Rural Electrification Concessions in Africa: What Does Experience Tell Us? Richard Hosier, Morgan Bazilian, Tatia Lemondzhava, Kabir Malik, Mitsunori Motohashi, and David Vilar de Ferrenbach Energy and Extractives Practice | Africa Region, World Bank With support from Rural-Layout-LJ-fin-text.indd 1 6/27/17 8:49 AM © 2017 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington, DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved This work is a product of the staff of The World Bank with external contributions. The findings, interpre- tations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guaran- tee the accuracy of the data included in this work. 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Cover photo credit: Curt Carnemark/World Bank Rural-Layout-LJ-fin-text.indd 2 6/27/17 8:49 AM CONTENTS Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Acronyms and Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xix 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Private sector participation in rural electrification in Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Defining concessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Forms of power concessions in Sub-Saharan Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Conditions for successful concessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Study methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Outline of the report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Annex 1A. Electrification concessions in Africa: Terminated or never implemented . . . . . . 14 2 Rural Electrification Concessions in Africa: Mini-Grids . . . . . . . . . . . 15 Viability and impact of mini-grid concessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Advantages and disadvantages of the mini-grid model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Suggestions to improve future mini-grid concessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 3 Rural Electrification Concessions in Africa: Solar and Zonal . . . . . . 31 Solar home system concessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Rural zonal concessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Senegal’s experience with zonal concessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Lessons from solar and zonal concessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 4 National Utility Concessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Experience with national utilities operating under concession . . . . . . . . . . . . . . . . . . . . . . . 43 Viability and impact of national utility concessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Prospects for national utility concessions in rural electrification . . . . . . . . . . . . . . . . . . . . . 48 iii Rural-Layout-LJ-fin-text.indd 3 6/27/17 8:49 AM 5 Lessons from Other Regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Mini-grids in Sri Lanka and Cambodia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Solar home system concessions: Argentina’s PERMER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 National utility concessions: Peru and Guatemala . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Main lessons from other regions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 6 The Contribution of Concessions to Rural Electrification . . . . . . . . . 57 Mini-grid concessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Concessions of solar home systems and zonal concessions . . . . . . . . . . . . . . . . . . . . . . . . 61 National utility concessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Concluding remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Figures 1.1 Concessions on the spectrum of public-private sector institutional engagement . . . . . . . . . . . . . . 3 Tables ES.1 Four types of rural electrification concessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiv ES.2 Improved Access to Electricity in Sub-Saharan Africa, 2000–12: Twelve Fastest Growing and Those with Concessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xv ES.3 Sub-Saharan African countries with mini-grid concessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xvi 1.1 Four types of rural electrification concessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.2 Improved Access to Electricity in Sub-Saharan Africa, 2000–12: Twelve Fastest Growing and Those with Concessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1A.1 “Buyer’s remorse”—Electricity concessions implemented but terminated early . . . . . . . . . . . . . . 14 1A.2 “Cold feet”—Planned electricity concessions that were never implemented . . . . . . . . . . . . . . . . 14 2.1 Sub-Saharan African countries with mini-grid concessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2.2 Features common to mini-grid concessions in Sub-Saharan Africa . . . . . . . . . . . . . . . . . . . . . . . . 18 2.3 Financial status of mini-grid concessions in Sub-Saharan Africa . . . . . . . . . . . . . . . . . . . . . . . . . . 24 3.1 South Africa’s solar home system concessions and their active customers . . . . . . . . . . . . . . . . . 32 3.2 Typical features of rural zonal concessions in Senegal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 3.3 Status of rural zonal concessions in Senegal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 4.1 Features common to national utility concessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 6.1 Necessary conditions for concessions: Examples from the case studies . . . . . . . . . . . . . . . . . . . . 59 iv Rural-Layout-LJ-fin-text.indd 4 6/27/17 8:49 AM FOREWORD Recent estimates presented in the 2017 version also have been applied to mini-grids, solar home of the Global Tracking Framework established by systems, and even previously unelectrified zones. the international initiative known as Sustainable This report presents a review of the experi- Energy for All (World Bank and IEA 2017) show ence of Sub-Saharan African countries in de- that roughly a billion of the world’s people still ploying concessions to increase both the level of live without access to electricity. Over half of electrification and the level of private investment these people are estimated to live in Sub-Saha- in rural electrification from the 1990s until the ran Africa, with approximately 482 million living present. The results have been mixed. In several in rural areas and another 105 million in urban. cases, concessions have proven successful at In order to achieve the UN Sustainable Develop- increasing access to electricity. In others, ev- ment Goal #7, which focuses on ensuring access idence indicates that the effect of electricity to affordable, reliable, sustainable, and modern concessions on the pace of electrification has energy for all by 2030, an estimated $49 billion been minimal. In yet another set of instances, the per year will have to be invested in extending concession proved unprofitable or unworkable, electricity. and the model was abandoned. Public funds alone are insufficient to meet Regardless of whether the concession ap- this daunting challenge. Various approaches to proach to rural electrification is a promising solu- increasing the flow of private investment to rural tion (and the authors believe that, under certain electrification have been attempted, but consis- conditions, concessions can deliver results), this tent and replicable success remains elusive. report presents a first-of-its kind summary and Electricity “concessions” represent one of inquiry into the use of these public-private part- those approaches. A concession is a form of pub- nerships for enhancing rural access to electricity lic-private partnership in which the private sector in the region. By learning from experience, we is granted the right to build, operate, and expand can find effective ways to meet the formidable public infrastructure for a predefined period and urgent challenge of universal access to elec- of time. Although electricity concessions have tricity in Sub-Saharan Africa. been used most prominently to attract private investors to improve the operational efficiency of Lucio Monari, Director national utilities and distribution networks, they Energy and Extractives Global Practice World Bank Group v Rural-Layout-LJ-fin-text.indd 5 6/27/17 8:49 AM Rural-Layout-LJ-fin-text.indd 6 6/27/17 8:49 AM ACKNOWLEDGMENTS The authors would like to acknowledge the sup- who contributed (in alphabetical order): Katha- port of the African Renewable Energy and Access rine Baragona, Malcolm Cosgrove-Davies, Koffi (AFREA) program and the Energy Sector Manage- Ekouevi, Raihan Elahi, Jon Exel, Christophe de ment Assessment Program (ESMAP) in funding Gouvello, Mark Moseley, Christina Paul, Venkata the work presented in this report. Ramana Putti, Pedro Sanchez, and Robert Schlot- A significant number of World Bank col- terer. We appreciate the thought put into their leagues and friends proved instrumental to the comments, which improved the final product. formulation, production, and completion of this We regret that not every insightful comment may review and we would like to thank them for their have found its way into this final version. Life is a support. Meike van Ginneken provided early series of compromises. guidance and encouragement in shaping the The consulting team behind the review that framework for the activity. Lucio Monari pro- was the basis for this report was fielded by vided honest and candid feedback that helped Castalia, Ltd. We wish to single out the individual us bring the review to a successful conclusion. contributions made by Castalia’s David Ehrhardt Sameer Shukla provided very constructive and team members Ikepo Oyenuga, Marc Picker- suggestions through several review stages ing, and Philippe Durand. that helped us reach closure on the final drafts. Two further consultants who strongly shaped Malcolm Cosgrove-Davies provided early peer the final product deserve our heartfelt apprecia- review, encouraged us thereafter, and helped tion. Subodh Mathur served a very helpful role in organize the Quality Enhancement Review that molding the final drafts of the report, providing a gave us the confidence to finalize the report for shot of energy and fresh eyes when the authors’ publication. Thomas O’Brien provided effective energy was faltering. Steven Kennedy served as managerial guidance and constructive sugges- an extremely efficient and skilled editorial writer tions in the Decision Review; these proved very who whipped the final drafts into presentable helpful in completing this report. In his role as shape. This report was never in more capable ESMAP Program Manager, Rohit Khanna proved hands than when it was with Mr. Kennedy. patient and supportive throughout the project’s implementation. Richard Hosier, Morgan Bazilian, As the project progressed, it went through Tatia Lemondzhava, Kabir Malik, three different stages of peer review, and we Mitsonuri Motohashi, and would like to thank all of the peer reviewers David Vilar de Ferrenbach vii Rural-Layout-LJ-fin-text.indd 7 6/27/17 8:49 AM Rural-Layout-LJ-fin-text.indd 8 6/27/17 8:49 AM EXECUTIVE SUMMARY To extend the educational, economic, and As national power utilities in most African health-related benefits of electricity to more peo- countries have struggled to extend the power ple, African governments are working to increase grid beyond urban areas, interest has grown in the scale and pace of rural electrification, often alternative institutional and business models to in partnership with international donors guided speed electrification. And because the invest- by the international Sustainable Energy for All ments required by the power sector are so great, (SE4All) Initiative. SE4All, a partnership of the increased attention has been paid to attracting United Nations, the World Bank, and the Interna- funds from the private sector. Well-structured tional Energy Agency, has drawn the attention of public-private partnerships (PPPs) can bring the international community to the more than private resources to bear on challenges such as 1.1 billion people around the world now living rural electrification. without access to modern energy sources. Of Concessions—agreements in which the gov- these people, roughly 630 million live in Sub- ernment grants a private company the right to Saharan Africa, where the overall rate of access extend a specific service under conditions of sig- to electricity is just 35 percent; the rural rate is nificant market power—are one of many forms considerably lower (World Bank and IEA 2015). of private sector engagement in infrastructure. In several countries, fewer than 20 percent of Several African countries have already awarded rural dwellers have access to electricity in their concessions in the power sector, and their ex- homes. At its founding in 2013, SE4All announced perience is the subject of this study. Many more the goal of achieving universal access to electric- have considered but chosen not to implement ity by 2030. concessions, sometimes after an initial unsuc- Progress toward universal electricity access cessful experience. has been slow in Sub-Saharan Africa, with a few The record of concession arrangements notable exceptions. Between 2000 and 2012, only in stimulating faster and more effective rural 14 of the 49 countries in the region increased electrification in Sub-Saharan Africa is mixed. electricity connections at a rate faster than 1 per- Although no case has brought universally her- cent per year (World Bank and IEA 2015). In most alded success, it is possible to distinguish cer- places, population growth continues to outpace tain characteristics, approaches, and conditions electricity access growth. At current levels of that may improve the effectiveness of future progress, more than 50 years will be required for concessions. Those lessons, coupled with tech- the subcontinent to achieve universal access. nological advances that can make concessions ix Rural-Layout-LJ-fin-text.indd 9 6/27/17 8:49 AM x RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? more attractive to the private sector, can make This report evaluates the use of rural elec- future concessions a powerful tool in the fight for trification concessions in Africa. It provides a universal access to electricity. comprehensive overview of successful and failed The fundamental challenge of rural electrifica- cases and identifies the likely factors behind tion undertaken through concessions and other successes. PPPs is that rural electrification is not profitable The research was conducted in three stages. within the time frames normally considered at- First, a detailed desk review of rural electric con- tractive to the private sector. Partly for reasons of cessions in Africa was undertaken to understand affordability and partly because they lack elec- the landscape of concessions. Next, six in-depth, trical appliances and other devices, rural con- field-based country case studies were prepared.1 sumers initially consume only small amounts of Finally, a limited desk review of the experiences electricity, frequently falling within the subsidized with concessions and concession-like structures segment of the tariff structure often referred to in both Asia and Latin America was carried out as the “lifeline” tariff, which does not begin to in order to provide a point of comparison for the meet the capital costs of establishing new con- African experience. nections and supplying electricity in rural areas. This report is aimed at two primary audiences: Thus, rural electrification must be viewed as a World Bank energy and infrastructure practi- long-term investment in social welfare. tioners, who often receive queries from clients These characteristics of the rural electricity about the potential benefits and challenges of us- market in developing countries limit the scope ing concessions for rural