subsidized portion from informal service providers coupled with weak enforcement of wiring costs. The OBA subsidy was payable to RIL in phases of a legal connection policy hampered efforts to connect target once the outputs were achieved, and was staggered over a consumers to the RIL network. one-year period with no compensation for financing costs. To Future slum electrification projects could explore the work, the project needed the utility to engage contractors and option of partnering with local governments and the target assume a payment risk if the outputs were not fully achieved. communities to manage energy distribution in slums. Varying The absence of a financial incentive to compensate for such degrees of delegated management and participatory risk was an additional deterrent for the utility to connect users approaches have been used to extend water and energy under the project. The case studies are chosen and presented by the authors in agreement with the GPOBA program management team and are not to be attributed to GPOBA’s donors, the World Bank Group, or any other affiliated organization, nor do any of the conclusions represent official policy of the aforementioned organizations.