electrification, and gov- of concession arrangements and the potential ernments in Sub-Saharan Africa and beyond that of private sector participation. Because rural are considering using the concession approach to electrification has usually been inconsistent address the challenge of rural electrification. with the investment requirements of private investors, many concessionaires demand public grants or cost-sharing to meet the financing gap Understanding concessions associated with building and operating new rural A “concession” is “any arrangement in which a electrification lines. But as small-scale renewable firm obtains from the government the right to energy technologies become a common part of provide a particular service under conditions of the electrification tool kit, so does the potential significant market power. A concession is thus a to reduce the capital costs of electrification and device that can be used to create competition for quicken its payback period. The maturation of a market, when competition in the market is not geographic information systems (GIS) also prom- operating” (Kerf and others 1998). ises to elicit greater interest from private parties Concessions may be better understood by lowering various risks. when located along the continuum of PPP Rural-Layout-LJ-fin-text.indd 10 6/27/17 8:49 AM EXECUTIVE SUMMARY xi arrangements in the provision of infrastructure rehabilitate-operate-transfer concessions for services. Options along that continuum vary brownfield (rehabilitated) interventions fall into based on the allocation of risks and responsi- this category. bilities—from pure public to pure private own- The highest degrees of private sector involve- ership and operation (Guislain and Kerf 1995). ment (where a private entity is selected to build, The most elementary forms of private sector own, and operate an asset under contract with engagement come in the form of contracts with the public sector or where the public sector di- public owner/operators to provide supplies, civil vests itself entirely of an asset) are not dealt with works, technical assistance, or management in this report. services. But even management contractors take A detailed review undertaken for this study little or no operating risk and are paid a fee for identified nearly 200 electricity concessions. providing services (frequently linked with perfor- Many are small operations connecting to as few mance-based incentives). as a hundred customers. Others are national util- The level of private sector engagement ity concessions that focus less on providing ser- increases under concessions. Here, the pri- vice to previously nonelectrified rural households vate contractor assumes risk in anticipation of than on improving the technical and financial a return. Leasing (widely referred to using the management of the electricity sector as a whole. French term affermage) represents a type of PPP About 15 African countries host one or more in which the public sector retains ownership of active concessions of four types, all following the assets as well as responsibility for making the lease (affermage) or strict concession model new investments and expanding the asset base. (table ES.1). Another six countries adopted elec- The private partner assumes responsibility for trification concessions at some point in the past operating and maintaining the assets, providing 25 years but later abandoned them. Still another the public service, and collecting payments for it. six or seven countries gave serious consideration In exchange for the right to collect payments, the to adopting a form of concession before aban- concessionaire makes regular lease payments to doning the idea. the asset owner. Mini-grid concessions have shown Strict concessions, as opposed to leases, themselves to be successful at engaging local require the private lessor to operate, maintain, investors and increasing the number of rural and expand the asset in accordance with care- customers served. However, in none of the fully negotiated and specified terms. The lessor six cases studied have these arrangements must return the asset, with all improvements, attracted large international investors or resulted to the owner at the end of the concession in a rapid increase in overall national electrifica- period. Both build-operate-transfer conces- tion. As policy makers and international donors sions for greenfield (new) interventions and turn to mini-grids as a cost-effective way to Rural-Layout-LJ-fin-text.indd 11 6/27/17 8:49 AM xii RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? Table ES.1. Four types of rural electrification concessions Concession Scale (number of Demographic Electrification type connections) of clientele Power source technology Type of asset Mini-grid 100–10,000 customers Rural Small integrated generation and Mini-grids Greenfield or concessions distribution networks (in some brownfield instances operated as localized distribution utilities selling power from the national grid) Solar home Solar home systems Rural Solar home system Isolated solar Greenfield system can electrify one home systems concessions household at a time, sometimes more, and concessions can service 5,000–30,000 such systems Rural zonal As conceived, 5,000– Rural Various: large, centralized Grid extension, Greenfield or concessions 30,000 to begin, with power stations, small isolated mini-grids, and brownfield the intent that they generators, or solar home isolated solar could grow beyond systems home systems that size National utility 100,000 or more Mostly urban, Large, centralized power stations Grid extension Brownfield concessions partly rural and occasionally, mini-grids Note: In a greenfield concession, a private entity builds and operates a new facility. In a brownfield concession, a private entity takes over an existing facility or asset, which is usually government-owned. expand access to electricity, it becomes increas- on the South African case, this will occur outside ingly important to ensure that mini-grid conces- the bounds of a concession framework. sions are designed and implemented properly, Rural zonal concessions have been un- as discussed further on. dertaken only in Senegal, where progress Concessions of solar home systems have has been slow. While the concessions continue so far been tried only in South Africa, and to function, one of their biggest drawbacks has the model is being gradually abandoned. been the time needed to design and implement Given the absence of natural monopolies in the the model. Work on the program began in 2004, supply of solar home systems and the rapid and and by the end of 2015 only 3,760 connec- serendipitous innovations in solar technology, tions had been provided, with approximately this model holds little promise for future replica- two-thirds of them made through solar home tion. Solar home systems surely will play an in- systems. While conceptually appealing, the Sen- creasing role in rural energy provision. But, based egalese experience is not an attractive model for Rural-Layout-LJ-fin-text.indd 12 6/27/17 8:49 AM EXECUTIVE SUMMARY xiii any countries considering the zonal concession been one of their primary objectives. But when approach. governments have encouraged such concessions National utility concessions have been to contribute to help expand access to electricity, successfully implemented in four countries they have responded favorably and with positive (Cameroon, Côte d’Ivoire, Gabon, and Uganda) results. Although the number of national utility and have all been effective at increasing the concessions across Africa is not growing at the density of electrification. The primary aim of present time, the success that several countries such concessions has been to improve utility have had in using them to expand access in rural performance, and rural electrification has not areas should be borne in mind by other countries. Table ES.2. Improved Access to Electricity in Sub-Saharan Africa, 2000–12: Twelve Fastest Growing and Those with Concessions Changes between 2000 2012 2000 and 2012 2012 Average Increase in annual Access National National the national percentage Annual growth electrification electrification electrification growth in population rank rate rate rate electrification growth rate (#) Country Population (percent) Population (percent) (percent) rate (percent) 1 Senegal* 9,860,578 37 13,780,108 57 20 1.67 3.12 2 South Africa* 44,000,000 66 52,341,695 85 19 1.58 1.55 3 Ghana 18,824,994 45 25,544,565 64 19 1.58 2.44 4 Gabon* 1,231,548 74 1,613,489 89 16 1.33 2.27 5 Lesotho 1,856,225 5 2,057,331 21 16 1.33 1.19 6 Togo* 4,874,735 17 6,745,581 31 14 1.17 2.70 7 Ethiopia 66,443,603 13 92,191,211 27 14 1.17 2.56 8 Botswana 1,736,579 40 2,132,822 53 14 1.17 2.04 9 Mozambique 18,264,536 7 25,732,928 20 13 1.08 2.82 10 Benin 6,949,366 25 10,049,792 38 13 1.08 2.73 11 Cabo Verde* 438,737 59 500,870 71 12 1.00 1.15 12 Rwanda 8,021,875 6 10,817,350 18 12 1.00 2.44 20 Uganda* 23,757,636 9 35,400,620 18 10 0.83 3.27 22 Mali* 11,046,926 17 16,112,333 26 9 0.75 2.98 26 Cameroon* 15,927,713 46 21,659,488 54 8 0.67 2.53 43 Madagascar* 15,744,811 11 22,293,720 15 4 0.33 2.80 Source: World Bank and IEA (2015). *These countries had a concession in place during part of the period from 2000–12. The concessions in Togo and Cabo Verde were terminated in 2006. Rural-Layout-LJ-fin-text.indd 13 6/27/17 8:49 AM xiv RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? Concessions and growth in Of the top 12 countries, three had conces- access to electricity sions still in place by 2015: Senegal, South Africa and Gabon. In neither Senegal nor South Africa Our review of concessions in Africa surveyed ad- can the relatively rapid increase in electrification vances in rural electrification under the conces- be attributed to the concessions. Rather, in each sions. To place that information in context, table of these instances, the national utility (SENELEC ES.2 provides information about the changes in and Eskom, respectively) was responsible for the electrification in the 12 most rapidly electrifying rapid increase in electricity connections, with the countries in Sub-Saharan Africa (including two concessions playing only a very small role in this of the case-study countries, Senegal and South growth. For Gabon, the government and the con- Africa), supplemented by the same numbers (and cessionaire cooperated to increase access, but it ranks) for the four remaining case-study coun- was still outpaced by population growth. tries. The astericked countries had some form of For the other case-study countries—Uganda, concession in place for the years from 2000 to Mali, Cameroon, and Madagascar—the conces- 2012, although the concessions in Togo and Cabo sion programs did not result in a rate of electrifica- Verde were terminated in 2006. tion growth increase of even 1 percent per year. Table ES.3. Sub-Saharan African countries with mini-grid concessions Total number Number of mini-grid of connections Average concessionaires made through number of and mini-grids in mini-grid connections Country Mini-grid program name Years in operation operation concessions per mini-grid Burkina Faso Electricity Cooperatives (Coopels) 2003–present Concessionaires = 92 14,250 155 Mini-grids = 92 Guinea Decentralized Rural Electrification 2006–present Concessionaires = 26 8,248 317 (PERD) Project Mini-grids = 26 Madagascar Mini-grid concessions 2005–present Concessionaires = 30 7,100 237 Mini-grids = 30a Mali Projets de Candidatures 2003–present Concessionaires = 68 78,000 312 Spontanées d’Electrification Mini-grids = 250 Rurale (PCASER) Senegal Projets d’Electrification Rurale 2003–present Concessionaires = 4 500 125 d’Initiative Locale (ERIL) Mini-grids = 4 Uganda West Nile Rural Electrification 2003–present Concessionaires = 1 6,800 6,800 Project Mini-grids = 1 Small grid extension concessions 2006–present Concessionaires = 5 31,600 6,320 Mini-grids = 5 a. In Madagascar, 200 villages are provided with service by the remaining 30 operators, but the exact number of mini-grids is not known (some mini-grids serve multiple villages). Rural-Layout-LJ-fin-text.indd 14 6/27/17 8:49 AM EXECUTIVE SUMMARY xv Mini-grid concessions Two developments are likely to help mini-grid concessions work better in the future. First, the The study examined six countries—Burkina shift from reliance on diesel fuel to renewable Faso, Guinea, Madagascar, Mali, Senegal, and energy promises to lower mini-grids’ opera- Uganda—in which mini-grid concessions were tional costs. Second, new technology—such still in operation in late 2015 (table ES.3). as pay-as-you-go, smart meters, and remote In all cases, the concessions were established control—should improve their financial viability. under a program initiated by the country’s rural Rapid technological innovation can quickly make energy agency or fund, which shouldered some unattractive installations more attractive and or all of the capital costs of the system. These pro- sustainable. grams elicited participation from local entrepre- Experience to date has brought to the fore- neurs possessing the knowledge and resources to front several areas in which future mini-grid operate a mini-grid system. But because they did concession arrangements can be improved not have access to large pools of equity and debt over those reviewed in this study. In brief, future investment capital, they required financial support mini-grid concessions will need to become more from their respective governments to meet the attractive and susceptible to private financing. capital costs of building the system. They should benefit from significant and well- Mini-grid concessions have increased the tuned subsidies. They should be permitted to number of rural electricity customers in the offer tariffs that promote financial viability. They countries in which they have been established should operate in accordance with a plan either and unleashed local entrepreneurs and enter- to reach utility scale and scope (for example, by prises, creating an avenue for local investment being encouraged to operate several mini-grids) and for the bottom-up emergence of small or to be connected to the national grid. electricity networks in rural areas. Mali may have implemented the most successful mini-grid pro- National utility concessions gram to date, one that has resulted in more than 70,000 people gaining access to electricity. The study reviews all four national electrical Typical cost breakdowns between public and utility concessions operating in Sub-Saharan private cost-sharing range from 60 percent to Africa at the end of 2015: ENEO in Cameroon, 80 percent public funding. But when the point of CIE in Côte d’Ivoire, SEEG in Gabon, and Umeme comparison is rural electrification projects with in Uganda. The first three firms operate as 100 percent public funding, these concessions vertically integrated electric utilities, whereas have demonstrated that private financing and Umeme is purely a distribution utility with no expertise can indeed be brought to bear. responsibility for generation or transmission in Rural-Layout-LJ-fin-text.indd 15 6/27/17 8:49 AM xvi RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? Uganda’s unbundled electricity sector.2 All four cost-sharing arrangements between the gov- concessions have met the objectives of improv- ernment and concessionaires or government ing sector performance and maintaining fiscal guarantees of loans to the concessionaires sustainability. for grid extensions not expected to contribute None of these concessions was established immediately to the health of the concessionaire’s with a primary objective of increasing rural short-term balance sheet. Such arrangements access to electricity, but three of the four conces- might be the most direct way of harnessing the sions have shown an ability to increase access to financial strength of relatively large actors to play electricity within the concessionaire’s designated a greater role in expanding access to electricity service areas. In Cameroon, ENEO (and its prede- in rural areas. cessors) have added an average of about 40,000 connections per year and succeeded in raising Conditions for successful the number of grid connections by 570,000, of concessions which 190,000 are in rural areas. In Gabon, SEEG Concessions are conceived, designed, and imple- has added roughly 10,000 new connections per year, raising the national access rate to 89 mented within the context of a country’s power percent and the rural access rate to 45 percent. sector, and that context is crucial in determining Umeme averaged 30,000 new connections annu- their success. Particularly important is commit- ally from 2005 to 2014, peaking with 78,000 new ment on the part of the government and major connections made in the final year of this period. power sector institutions to enable concessions Altogether Umeme has increased connections to succeed. Building on that commitment, the by a total of 360,000, of which roughly 120,000 context for concessions must meet certain key are in the rural areas. CIE is the only one of the conditions, both financial and regulatory. four utility concessions that has not yet achieved Financial viability. As noted, investments in significant increases in rural access. large-scale expansion of the grid to rural areas The challenge now is to reach agreements generate economic benefits over the long-term, whereby the strengths of the concessions are but for the most part they are not financially brought to bear on expanding rural access with- viable in the short to medium term. The public out compromising the primary goal of improving sector, therefore, typically bears the capital ex- utility performance. Perhaps the simplest way penditures required to connect rural consumers. to do this would be to negotiate a set of agree- Concessionaires, meanwhile, expect to earn a ments related to rural electrification within the sufficient positive rate of return on their invest- overall concession framework. This could include ment and for the assumption of various risks. Rural-Layout-LJ-fin-text.indd 16 6/27/17 8:49 AM EXECUTIVE SUMMARY xvii Over the duration of the concession, the govern- the existence of an adequate overall regulatory ment and regulatory environment must ensure a and legal framework—one that encompasses balance between the adequate financial returns public-private partnership laws or a dedicated for the concessionaire and socioeconomic objec- Law on Concessions—in which the respective tives such as affordability and inclusiveness. This concession regime would be embedded. requires a combination of subsidies and well-de- Detailed contracts with built-in flexibil- signed tariff regime. ity. Legally binding contracts should compre- Pre-investment support. The pre-invest- hensively define the rules of the game and key ment period—when a private firm is considering operating parameters. Regulatory or legal pro- becoming a concessionaire—requires active cesses for changing contractually defined terms support and engagement on the part of the and parameters in response to evolving eco- public sector. Regulators (or relevant government nomic, technological, or legal conditions should authorities) should formulate a comprehensive also be clearly defined. Protecting contracts from investment prospectus based on high-quality unexpected or arbitrary changes will improve sector data to assist prospective concessionaires concessionaires’ willingness to invest, while the in making informed decisions. Government au- possibility of renegotiation under specified con- thorities also should assume some of the costs ditions enables mutually agreeable and optimal of gathering information useful for prospective adaptation to new circumstances. concessionaires in meeting their due-diligence Reasonable costs of compliance. The responsibilities and should provide timely re- costs of compliance should be reasonably sponses to requests from concessionaires for matched to the nature and size of the conces- additional data and information. sions being implemented. Clarity as to mutual rights and responsi- Timely payments and predictable cash bilities. The roles of power sector entities that flows. Public sector payments to the conces- interact with or affect the concession should sionaire in the form of initial capital-cost sub- be defined distinctly and transparently. Uncer- sidies, recurrent subsidies, or reimbursements tainties, conflicts, and failure to adhere to com- must be adequately budgeted and disbursed in a mitments can discourage investment. This cuts timely manner. Large or repeated deviations from both ways, of course. A concession can work as expected cash flows will sap the confidence of pri- a partnership between private and public parties vate partners and discourage further investment. only when the rights and responsibilities of each are clearly defined, agreed upon, and adhered to. Provision of this condition largely depends on Rural-Layout-LJ-fin-text.indd 17 6/27/17 8:49 AM xviii RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? The future of concessions for Through the use of GIS-based planning, rural electrification through the use of stand-alone solar home systems (likely under conditions of competition This report has reviewed electricity concession rather than concession), and through cost-reduc- arrangements in Sub-Saharan Africa during a ing hybridization of mini-grid generation, rural period when electrification lagged behind pop- electrification is evolving rapidly, making it easier ulation growth. As African populations, govern- to plan and manage successful concessions. ments, and the international community place When sufficiently supported by the interested greater emphasis on universal electrification, the government, properly incentivized, and placed pressure will grow to find ways to tap private in- within an appropriate legal framework, conces- vestment and expertise to meet the challenge— sions can be a useful tool for attracting private notably through mini-grids and specialized resources, managerial expertise, and technical adaptations to national utility concessions. know-how to address the enormous rural electri- Properly conceived concessions provide a fication challenge. legal structure for effective public-private-part- nerships in the electricity sector. Of course, they References do not alter the fundamental economics of rural electrification or reduce overall costs; rather, they Guislain, Pierre, and Michel Kerf. 1995. “Concessions— provide opportunities to bring private resources The Way to Privatize Infrastructure Sector Monop- to bear. What should be clearly understood is olies,” Viewpoint, Note 59 (October). World Bank, that concession arrangements are not an end in Washington, DC. themselves, but a means to provide incentives Kerf, Michel, R. David Gray, Timothy Irwin, Celine and protections that can attract private re- Levesque, Robert R. Taylor, and Michael Klein. 1998. sources and expertise to the challenge of accel- “Concessions for Infrastructure: A Guide to Their erating electrification in rural Africa. Design and Award.” World Bank Technical Paper 399, Advances in electrification planning made Finance, Private Sector, and Infrastructure Network, possible by GIS technology will allow future mini- World Bank, Washington, DC. grid concessions to yield greater economies of World Bank and IEA (International Energy Agency). 2015. scope and cost-recovery tariffs. Simultaneous Sustainable Energy for All: Progress toward Sustain- advances in renewable energy technology— able Energy 2015. Global Tracking Framework Report. especially solar photovoltaics—already have Washington, DC: World Bank. multiplied the options for generating power in rural areas. Rural-Layout-LJ-fin-text.indd 18 6/27/17 8:49 AM ACRONYMS AND ABBREVIATIONS ADER agency for the development of rural JIRAMA national electrical utility company of electrification (Madagascar) Madagascar AER Agence d’Electrification Rurale ONEE Office National de l’Electricité et de l’Eau Potable du Maroc AMADER Agence Malienne pour le Développement de l’Energie Domestique et de PCASER Projets de Candidatures Spontanées l’Electrification Rurale d’Electrification Rurale ARSEL Agence de Régulation du Secteur de PERMER Proyecto de Energías Renovables en l’Electricité du Cameroun Mercados Rurales ASER Agence Sénégalaise d’Electrification PPER Programmes Prioritiaires d’Electrification Rurale Rurale AU administrative unit PPP public-private partnership BOT build-operate-transfer RERED Renewable Energy for Rural Economic Development BOO build-own-operate ROT Rehabilitate-Operate-Transfer CIE Compagnie Ivorienne d’Electricité SEEG Société d’Énergie et d’Eau du Gabon CRSE Commission de Régulation du Secteur de l’Electricité SENELEC Société Nationale d’Électricité du Sénégal EdF Electricité de France SE4ALL Sustainable Energy for All ENEO national electrical utility company of SONABEL Société Nationale d’Électricité du Burkina Cameroon Faso Eskom national electrical utility company of SONEL Société Nationale d’Electricité du South Africa Cameroun ERIL Electrification Rurale d’Initiative Locale du STEG Société Tunisienne de l’Electricité et du Sénégal Gaz FDE Fonds de Développement de Umeme private concessionaire operating main l’Electrification de Burkina Faso national distribution network in Uganda FERD Fonds pour l’Electrification Rurale UEDCL Uganda Electricity Distribution Company Décentralisée Limited GIS geographic information systems WENRECO West Nile Rural Electrification Company IPP independent power project All references to dollars refer to U.S. dollars ($) unless otherwise indicated. xix Rural-Layout-LJ-fin-text.indd 19 6/27/17 8:49 AM Rural-Layout-LJ-fin-text.indd 20 6/27/17 8:49 AM Chapter 1. INTRODUCTION Private sector participation in was invested in increasing access to electricity rural electrification in Africa in developing countries, against the $45 billion estimated to be needed to achieve SE4All’s goal The Sustainable Energy for All (SE4All) initiative, of universal access by 2030 (SE4All Advisory representing a partnership of the United Nations, Board’s Finance Committee 2015). As Sub-Saha- the World Bank, and the International Energy ran Africa is host to 19 of the 20 countries with Agency, has drawn the attention of the interna- the lowest electrification rates and 14 of the 20 tional community to the more than 1.1 billion countries with the highest absolute electricity ac- people around the world now living without ac- cess deficits, achieving universal access in Africa cess to modern energy sources. Of these people, will require special focus (World Bank and IEA roughly 630 million live in Sub-Saharan Africa, 2015: 48). Because no single solution with univer- where the overall rate of access to electricity sal appeal or effectiveness has been identified is just 35 percent; the rural rate is considerably to simplify and accelerate the expensive and lower (World Bank and IEA 2015). At its founding time-consuming process of rural electrification in 2013, SE4All announced the goal of achieving across the vast continent, future efforts will have universal access to electricity by 2030. to draw upon successful models wherever they Progress toward universal electricity access can be found. has been slow in Sub-Saharan Africa, with a few Annual investments to increase electricity notable exceptions. Between 2000 and 2012, access currently amount to just a fifth of what only 14 of the 49 countries in Sub-Saharan Africa is required to achieve universal access by 2030. increased electricity connections at an annual What can be done to increase them investments rate of at least 1 percent (World Bank and IEA and to improve their effectiveness? A common 2015). In most places, population growth contin- answer is to bridge the financing gap by leverag- ues to outpace growth in access to electricity. At ing the resources of the private sector. The SE4All current levels of progress, more than 50 years Advisory Board’s Finance Committee made link- will be required for the subcontinent to achieve ages to the private sector the focus of its 2015 universal access. report (SE4All Advisory Board’s Finance Commit- The financial costs of providing universal tee 2015). However, because rural electrification access are daunting. In 2015, a total of $9 billion investments are rarely profitable in the short-run, 1 Rural-Layout-LJ-fin-text.indd 1 6/27/17 8:49 AM 2 RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? they are generally unattractive to most private provides a review and analysis of such conces- investors unless they can be blended or supple- sions in order to understand the extent to which mented with resources from the public sector.3 they can improve the pace, effectiveness, and Independent power projects (IPPs) are the sustainability of rural electrification in Sub-Saha- most common form of private engagement ran Africa. on the generation side of the power sector in Sub-Saharan Africa. A recent World Bank study Defining concessions (Eberhard and others 2016) notes: The term concession is broadly used to refer to Historically, most private sector finance has been “any arrangement in which a firm obtains from channeled through privately financed independent the government the right to provide a particular power projects (IPP), supported by nonrecourse service under conditions of significant market or limited recourse loans, with long-term power power. A concession is thus a device that can be purchase agreements with the state utility or used to ”create competition for a market, when another off-taker. Between 1990 and 2014, IPPs competition in the market is not operating” (Kerf have spread across Sub-Saharan Africa and are and others 1998). now present in 17 countries. Currently, there are Concessions have been used in Europe for 125 IPPs, with an overall installed capacity of 10.7 centuries to provide incentives for the private GW and investments of $24.6 billion. However, sector to operate, maintain, and even expand private investment could be much greater and less upon infrastructure investments that remain concentrated. South Africa alone accounts for 67 publicly owned (see, for example, Bousquet and IPPs, 4.3 GW of capacity and $14.4 billion of invest- Fayard 2001). Their use is more common under ments; the remaining projects are concentrated in legal systems shaped by the tradition of civil law a handful of countries. (the continental European or French tradition), As with IPPs on the generation side, public-pri- which is highly codified and rooted in reliance on vate partnerships (PPPs) on the distribution side existing robust regulations and statutes; judges can be used to bring private sector capital and have a more limited role of applying the law to expertise to accelerate universal electricity ac- the case in hand rather than acting as arbiters cess. If structured properly and offering appropri- between parties that present their arguments, as ate incentives, PPPs can enlist private resources is the norm in the common law approach (British to supplement public resources, thereby in- tradition). In the European tradition, concession- creasing the pool of capital available to meet the aires assume operational risks, maintenance electrification challenge. obligations, and often investment responsibili- Electricity concessions are one form of PPP ties for the concessioned asset over an agreed that has been tried in various forms in several period, but the public sector retains ownership. countries in Africa and elsewhere. This report A concession contract spells out the private Rural-Layout-LJ-fin-text.indd 2 6/27/17 8:49 AM 1. INTRODUCTION 3 concessionaire’s right to operate the publicly- arrangements under which the private sec- owned asset under an agreed-upon regulatory tor is wholly responsible for managing the regime (Bakovic, Tenenbaum, and Woolf 2008). In infrastructure. the British tradition, the focus has been more on While private engagement gradually increases property rights, with the tendency being to divest in the first four boxes along the continuum, the public sector of assets, leaving the private even management contractors, which have the sector to assume full responsibility for those greatest private involvement of the four, take assets subject to regulatory oversight. little or no operating risk and are paid a fee for Concessions may be better understood when providing services (frequently linked with perfor- placed within the spectrum of PPP arrangements mance-based incentives). in the provision of infrastructure services. Op- The level and quality of the private sector tions along the continuum vary based on the engagement changes as the involvement moves allocation of risks and responsibilities—from pure to the next two steps, represented in violet. Here public to pure private ownership and operation, the private contractor assumes risk in anticipa- as seen in figure 1.1. (Guislain and Kerf 1995). tion of a return. These two stages—leasing (or On the left side of the diagram (in red), are affermage) concessions and strict concessions— boxes representing the public sector’s responsi- represent the categories of partnerships referred bilities for a publicly owned infrastructure asset. to as “concessions” for purposes of this report. Moving from left to right, the level of private The leasing stage (widely referred to using sector engagement increases in both scope of the French term affermage) stage represents a responsibility and financial risk allocation, with type of PPP in which the public sector retains the right side (in blue) representing institutional ownership of the assets as well as responsibility Figure 1.1. Concessions on the spectrum of public-private sector institutional engagement Supply and civil works Leasing contracts Subcontracting (affermage) BOO Technical BOT and Divestiture assistance Management concession by contracts contracts (stricto sensu) license Pure Pure public private Source: Modified from Guislain and Kerf (1995). Rural-Layout-LJ-fin-text.indd 3 6/27/17 8:49 AM 4 RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? for making new investments and expanding the electrification has a long payback period. Building asset base. The private sector partner assumes long rural feeder lines is an expensive proposi- responsibility for operating and maintaining the tion, and frequently, the customers served by assets, providing the public service, and collect- those lines use only small amounts of electric ing payments for service. In exchange for the power. As a result, rural electrification has usually right to collect these payments, the concession- been inconsistent with the investment require- aire makes regular lease payments to the public ments of private investors. In other words, it is sector asset owner. rarely profitable over the short to medium term. The next stage—strict concession—requires As a result, many concessionaires demand public the private lessor to operate, maintain, and grants or cost-sharing to meet the “financing expand the asset in accordance with carefully gap” associated with building and operating new negotiated and specified terms. The lessor must rural electrification lines. return the asset, with all improvements, to the As small-scale renewable energy technologies owner at the end of the concession period. become a common part of the electrification tool Both build-operate-transfer (BOT) concessions kit, so does the potential to reduce the capital for greenfield (new) interventions and rehabil- costs of electrification and quicken its payback itate-operate-transfer (ROT) concessions for period. brownfield (rehabilitated) interventions fall into this category. Forms of power concessions in The final two categories on this continuum Sub-Saharan Africa correspond to the highest degrees of private sec- A detailed review undertaken for this study iden- tor involvement in infrastructure. Build-own-op- tified nearly 200 electricity concessions. Many erate (BOO) is a scheme wherein a private entity are small concessions connecting to as few as is selected to build, own and operate an asset— a hundred customers. Others are national utility typically a greenfield development—under con- concessions that focus less on providing service tract with the public sector. Divestiture by license to previously unelectrified rural households than represents full private ownership, operation, and on improving the technical and financial man- expansion of the licensed asset, typically subject agement of the electricity distribution sector, in to an established regulatory regime. This report general. does not deal with these two categories. About 15 African countries host one or more Certain characteristics of the rural electric- active concessions corresponding to the lease ity market in most developing countries limit (affermage) or strict concession variety. Another the scope of concession arrangements and six countries adopted electrification concessions the potential of private sector participation in at some point in the past 25 years but then aban- the sector. As a “greenfield” investment, rural doned them (see table 1A.1). Still another six (or Rural-Layout-LJ-fin-text.indd 4 6/27/17 8:49 AM 1. INTRODUCTION 5 possibly seven) countries gave serious consider- located far enough from the national grid that the ation to adopting a form of concession but then costs of extending a medium- and low-voltage abandoned the idea. line to it cannot be economically justified. They This review identified four different types of are frequently established in regions so remote electricity-sector concessions present in Sub- that the national grid is not expected to reach Saharan Africa (table 1.1). Each is described them for a decade or more. The grids tend to briefly below. serve between a hundred and a few thousand customers and do not offer significant scale economies. As a result, the power produced and Mini-grid concessions sold by these “integrated” mini-grids is more ex- Mini-grid concessions cover two slightly different pensive than that supplied through the national categories of concessions. In most instances, grid. Most concessioned mini-grids generate and they generate and distribute electricity for distribute power; some serve as local distribu- relatively small, isolated communities that are tors of power acquired from the national grid. In Table 1.1. Four types of rural electrification concessions Concession Scale (number of Demographic Electrification type connections) of clientele Power source technology Type of asset Mini-grid 100–10,000 customers Rural Small integrated generation and Mini-grids Greenfield or concessions distribution networks (in some brownfield instances operated as localized distribution utilities selling power from the national grid) Solar home Solar home systems Rural Solar home system Isolated solar Greenfield system can electrify one home systems concessions household at a time, sometimes more, and concessions can service 5,000–30,000 such systems Rural zonal As conceived, 5,000– Rural Various: large, centralized Grid extension, Greenfield or concessions 30,000 to begin, with power stations, small isolated mini-grids, and brownfield the intent that they generators, or solar home isolated solar could grow beyond systems home systems that size National utility 100,000 or more Mostly urban, Large, centralized power stations Grid extension Brownfield concessions partly rural and occasionally, mini-grids Note: In a greenfield concession, a private entity builds and operates a new facility. In a brownfield concession, a private entity takes over an existing facility or asset, which is usually government-owned. Rural-Layout-LJ-fin-text.indd 5 6/27/17 8:49 AM 6 RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? other cases, mini-grid concessions are provided most have been selected and negotiated on a to distribution-only networks that sell power gen- case-by-case basis. To date, acceptance and im- erated by a national utility or other larger-scale plementation of unsolicited proposals has been generator to local areas previously unconnected common. Most have been built from scratch but to the grid. Most of the discussion of mini-grid have attracted public funding to defray part, if concessions in this report refers to the former not most, of their capital costs under public-pri- category, but in a handful of cases, the conces- vate partnerships. sions referred to as mini-grid concessions are In mini-grid concessions, the risk falls largely small distribution-only mini-grids. For example, in on the shoulders of the concessionaire. Govern- Uganda, two types of mini-grid concessions have ment may share some risks by contributing to been granted. the capital costs of the operation or by subsidiz- To operate sustainably and cover their long- ing fuel costs. Consumers may share the risks of run marginal costs, mini-grids typically must rising prices through indexation formulas. But for charge tariffs higher than those faced by cus- the most part, the concessionaire must bear the tomers on the national grid. The exception to risks inherent in operations, collection, system this rule is encountered in cases where the losses, shifting demand, inflation, and fluctuating national government has agreed to enforce a rates of interest and foreign exchange. Histori- uniform national tariff in which other electricity cally, they have also been exposed to the risk of consumers cross-subsidize the mini-grids’ higher the main grid arriving sooner than expected, but costs. Traditionally, mini-grids relied on diesel good concession contracts will explicitly spell out fuel or biomass to generate power, but small the concessionaire’s rights and responsibilities hydropower plants, where feasible, represent a when the national grid reaches the mini-grid’s cheaper generation source. Increasingly, mini- service area. grids are making use of new renewables, such as solar photovoltaic, small hydro, wind, and Solar home system concessions biomass gasification to generate electricity. The trade-off between diesel and renewables lies in In the concessions tried in South Africa, the gov- their contrasting cost profiles: renewable gen- ernment contracted a private firm to install and eration requires a greater share of capital cost: maintain solar home systems in defined geo- diesel generation demonstrates a higher share of graphic areas, typically a sparsely settled area recurrent, fuel-related costs. located far from the existing grid. A government Mini-grid concessions have been used primar- considering such a concession may view certain ily to stimulate bottom-up or “spontaneous” lo- regions as being perpetually served by solar calized electrification networks. While some have home systems, or it may view the systems as a been established through competitive selection, stop-gap pending arrival of the national grid. Rural-Layout-LJ-fin-text.indd 6 6/27/17 8:49 AM 1. INTRODUCTION 7 In a response to a government-led solicitation, most advantageous to service the area, or it may solar home system companies compete to have specify targets for various electrification technol- an exclusive or monopolistic right to supply solar ogies. Typically, such concessions are designed home systems or electricity from solar home sys- to serve a large number of potential customers tems to the area. The expectation is that in return (5,000–30,000 or more), but settlement density for these monopolistic rights, the concessionaire may vary from low to high within the concession will invest its own resources in establishing supply zone. Most such concessions have been green- and maintenance networks in the target region. field operations, it is possible to envision rural Only in South Africa has this type of con- zonal concessions where some existing assets cession been tried in Sub-Saharan Africa. The may already be in operation or may require reno- concessionaire was expected to assume the vation prior to operation. risks of capital investment, operations, collection, The area of a rural zonal concessions should system losses, inflation, and fluctuating rates of be large enough to permit economies of scale interest and foreign exchange. The only shared and its attendant benefits: lower costs, lower risk was that of fluctuating demand, which was prices, adequate profits, and sustainability. Be- split between the participating municipalities and cause of the focus on scale, some larger inter- consumers. The latter were charged a minimum national companies have become involved as monthly service charge and the former were concessionaires. Concessionaires charge cost-re- meant to provide a monthly operating subsidy to covery tariffs subject to regulatory oversight, reduce the demand risks assumed by the con- but the government or the rural energy agency cessionaire. If this concession had been estab- may help keep costs low by providing initial lished more recently, the collection risk could capital subsidies as part of its contribution to the easily have been shared with the consumer via partnership. the use of pay-as-you-go technology. As it was Senegal hosts the one case of a rural zonal not, cost-recovery remained a significant opera- concession found in Sub-Saharan Africa. The tional challenge to the continued operation and concessionaire bears the risks of operations, expansion of these companies. collection, system losses, shifting demand, and fluctuating interest rates. In the Senegalese case, Rural zonal concessions the risk associated with the prices of purchased Rural zonal concessions enable governments power and fuel is shared between the conces- to concede the rights to electrify a large area or sionaire, the government (which provides sub- zone. The terms of the contract may be tech- sidies to the utility that are passed through to nology-neutral, leaving the concessionaire free concessionaires in pricing), and consumers to deploy whatever technology they consider (fuel-price pass-throughs). Inflation risk and Rural-Layout-LJ-fin-text.indd 7 6/27/17 8:49 AM 8 RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? foreign exchange risk are split between the con- The concessionaire is responsible for collect- cessionaire and consumers. ing revenue from customers and for maintaining Owing to the complexity of risk-sharing and, in some cases, expanding infrastructure. formulations; the rules and standards governing Typically, the concession is for 15–30 years, at multiple electrification technologies in the same the end of which the assets revert to the govern- contract; and the need for negotiation of capital ment, which then decides whether to renew the cost subsidies, rural zonal concessions require concession or to open a new tender. Tariff-setting strong institutional capacity both to establish and rules and service standards are normally em- to regulate. bodied in the contract or license provided to the concessionaire, and these cannot be unilaterally National utility concessions changed. Disagreements between the govern- ment and the concessionaire must be resolved National utility concessions are typically estab- through international arbitration. lished to take over a utility that is solely responsi- The allocation of risks is spelled out in the ble for the major electricity network in a country. tendering process. Generally, risk is distributed It may be a vertically integrated utility that between the concessionaire, the government, operates the country’s entire electricity system and consumers according to which is in the (generation, transmission, and distribution) or it best position to control it. The concessionaire is may cover only the distribution network in an wholly responsible for operating risks, demand unbundled system. risks, and collection risks. Other risks, such as National utility concessions may or may not system loss risks and interest rate risks may be have explicit connection or access targets. Their shared between the concessionaire and con- primary purpose has been to help governments sumers. Still other risks, such as those related reform underperforming utilities that drain gov- to fuel price, inflation, and foreign exchange, ernment budgets and provide poor service. Most may be passed through to consumers so that serve more urban than rural customers, and they the concessionaire is not burdened with factors are not normally established for the purpose of beyond its control. One risk that has sometimes rural electrification. been left to the government is the fuel-price risk. A concession for a national distribution utility In the case of Cameroon, the government has gives the concessionaire a long-term right to chosen to absorb the risk of fluctuations in the use a set of state-owned electricity infrastruc- price of fuel and other inputs, thereby stabiliz- ture assets for which the concessionaire usually ing the retail price on behalf of consumers. In pays an up-front concession fee and commits to Uganda, the government has passed through investing in new infrastructure. to development partners the demand risk from public entities. Rural-Layout-LJ-fin-text.indd 8 6/27/17 8:49 AM 1. INTRODUCTION 9 Conditions for successful and the government ministries, but also reg- concessions ulatory authorities, national utilities, and even local authorities. Under what conditions are concessions likely to • Consistency. Major changes in the rules of succeed? Concessions are conceived, designed, the concession’s framework, in its interpreta- and implemented within the context of a coun- tion, and in its application should not be made try’s power sector, and that context is crucial without prior consultation and agreement with in determining their success. If the institutions the concessionaire and other key actors. It is that manage the power sector are working well, vital that governments and regulators not uni- other things being equal, it is more likely that laterally change the rules of the game or allow concessions will be successful in achieving their one actor to overreach or underperform with aims. Although this review does not analyze the respect to its responsibilities over a conces- power sector institutions of particular countries, sion’s lifetime. it is important to emphasize the crucial role of • Flexibility. Most concessions are set in place the broader sector in the success of concession for a long period of time, normally at least projects. Particularly important is commitment on a decade. As a result, they are exposed to the part of major power sector institutions to see changing economic, technological, and legal concessions succeed. In other words, the con- conditions. To respond to these changes cessionaire’s activities should not be undermined productively, the concession framework must by other sector entities. contain a mechanism to allow its terms and What are the major building blocks of implementation to evolve in a transparent and successful concessions? This report has consensual manner. identified several; they fall into two categories: • Nononerous compliance. The costs of regulatory and financial. Within each category compliance should be commensurate with several conditions appear to result in more the nature and size of the concessions being successful implementation of electrification implemented. It might be reasonable to concessions. expect detailed quarterly or even monthly The key regulatory issues that serve as build- reports from a national utility concession, ing blocks for a successful concession are: but the same requirement may be excessive • Clarity. The roles of the various parties in the for a local mini-grid. The compliance burden concession should be well-defined and remain needs to be matched to the complexity of the clear throughout the concession’s implemen- operation and the ability of the concessionaire tation. All pertinent entities should be included to bear it. in the process, not only the concessionaires Rural-Layout-LJ-fin-text.indd 9 6/27/17 8:49 AM 10 RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? The key financial issues that serve as building partner expects to earn a positive financial blocks for a successful concession are: return on its investments and for having as- • Pre-investment support. The pre-invest- sumed various risks.4 Within this scheme, the ment period requires active support and public sector can support or undermine the engagement on the part of both the public efficacy of concessions through its attitudes and private sectors. The latter must evaluate and actions toward pricing and subsidies. (in a process known as due diligence) whether Some, but not all, successful concessions the concession, including all available incen- have been conceived as operating on the tives, is economically attractive and offers an basis of full cost recovery, that is, with the ex- acceptable rate of return. The public sector pectation that tariffs will cover the operator’s partner must not only clearly define the goals, full costs, including an adequate rate of return. objectives, and rules of the concession ar- Cost-sharing for the early investment stage of rangement, it should also be prepared to bear the concession frequently includes a one-time some of the burden of the pre-investment capital subsidy. A few concessions have con- (due diligence) expenses of potential private tinued to operate in contexts where the public concessionaires. The necessary support could partner provides a recurrent subsidy to avoid take the form of preliminary field work and tariff hikes that the concessionaire would oth- data collection by the public sector owner erwise have to make to meet its revenue and to demonstrate likely financial viability of the return requirements. concessions, or cost-sharing with potential • Timely disbursement of public funds. concessionaires who wish to do their own Successful implementation of a concession fieldwork and analysis. Alternatively, the sup- project requires that the relevant public agen- port may come in the form of subsidies for the cies pay out funds allocated to the project in construction of greenfield systems or perhaps a timely manner. This applies not only to the as a reduction in the concession price (es- initial capital-cost subsidies (if any) but also to sentially an increased subsidy) to make up for any recurrent subsidies provided by the public shortfalls in existing brownfield concessions. sector over the concession period. A two- • Need for financial viability. Concessions month payment delay that may be routine are a partnership. The public partner will ex- for public agencies could well bring a small pect the private partner to contribute financ- concessionaire to bankruptcy. ing (both debt and equity), technical expertise, and managerial competence to the manage- ment of electricity assets. In return, the private Rural-Layout-LJ-fin-text.indd 10 6/27/17 8:49 AM 1. INTRODUCTION 11 Study methodology The second step involved the preparation (in 2015) of detailed case studies for six countries This study was designed to explore the use of where the identified concessions or concession concessions in Africa to promote rural electrifi- frameworks were still in operation. These case cation. As will be seen, not all concessions have studies involved site visits to gather data on the had as one of their goals increasing access to legal, regulatory, and contractual arrangements electricity among previously unconnected rural employed; interviews with key actors in govern- households. For that reason, this evaluation may ment, utilities, and private companies; and an assess some concessions against an objective assessment of the gains in rural access to elec- that they were never meant to meet. However, tricity attributable to each concession. the expansion of scope is justified in the search The six case study countries were Cameroon, for legal and institutional arrangements that Madagascar, Mali, Senegal, South Africa, and could lead to a greater flow of investment and Uganda. In addition, a brief review was done on expertise for rural electrification in Africa. the case of Burkina Faso, where the concession The methodology followed in the preparation arrangement relied upon is somewhat unique, as of this report had three steps. The first was a the concessionaires are cooperatives rather than desk review of nearly all electricity sector con- private companies. During the review, it became cessions in Sub-Saharan Africa from the late clear that the countries’ experiences with con- 1990s until 2015, when the review was con- cessions were more complex than anticipated, as ducted. These concessions fell into three cate- in both Senegal and Uganda at least two different gories: those implemented and still in operation types of concession had been undertaken either in 2015; those planned but never implemented successfully or otherwise. This provided a unique (because one or both of the partners got “cold opportunity to compare two different models of feet”); and those implemented but abandoned concessions operating under different rules but for one reason or another (“buyer’s remorse”). similar conditions. The reports from each of these This report focuses on the first group. Non-start- detailed case studies are available as separate ing and abandoned concessions are listed in case studies.5 annex 1A, with the reasons for those failures The third and final step of the methodology running the gamut from political opposition to was a review of electrification concession experi- financial nonviability and unrealistic expectations. ences and successful national rural electrification (Table 1A.1 summarizes concessions that were programs in countries outside Sub-Saharan Af- initiated but terminated early, and table 1A.2 rica. These desk reviews, based largely on World summarizes concessions that were seriously Bank documents, bring to the discussion not only considered but never implemented.) an idea of where concessions had proven suc- cessful at stimulating rural electrification, but also Rural-Layout-LJ-fin-text.indd 11 6/27/17 8:49 AM 12 RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? an overview of where rapid rural electrification rapidly electrifying countries in Sub-Saharan had been achieved with partial private sector Africa (including two of the case-study countries), support though without the use of concessions. supplemented by the same numbers (and ranks) The desk review of concessions in Africa for the four remaining case-study countries. All included advances in rural electrification under countries highlighted in the table had some form the concessions. To place that information in of concession in place for the years from 2000 to context, table 1.2 provides information about 2012, although the concessions in Togo and Cabo the changes in electrification in the 12 most Verde were terminated in 2006. Table 1.2. Improved Access to Electricity in Sub-Saharan Africa, 2000–12: Twelve Fastest Growing and Those with Concessions Changes between 2000 2012 2000 and 2012 2012 Average Increase in annual Access National National the national percentage Annual growth electrification electrification electrification growth in population rank rate rate rate electrification growth rate (#) Country Population (percent) Population (percent) (percent) rate (percent) 1 Senegal* 9,860,578 37 13,780,108 57 20 1.67 3.12 2 South Africa* 44,000,000 66 52,341,695 85 19 1.58 1.55 3 Ghana 18,824,994 45 25,544,565 64 19 1.58 2.44 4 Gabon* 1,231,548 74 1,613,489 89 16 1.33 2.27 5 Lesotho 1,856,225 5 2,057,331 21 16 1.33 1.19 6 Togo* 4,874,735 17 6,745,581 31 14 1.17 2.70 7 Ethiopia 66,443,603 13 92,191,211 27 14 1.17 2.56 8 Botswana 1,736,579 40 2,132,822 53 14 1.17 2.04 9 Mozambique 18,264,536 7 25,732,928 20 13 1.08 2.82 10 Benin 6,949,366 25 10,049,792 38 13 1.08 2.73 11 Cabo Verde* 438,737 59 500,870 71 12 1.00 1.15 12 Rwanda 8,021,875 6 10,817,350 18 12 1.00 2.44 20 Uganda* 23,757,636 9 35,400,620 18 10 0.83 3.27 22 Mali* 11,046,926 17 16,112,333 26 9 0.75 2.98 26 Cameroon* 15,927,713 46 21,659,488 54 8 0.67 2.53 43 Madagascar* 15,744,811 11 22,293,720 15 4 0.33 2.80 Source: World Bank and IEA (2015). *These countries had a concession in place during part of the period from 2000–12. The concessions in Togo and Cabo Verde were terminated in 2006. Rural-Layout-LJ-fin-text.indd 12 6/27/17 8:49 AM 1. INTRODUCTION 13 These data demonstrate that in only two For the other case-study countries—Cam- countries of Sub-Saharan Africa—South Africa eroon, Madagascar, Mali, and Uganda—the and Lesotho—did the average annual rate of concession programs did not result in a rate of growth in electrification over the time span electrification growth increase of even 1 percent exceed the population growth rate in the final per year. year, 2012—and in neither case is this result attributable to concessions. In all countries, Outline of the report annual population growth has exceeded annual Chapters 2 and 3 explore concessions in Sub-Sa- access growth, demonstrating a slow record haran Africa aimed specifically at expanding rural overall for electrification. Of the concession electrification by means of mini-grids, solar home countries among the top twelve electrifiers, systems, or rural zonal concessions. Chapter 4 three had concessions still in place by 2015: deals with national utility concessions that may Senegal, South Africa, and Gabon. In two case- or may not have had as one of their goals the study countries, Senegal and South Africa, the expansion of rural access to electricity. Chapter relatively rapid increase in electrification cannot 5 presents several cases of rural electrification be attributable to the concessions. In both these from outside Sub-Saharan Africa—some of which instances, the national utility was responsible for are not formal concessions—with the aim of de- the rapid increase in electricity connections, with riving lessons for future concessions in Sub-Sa- the concessions playing only a very small role in haran Africa. Chapter 6 presents conclusions. this growth. This will be further demonstrated in the subsequent analysis. For Gabon, the gov- ernment and concessionaire, SEEG, cooperated to increase access, but it was still outpaced by population growth. Rural-Layout-LJ-fin-text.indd 13 6/27/17 8:49 AM 14 RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? Annex 1A. Electrification concessions in Africa: Terminated or never implemented Table 1A.1. “Buyer’s remorse”—Electricity concessions implemented but terminated early Dates Country Concession or program name or description implemented Type of concession Cabo Verde Electra concession 2002–06 National grid (concession) Comoros Comorienne de l’eau et de l’électricité (CEE) 1998–01 National grid (affermage) Gambia SOGEA 1992–95 National grid (affermage) Guinea Electricité de Guinée (EDG) 1995–00 National grid (affermage) Mali Energie du Mali 2000–05 National grid (concession) Mozambique Energia de Moçambique Concession for Northern 2004–07 National grid (subregion) (concession) Inhambane area Namibia Northern Electricity Distribution Lease 1997–01 National grid (subregion) (affermage) Senegal SENELEC 1999–01 National grid (concession) Togo Togo Electricité 2000–06 National grid (concession) Table 1A.2. “Cold feet”—Planned electricity concessions that were never implemented Year(s) Country Name implemented Type of concession considered Benin Local rural electrification initiatives 2009 Mini-grid Benin Rural electrification concessions (REC) 2009 Rural zonal Cameroon Local project initiatives of rural electrification (LPIRE) 2008–12 Mini-grid Cameroon Rural energy priority programs (REPP) 2008–12 Rural zonal Chad Société Tchadienne d’électricité et d’eau (STEE) 2000–04 National grid Congo, Republic of Societé Nationale d’électricité (SNE) 2004 National grid Lesotho Lesotho Electric Company 2004 National grid Madagascar Jiro sy Rano Malagasy (JIRAMA) 2005 National grid Mali ZEM (priority electrification zones) 2005 Rural zonal Zambia ZESCO concession 2000–03 National grid Rural-Layout-LJ-fin-text.indd 14 6/27/17 8:49 AM Chapter 2. RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: MINI-GRIDS This chapter focuses on the use of concessions connect customers living within reach of the ex- in mini-grid development. isting national network. In such cases, the power A mini-grid is an electricity network built to purchased by these distribution-only mini-grids provide service to settlements in which demand and sold on to consumers may or may not cost is limited and the costs of extending the national the same as that sold to customers of the na- grid to the area either cannot be justified or tional utility. Mini-grid concessions of this nature cannot be undertaken in a timely manner. Most are found in Uganda and Senegal. mini-grids are small and operate in remote areas, Mini-grid concessions are a form of public-pri- where they generate and distribute power for vate partnership (PPP) intended to provide incen- sale to local consumers. Given their localized na- tives for the private sector to invest in supplying ture, no transmission lines are needed. Because electricity to rural areas. To date, most mini-grid of their limited size, mini-grids seldom grow large concessions have emerged through a some- enough or fast enough to achieve economies of what informal or “bottom-up” process which the scale, meaning that the power that they generate government establishes a policy framework, a remains relatively expensive. As national grids subsidy formula, and an information program expand, they will gradually absorb mini-grids, to attract interested private operators. Although thereby resulting in lower unit costs for consum- a few countries have tried to organize public ers. Both the outcome of lower unit costs and the procurements to elicit proposals, most mini-grid need for mini-grid operators to be compensated concessions established to date have arisen for stranded assets need to be borne in mind and from locally prepared proposals evaluated and planned for in any mini-grid program. endorsed by a rural energy agency. However, in a few cases the mini-grids were All mini-grid concessions reviewed here were granted concessions for distribution-only net- developed with the support of a rural energy works. This second subcategory of mini-grids agency that typically provided a financial contri- represent cases where small distribution grids bution to the effort. While some of the conces- are built beyond the limits of the existing grid to sions only sought to distribute grid-generated 15 Rural-Layout-LJ-fin-text.indd 15 6/27/17 8:49 AM 16 RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? power to remote rural areas, most of them generation mixes, but also a concomitant in- operated as mini-utilities, undertaking both gen- crease in capital costs (because the capital costs eration and distribution. of generating energy from renewable sources are From this first generation of mini-grids con- higher than those of generation using fossil fuels). tracted out under bottom-up conditions, there is A few African countries have encouraged little evidence of a clear link to planning beyond privately led mini-grid development without first the solicitations of proposals. No national plans adopting a legal concession framework. However, specified certain areas as being a priority for this approach has generated considerable uncer- mini-grids—for example, because the national tainty and a reluctance to invest on the part of grid would not reach them for a certain number the private sector, particularly with respect to the of years. Neither were studies of load or willing- investors’ rights once the national grid reaches ness to pay carried out to prove to investors that their network. Those rights may be nonexistent, investments would be financially viable. weakly developed, or unclear (Tenenbaum and In the future, the definition of priority areas to others 2014). be electrified by mini-grids operated as conces- The review underpinning this study identified sions may well be an important policy or plan- six countries—Burkina Faso, Guinea, Madagascar, ning prerequisite for accessing public subsidies Mali, Senegal, and Uganda—in which mini-grid for such ventures. Geospatial planning using concessions were still in operation in late 2015. geographic information systems would contrib- With the exception of Uganda, these countries ute to a more structured, logical, and financially are governed in the French administrative tra- attractive approach to identifying candidates for dition. Table 2.1 provides details. The analysis is such concessions. restricted to mini-grids that have operated under Those early mini-grids that generated their concession agreements. The discussion excludes own power relied either on locally available mini-grid operations that appear to operate fully renewable energy (such as small hydropower on public funds. plants or biomass) or on diesel generators. As a In all cases, the concessions were estab- result, their location and operations were limited lished under a program initiated by the country’s by local resource endowments and the cost of rural energy agency or fund, which shouldered purchasing transported diesel fuel. As solar PV some or all of the capital costs of the system. systems become cheaper and more broadly These programs elicited participation from local available, self-contained, isolated mini-grids will entrepreneurs possessing the knowledge and be more able to operate wherever the sun shines resources to operate a mini-grid system, even if and its energy can be stored. Existing mini-grids they did not have access to large pools of equity will see a drop in operating costs as renewable and debt investment capital. Given this financing sources are increasingly incorporated into their gap, they required financial support from their Rural-Layout-LJ-fin-text.indd 16 6/27/17 8:49 AM CHAPTER 2. RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: MINI-GRIDS 17 Table 2.1. Sub-Saharan African countries with mini-grid concessions Total number Number of mini-grid of connections Average concessionaires made through number of and mini-grids in mini-grid connections Country Mini-grid program name Years in operation operation concessions per mini-grid Burkina Faso Electricity Cooperatives (Coopels) 2003–present Concessionaires = 92 14,250 155 Mini-grids = 92 Guinea Decentralized Rural Electrification 2006–present Concessionaires = 26 8,248 317 (PERD) Project Mini-grids = 26 Madagascar Mini-grid concessions 2005–present Concessionaires = 30 7,100 237 Mini-grids = 30a Mali Projets de Candidatures 2003–present Concessionaires = 68 78,000 312 Spontanées d’Electrification Mini-grids = 250 Rurale (PCASER) Senegal Projets d’Electrification Rurale 2003–present Concessionaires = 4 500 125 d’Initiative Locale (ERIL) Mini-grids = 4 Uganda West Nile Rural Electrification 2003–present Concessionaires = 1 6,800 6,800 Project Mini-grids = 1 Small grid extension concessions 2006–present Concessionaires = 5 31,600 6,320 Mini-grids = 5 a. In Madagascar, 200 villages are provided with service by the remaining 30 operators, but the exact number of mini-grids is not known (some mini-grids serve multiple villages). respective governments to meet the capital costs purchased from the national grid system oper- of building the system. ated by Umeme, Uganda’s national distribution All but one of the identified programs are utility concessionaire. greenfield developments in which the mini-grids Table 2.2 summarizes the elements common were built from the ground up. The exception is to the mini-grid concessions considered in this the Ugandan WENRECo mini-grid, part of which review. Typically, the concessionaire is obliged to existed prior to the awarding of the concession. build, operate, and maintain the mini-grid asset, With the exception of the small grid-extension and to connect new customers who pay the concessions in Uganda, the mini-grids identified connection fee. However, meeting a target to in this table generate and distribute electricity to connect a specific number of new customers is local communities. In Uganda, the concession- not normally an obligation under such systems. aires are responsible only for running the rural Mini-grids implemented using concession distribution networks built and handed over to agreements have proven useful in bringing local them by the rural electrification agency: they private sector entities into rural electrification. do not generate power. The power they sell is They have tended to work best where rural Rural-Layout-LJ-fin-text.indd 17 6/27/17 8:49 AM 18 RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? Table 2.2. Features common to mini-grid concessions in Sub-Saharan Africa What is concessioned? The right to build a new power plant and a distribution grid, along with the right to operate these assets to sell power to customers and to collect revenue from customers. General obligations of the To build out the proposed investment, maintain and renew the equipment. concessionaire To build out final distribution lines to the premises of the new subscribers. To maintain minimum service standards, including provision of electricity for a minimum number of hours per day. Specific obligations related The number of expected connections is in the concessionaire’s business plan. to electrification Meeting more general electrification targets (beyond connecting anyone willing and able to pay the connection fee) is not typically required. Concessionaires are obligated to connect households in their service area that request a connection and pay the relevant connection fees. Main sources of finance For up-front capital investment, 60–80 percent of the financing is provided by the government (or for investment donors). The remainder (20–40 percent) is provided by the private sector. The private sources of finance are often informal (for example, own savings, remittances, business partners, friends, family). How costs are recovered The private portion of the investment cost and operational and maintenance costs are recovered through tariffs. How tariffs are set Concessionaires are generally free to propose tariffs that cover their costs and a reasonable rate of return. Once the tariffs are agreed upon, they may be lightly regulated either by a rural electrification agency or an electricity sector regulator. Type and extent of subsidy Usually the only subsidy is paid up-front by the government as a proportion of the capital costs. How concessions are Concessions are awarded by the government or the rural electrification agency (if one exists) on the awarded basis of proposals submitted by private firms, in response to expressions of interest or requests for proposals published by the government. Proposals cover the private entities’ plans and their request for start-up funding. To date, such proposals have not prespecified the precise settlement or bundles of settlements to be awarded through the solicitation process; the process has been bottom-up. Why governments chose To accelerate the extremely low rural electrification rate. this model To provide electricity service to areas remaining unserved by the national grid. For isolated, low-load customers, mini-grids may be the least cost solution for electricity service provision. Experience with mini-grid concessions in Sub-Saharan Africa energy agencies are capable of forming properly may have been unattractive to international functioning PPPs, combining public and private firms, failing to offer the type of risk-reward resources to meet both capital costs and, in a profile such firms seek. They also have been few notable cases, operating costs. configured to solicit bottom-up proposals rather At the time of this writing, no solicitation for than structured, detailed proposals submitted mini-grid concessions has received bids from in response to formal planning and tendering companies of international scale. The solicitations processes. Rural-Layout-LJ-fin-text.indd 18 6/27/17 8:49 AM CHAPTER 2. RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: MINI-GRIDS 19 Burkina Faso’s approach to mini-grid electrifi- construction. About 58 percent of the people in cation concessions relies on a unique structure the concession areas were connected to mini- built around electricity cooperatives. Access to grids, with the rest unable to connect because electricity in Burkina Faso remains low, at about they could not pay the connection fees. The 13 percent nationwide (World Bank and IEA Guinean concessionaires used diesel generators, 2015). For those parts of the country not in the although some consideration has been given to service area of the national utility, Société Na- bringing renewable generation to bear. However, tional d’Electrification du Burkina (SONABEL), the by late 2013 only one small hydropower plan had Fond de Développement de l’Electrification (FDE) been tapped by the concessionaires. The remain- allows cooperatives formed by village leaders ing 25 mini-grids were operating on diesel only. and entrepreneurs to be electrified. The electric- The building of these mini-grid concessions ity cooperatives (Coopels) are then allowed to relied upon funds provided by the Fonds pour sign concession contracts with FDE. l’Electrification Rurale Décentralisée (FERD). Under the terms of this agreement, the coop- The Guinean concessions were granted to local erative is then responsible for recruiting a builder entrepreneurs following a request for proposals. and a private technical operator. FDE will provide The costs of the construction were shared be- a mix of loans and grants to help pay for the con- tween the private sector (18 percent) and FERD struction of transmission lines (100 percent grant) (82 percent), comprising both loan and grant and distribution lines (60 percent grant). Of these components. Loan recoveries were targeted small concessions, 15 percent generate their to reach 75 percent, but actual achievements own power; the remaining 85 percent distribute amounted to 59 percent by the time the project power purchased on contract from SONABEL. closed in 2013. The FERD, which was established Currently, 92 cooperatives operate mini-grid with project funds, was never converted into a concessions in Burkina Faso, servicing approxi- permanent, sustainable financing source. As a mately 14,250 connections. However, their long- result, a few additional systems were supported, term financial sustainability will be challenged in but the process of electrifying communities using the near future as their diesel generating assets concessional arrangements to drive remote, rural begin to age and require replacement. It is not electrification has ground to a halt. clear how many of them will require further Madagascar took an approach similar to subsidies to replace the generating assets and Mali’s, but its solicitation of local enterprises to how many will be able to obtain financing for the serve as mini-grid utilities was not as effective. needed replacements. In 1998, Madagascar passed an electricity Guinea. Under a World Bank supported reform law designed to privatize the sector. project that closed in 2013,6 Guinea established The government’s main goal was to improve 26 rural concessions, with three more under the functioning of the national utility (JIRAMA). Rural-Layout-LJ-fin-text.indd 19 6/27/17 8:49 AM 20 RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? The law unbundled the industry and brought in As of September 2015, the 30 private oper- a private concessionaire to operate the utility. ators generate power using diesel, biomass, or While the JIRAMA reforms were unsuccessful— small hydro generators with capacities ranging because the private sector concessionaire was from 40 kW to slightly more than 200 kW. The unwilling to operate the concession at a loss at majority obtained their authorization contracts regulated prices—the utility reverted to public through bottom-up proposals being accepted ownership and management. The rural electri- by the Agency for Development of Rural Electri- fication agency began its operations in 2004. fication (ADER), as allowed under the law. These Several private operators took the opportunity proposals were required to include a workable to apply for subsidies to build small mini-grids, business plan and the agreement of the commu- mostly powered by diesel-fired generators. The nity in question. new rural electrification agency also tried, unsuc- The Malagasy government had hoped to con- cessfully at first, to run public tender processes nect more than 80,000 rural households using to select concessionaires for designated areas. concessions. That objective has not been realized What has emerged is a process of bottom-up for several reasons: development of mini-grid licensees or conces- • The operating costs of the widely used die- sionaires. Systems generating more than 500 kW sel-fired generators increased dramatically were made to compete for concessions, whereas when diesel subsidies were removed begin- systems below that size were considered licens- ning around 2012. Private operators reported ees and not required to compete. that the tariffs needed to recover fuel costs Since 2004, therefore, Madagascar has been were higher than consumers’ willingness (and granting mini-grid concessions to private op- ability) to pay. As diesel-fired mini-grids went erators to electrify rural areas. Originally, 47 out of business, the number of households operators were involved, but this number has served by mini-grids declined from a peak of since declined to 30 private rural concessions 9,000 in 2012 to 7,000 in 2015. (or authorizations). The remaining firms operate • The universal access subsidy intended to mini-grids that provide electricity to around 200 finance rural projects has not been disbursed villages, serving approximately 7,000 consumers to rural private operators as promised. In- in all. Most serve from 100 to 1,000 connections. stead, the funds raised by this levy have been Despite the efforts of these private players, the used predominantly to meet the losses of the national electrification rate in Madagascar is still national utility, JIRAMA. low (at 15 percent) and the rural electrification • Reforming JIRAMA has consumed the atten- rate has remained stable at about 5 percent for tion of policy makers since 1998. The failed the past decade. privatization process in the early 2000s was Rural-Layout-LJ-fin-text.indd 20 6/27/17 8:49 AM CHAPTER 2. RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: MINI-GRIDS 21 followed by a management contract between Finally, a third approach focused on sponta- 2005 and 2007 that ended acrimoniously. Not neous local proposals—Projets de Candidatures only does JIRAMA remain state-owned and in Spontanées d’Electrification Rurale (PCASER)— in poor financial condition, but it absorbs all of attracted significant interest from small entre- the attention given to the electricity sector. preneurs who continue to develop and operate The Malagasy government had plans to de- mini-grids under concession agreements up to velop larger rural zonal concessions that were the present. expected to use renewable energy technologies, Under PCASER, interested parties proposed particularly hydro and biomass. The aim of the to AMADER to build mini-grids with a generation plan was to support larger concessions and be- capacity of less than 250 kW. More than 250 such gin to achieve some economies of scale. How- mini-grids are operating in the country, run by ever, these plans have not yet come to fruition as 68 private entities and the vertically integrated JIRAMA continues to utilize all available electrici- electricity utility, Energie du Mali. The majority of ty-sector funding to subsidize itself. these projects are powered by diesel generators, Mali’s spontaneous bottom-up mini-grid but some are converting to hybrid solar-die- concessions have succeeded in providing elec- sel technologies with support from the World tricity to about 78,000 rural households since the Bank’s Rural Electrification Hybrid System Project program began in 2003. The concession ap- (P131084). Private operators typically manage proach evolved largely independently of broader between one and four mini-grids, with the largest electricity sector reforms. In 1999, Electricité de managing 15 mini-grids in 31 municipalities. France set up a mini-grid in Mali. This appears AMADER subsidized the investment costs of to have inspired replication in other projects. In new connections and has also subsidized on av- 2004, the government created the rural electrifi- erage 75 percent of the capital investment costs cation agency, AMADER (Agence Malienne pour of new installations of equipment. Private oper- le Développement de l’Energie Domestique et de ators have financed the remaining costs. Private l’Electrification Rurale), the main goal of which concessionaires are expected to recover their was to expand access to electricity in rural and investments, operations, and maintenance costs peri-urban areas. through tariffs. As a result, the price of electric- With World Bank support, AMADER initially ity from these mini-grids is currently around tendered out rural zonal concessions of around $0.50 per kWh, roughly three times the amount 10,000 customers, but with no success. Simul- paid by the customers of the national grid. taneously, AMADER issued tenders for mini-grid AMADER is building on its experience with the concessions, which also proved unsuccessful. PCASER concessions and encouraging private Rural-Layout-LJ-fin-text.indd 21 6/27/17 8:49 AM 22 RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? concessionaires to build out larger projects covering the allocation of subsidies, the collec- based on solar-diesel hybrid generators. tive purchase of equipment, and the selection of The PCASER projects reveal a trade-off engineers and construction firms to be hired by between the speed of project approval and the Agence Sénégalaise d’Electrification Rurale good governance. AMADER holds a great deal (ASER). However, the complete bidding process of responsibility over the rural electricity sec- occurred only once (in 2006), with four mini-grid tor, serving as both promoter and regulator. As concessionaires selected for support. a result, complaints have emerged about the Three of the four ERIL concessions were degree of discretion exercised by the agency, its established by local entrepreneurs; the other decision-making process, and whether or not its was established by donors. Under these conces- procurement process is “least-cost.” sions, the assets are state-owned and tariffs are The long-term sustainability of the Malian determined by the regulator, rather than ASER. mini-grids is now being tested, with some dis- Altogether, only about 500 electricity connections content emerging regarding the relatively high have been made in rural villages through the ERIL cost of the diesel-based power they provide. mini-grid concession program. Although ASER For those concessionaires able to participate discussed moving ahead with another phase of in the solar-hybridization program, operational the ERIL concession solicitation, no further action costs will undoubtedly decline, improving their has been initiated, as ASER’s attention became financial status. But as some of the equipment consumed by the rural zonal concessions (see they procured at the outset of the concession Chapter 3). nears the end of its useful life, it is not clear that Uganda has gone through two waves of cre- the concessionaires will be able to replace it. In ating mini-grid concessions. The first involved the recent months, some shaking out has occurred establishment of a concession around a small, among concessionaires; this has allowed the isolated grid that had been run by the Uganda more successful ones to consolidate and even Electricity Board before the unbundling of the expand their holdings. electricity sector, which began in 2001. The asset Senegal’s Electrification Rurale d’Initiative was an isolated grid in the West Nile region in Locale (ERIL) program was intended to stimulate northwest Uganda. It originally operated a 1.5 the development of small, bottom-up village-level MW diesel generator and sold power to about concessions that would operate in isolation from 1,200 customers. In 2003, the West Nile Rural the network of SENELEC, the national utility. The Electrification Company (WENRECo) was awarded procedures adopted were meant to undertake a 20-year concession to build and commission two competitive tenders for mini-grid concessions a 3.5 MW hydropower plant on the Nyagak River each year. The Ministry of Energy established and a new 1.5 MW diesel generator. detailed guidelines and formulas for the program, Rural-Layout-LJ-fin-text.indd 22 6/27/17 8:49 AM CHAPTER 2. RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: MINI-GRIDS 23 The new diesel gen-set was commissioned in new systems. As a result, five operators with little 2004, but the terms of the concession prohibited or no experience or technical expertise were any tariff hike until the hydro plant was com- granted responsibility for the new mini-grids, pleted. This placed considerable financial strain which collectively distribute power to about on WENRECo. The World Bank originally provided 31,600 connections. support to WENRECo for the construction of the small hydro plant, but the firm’s financial difficul- Viability and impact of mini-grid ties increased to such an extent that construc- concessions tion was discontinued in 2009. With support from Have mini-grid concessions in Sub-Saharan Af- KfW, the German development bank, WENRECo rica been successful in leveraging private invest- completed the plant in 2012. Since then, it has ment? Have they been financially sustainable? increased its customer base from the original What has been their impact? Table 2.3 summa- 1,200 to 6,800 by early 2015. rizes some of the answers to these questions. WENRECo’s situation has now stabilized, and its target of a 15 percent return on investment is Raising private investment finally within sight. Its prospects beyond 2019 are not yet clearly defined, however, as the compa- Because of how mini-grid concessions have ny’s mini-grid is expected to be connected to the been selected and developed—that is, in the ab- national grid at that time. As the concession was sence of a formal competitive process on a large granted for 20 years (that is, until 2023), the next scale—it is difficult to gauge their ability of to steps are unclear. bring in significant sums of private investment.7 The second wave of Uganda’s establishment Most operators remain local in orientation and of mini-grid concessions, begun in 2006, contin- small in scale, and no initial public offerings for ues to the present. Because private players had mini-grid concession companies serving com- not come forth on their own to request conces- munities have taken place. Still, it is clear that the sions to build new electricity networks, the Rural investments made by the operators tend to be Electrification Agency decided to finance and relatively small and are commonly shared with build new grid extensions, and then lease them the public sector, with the latter typically provid- out to private concessionaires. The rationale ing the lion’s share of the capital requirements. was that the public involvement in construction Nevertheless, given the relatively limited prof- would reduce the risk to concessionaires by itability of initial rural electrification, investments demanding less private capital to get started and that leverage as much as 20 percent from private thereby opening the door to local entrepreneurs. sources represent a positive step and help ex- The national distribution company, Umeme, tend the reach of limited public sector electrifica- was not considered eligible to operate these tion financing. Rural-Layout-LJ-fin-text.indd 23 6/27/17 8:49 AM 24 RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? Table 2.3. Financial status of mini-grid concessions in Sub-Saharan Africa Concession or program Estimated value of Estimated value of name or private investment in public investment Explanation of investment mix and financial Country description concession in concession sustainability of concession Burkina Faso Coopel — — The limited available information suggests that Coopels are unlikely to meet long-run marginal costs of operation. Guinea PERD $0.4 million $1.737 million Total value of mini-grid investments estimated at $2.137 million. No evidence available on financial sustainability of concessions. Madagascar Mini-grid $5.95 million $13 million When government stopped subsidizing concessions diesel, 17 of 47 mini-grids closed down. Some operators claim ability to recover initial investment costs and operating costs, but long-run prospects remain uncertain in the absence of fuel subsidies. Mali PCASER $13 million $39 million Ability of concessions to cover long-run marginal costs and achieve full sustainability not yet clear. Mini-grid market currently transitioning. Senegal ERIL — — ERIL mini-grids were meant to be bottom-up mini-grids largely funded by development partners. Insufficient evidence available on financial sustainability. Uganda WENRECo Unspecified own Initial grant of After initial financial difficulties, tariff rise and resources invested. $14.75 million made restructuring, WENRECo appears on target to Loan of $12.3 million. available from REA achieve 15 percent return on equity. using World Bank funds. Uganda Small grid — — Two of the five operators in this category distribution presently appear to be on sound financial concessions ground. Insufficient information to judge the situation for the remaining three. — = data not available. In Guinea, the local private operators pro- average, AMADER pays 75 percent of the invest- vided 18 percent of the capital investments. The ment costs for rural concessions,8 placing the remaining funds were provided as a mix of grants total value of the investments at $52 million. and public loans. In Madagascar, the mini-grids have invested a In Mali, mini-grid concessions have attracted little over $6 million in private resources into their at least $13 million in private investment from concessions. In theory, this amount was to have the local firms engaged. The estimate is that on leveraged approximately three times its value in Rural-Layout-LJ-fin-text.indd 24 6/27/17 8:49 AM CHAPTER 2. RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: MINI-GRIDS 25 subsidies from the Fonds National d’Electrifica- sources therefore comes to $27.05 million. The tion, bringing the total value of the investments other five Ugandan rural concessions that oper- to roughly $24 million. However, several conces- ate distribution networks have invested little or sionaires stated that they had not been paid the no private capital into their operations. full amount of the subsidy they were promised, All of the mini-grid concessions reviewed in owing largely to JIRAMA’s failure to turn over this report (with the exception of the five Ugan- to the rural energy agency the surcharges it dan distribution-only mini-grids) have managed collects. This means that more resources than to draw upon private sector debt or equity expected were drawn from the private sector funding for a portion of their capital needs. because JIRAMA was allowed to prioritize its own While in no case has the level of private funding financial needs over its obligations to the Fonds constituted the majority of the financing, in all National d’Electrification. cases the private sector resources have helped For Mali and Madagascar, the private invest- to move these projects from the drawing board ment amounts to between 25 and 30 percent to implementation. of the total investment in the mini-grid systems. On average, for Mali, the private investment Maintaining financial sustainability comes to approximately $167 per customer out of a total investment of $667 per customer. For In terms of financial sustainability, the mini-grid Madagascar, the private investment comes to concessions demonstrate a mixed record. approximately $845 per customer out of a total In Mali, most of the concessionaires appear investment of $3,380 per customer. The enor- able to recover their initial investment costs and mous difference in the overall cost per customer operating costs. However, their ability to replace in the two countries ($667 vs. $3,380) is largely outdated capital (in terms of generators and attributable to the harnessing of small hydro- prepayment meters) has not yet been demon- power resources for mini-grids in Madagascar strated. The larger concession operators in Mali versus reliance on diesel-only systems in Mali. know which of their individual mini-grid projects In Uganda, WENRECo—which is owned by are financially sustainable and which are not. Industrial Promotion Services, a subsidiary of the At present, the concessions in Mali seem to be Aga Khan Fund—has invested its own resources facing a period of winnowing and consolidation. into the concession. It has also obtained loans In Madagascar, 47 mini-grids were operating from KfW and Centenary Bank totaling $12 successfully as licensees or concessionaires million, as well as grants from KfW ($1.3 million) prior to 2013. By 2015, that number had declined and from the Rural Electrification Agency ($14.75 to 30. The decline is directly attributable to the million in World Bank funds). The total financing removal of the subsidy on diesel, which had support provided to WENRECo from outside helped hold down operating costs. Rural-Layout-LJ-fin-text.indd 25 6/27/17 8:49 AM 26 RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? In Uganda, WENRECo initially struggled to stay avoid the political backlash associated with the in business, particularly due to the conditional markedly higher tariff. prohibition against raising tariffs until a small hydropower plant was completed. It now ap- Impact pears to be heading toward its goal of 15 percent Mini-grid concessions have increased the num- return on equity. However, the Ugandan gov- ber of rural electricity customers in the countries ernment has decided to connect the WENRECo in which they have been established. Prepar- grid to the main national grid in 2019—before ing the policy, legal, and regulatory foundation the end of the 20-year concession period. The for the concession system requires thoughtful government then expects WENRECo to operate groundwork. For example, in Mali, the Electricity the entire service territory in West Nile, which Ordinance establishing the policy framework will require adjustments to the terms of the was passed in 2000, but no substantial mini-grid concession. construction took place until 2006. It allowed Two factors shape the ability or inability of for the establishment of three types of conces- mini-grid concessions to achieve financial sus- sions. The spontaneous, bottom-up variety was tainability. First, mini-grids demonstrate few econ- the only type that flourished under the PCASER omies of scale and therefore tend to produce and model. In Madagascar, the electricity reform law supply expensive electricity when compared to was passed in 1998, but the first projects were electricity generated on the national grid. 9 not tendered until 2004. As of 2015, the country Second, unless mini-grid concessionaires was still working to adopt a legal framework for are able to compensate for these higher prices PPP’s that would clarify the roles and protections by raising tariffs, obtaining subsidies, or reduc- extended to private partners. The WENRECo ing costs by generating from cheaper sources, mini-grid concession in Uganda was perhaps their financial sustainability remains a challenge. the quickest to implement, possibly because an Even if the regulator or the concession contract existing asset was available and the entire sector allowed them to charge higher prices, customer was being unbundled according to the Electricity dissatisfaction at having to pay much higher Act of 1999.10 The bidding process was initiated prices than fellow citizens attached to the main in 2001, and the contract for the 20-year conces- grid makes continual price rises a challenging sion was signed in April 2003. prospect. Several concessions in Mali that were In terms of the pace of connections, the relatively close to the grid have faced so much Malian PCASER mini-grids collectively managed political opposition to their proposed tariffs that to make approximately 78,000 rural connections their systems were eventually bought out by En- in slightly more than nine years, for an average ergie du Mali on an accelerated basis in order to of slightly less than 10,000 connections per year. Rural-Layout-LJ-fin-text.indd 26 6/27/17 8:49 AM CHAPTER 2. RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: MINI-GRIDS 27 These households are estimated to account for By and large, African mini-grid concessions nearly 577,000 rural inhabitants. In Madagascar, require public and private cost-sharing. The during the 2004–15 period, the average number typical cost breakdowns range from 60 percent of rural connections made each year by mini-grid to 80 percent public funding. But when the point concessions was 700. of comparison is rural electrification projects with WENRECo made approximately 467 connec- 100 percent public funding, these mini-grid con- tions per year on average during its 12 years of cessions have demonstrated an approach where operation. However, during the company’s finan- private financing and expertise can be brought cially unstable first decade from 2003 until 2012, to bear. The challenge for the future will be to roughly 210 connections were made per year, as find ways to effectively increase their leverage, the total customer base rose from 1,200 to just impact, and sustainability. 3,300. When its financial difficulties were resolved in 2012, its connection pace increased to almost Advantages and disadvantages 1,200 connections per year, representing 3,500 of the mini-grid model total connections in three years. This review has identified several advantages and The second wave of concession awards in disadvantages of the mini-grid concession model Uganda were distribution-only mini-grids. This as applied to date. wave began in 2006, with the first two contracts signed in 2007 with KIL and Ferdsult, which, by Advantages the first quarter of 2015, had developed cus- tomer bases of 7,700 and 19,500. Two more Concessions for mini-grids have shown a num- agreements were signed in 2011 with PACMECS ber of advantages for rural electrification, includ- and BECS cooperatives. These had reached 2,200 ing the following. and 4,200 customers, respectively, by the first Mini-grids are a technically and eco- quarter of 2015. 11 nomically optimal solution in some areas. The mini-grid concessions reviewed here have Mini-grids are often the best choice to connect unleashed local entrepreneurs and enterprises, small and geographically remote settlements and creating an avenue for local investment and for villages over the short to medium term. The In- the bottom-up emergence of small electricity ternational Energy Agency estimates that almost networks in rural areas. Mali may have imple- half of the 315 million people in rural areas of mented the most successful mini-grid conces- Sub-Saharan Africa who gain access to electric- sion program to date, one that has resulted ity in the next 25 years will do so through mini- in more than 70,000 people gaining access to grids. Although the IEA’s projections have not electricity. received universal acceptance and are viewed as Rural-Layout-LJ-fin-text.indd 27 6/27/17 8:49 AM 28 RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? being too optimistic about the long-term role of Disadvantages mini-grids, it is accepted that mini-grids have a Concessions for mini-grids have shown a num- significant role in increasing access to electricity ber of disadvantages or weaknesses for rural in Sub-Saharan Africa. electrification, including the following. Mini-grids tap market forces. Bottom-up Owners/operators lack capital. In rural concessions in Mali and Madagascar have Africa, the local businesses, entrepreneurs, de- revealed the existence of local entrepreneurs, velopers, and citizens who are best positioned to business leaders, and developers interested in undertake mini-grid projects have limited access obtaining mini-grid concessions and willing to to equity and debt. Lack of capital and limited ac- invest in mini-grid projects to serve their com- cess to finance limit the large-scale development munities. Such local entrepreneurship, while not of mini-grid concessions. universal, has proven an important force to be Financial viability can be marginal. Up- harnessed in cases where it is present. front capital subsidies can close the viability gap Mini-grids develop local entrepreneurial and help concessionaires get started. However, talent and local solutions. Mini-grid con- local concessionaires have proven susceptible cessions are entrepreneurial ventures in which to shocks that test their financial strength. Many private operators face substantial risks and have mini-grids run the risk of being unable to re- strong incentives to reach commercially viability. cover from customers the costs of unforeseen Some of the entrepreneurs who undertake these increases in the cost of diesel fuel or the high projects are local, and even foreign operators capital costs of tapping renewable generation typically take local partners. sources. Mini-grids attract private sources of Future integration with the grid is often financing from local sources. Mini-grid con- not adequately planned for. Connecting a cessions can generate private investment in rural mini-grid to the national grid raises many issues. electrification, though private operators typically Perhaps the most important question is this: provide only part of the financing for the mini- When the main grid reaches the mini-grid, on grid investment. In Guinea, Madagascar and Mali, what terms should the mini-grid be folded into the private portion of the investment cost came the main grid operator? Assuming that the mini- from personal investments, friends, business grid has been built in a manner consistent with partners, or local investors. Even if these private grid standards, its assets presumably have some resources represent a minority of the total invest- residual value for which the private operator ment cost, they supplement the limited public should be compensated. Concession guidelines resources available for rural electrification. need to make both the technical standards and the compensation formula explicit.12 Rural-Layout-LJ-fin-text.indd 28 6/27/17 8:49 AM CHAPTER 2. RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: MINI-GRIDS 29 Planning for mini-grid bidding has not donors could provide policy support to local yet attracted larger international inves- commercial banks to help them extend loans to tors. To date, none of the mini-grid concessions start-up operators or concessionaires in need of identified have been bid out as part of a detailed working capital or capital for expansion of their electrification planning program that would networks. The tenor of the debt is critical if tariffs attract larger, international investors keen to are to be affordable. Short-term financing forces operate multiple mini-grids in the same country, concessionaires to charge higher tariffs, squeez- thereby taking advantage of economies of scope. ing customer affordability. Similarly, it would be As electrification planning comes to take greater helpful to devise, for future mini-grid conces- advantage of geospatial analysis, governments sions, “patient” equity investments that are not should be able to identify and bid out multiple focused on quick returns. For example, if national sites that are ripe for mini-grid concessions. utilities were able to provide or guarantee long- term financing to mini-grid concessionaires, they Suggestions to improve future would be better able to synchronize the timing of mini-grid concessions their connection and take-over of the mini-grid to Two developments are likely to help mini-grid the payback period of the financing. concessions work better in the future. First, the Designing mini-grid concessions around shift from reliance on diesel fuel to renewable existing (brownfield) networks—something found energy promises to lower mini-grids’ operational only in the case of WENRECo in Uganda—would costs. Second, new technology—such as pay-as- provide a way to quickly increase the equity base you-go, smart meters, and remote control—can of small, local concessionaires. improve their financial viability. Rapid techno- Provide significant subsidies. Mini-grids logical innovation can quickly make unattractive in Africa need subsidies to bring their systems installations more attractive and sustainable. quickly to the point of financial viability. Such Experience to date has brought to the forefront subsidies are needed to overcome the lack of five areas in which future mini-grid concession ready financing, the significant perceived risks of arrangements can be improved over those re- building and operating mini-grids, and the limited viewed in this study. These recommendations are: willingness and ability to pay found in many rural Improve access to outside financing. communities. Private operators starting mini-grid concessions Implement tariffs that promote finan- rely for the most part on their personal wealth, cial viability. Tariffs, combined with subsidies, networks, and business associates for start-up should allow the concessionaire to be financially capital and ongoing financing. Local banks rarely viable. Governments need to be aware that with- finance such operations. Governments and out recurrent subsidies, private concessionaires Rural-Layout-LJ-fin-text.indd 29 6/27/17 8:49 AM 30 RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? will have to raise tariffs frequently to keep up Encourage common ownership/man- with rising costs. Without the ability to adjust agement of several mini-grids. Because of prices either through tariff hikes or recurrent their small size, mini-grids are rarely able to take subsidies, private participants will not find mini- advantage of the economies of scale that are so grid concessions attractive enough to meet their crucial to the economical delivery of electricity. risk-reward requirements. This problem can be mitigated by allowing one Develop a transition path to reach utility firm to operate several mini-grids. The economies scale and connect to the national grid. In and savings can then be captured in administra- the 10-year to 30-year life of a mini-grid con- tive functions, engineering design, and repetition. cession contract, the main grid may reach the A system of efficiently run mini-grids operating mini-grid’s service area. Private developers need at similar sizes, utilizing the same generation, regulatory certainty about what options will be distribution, and metering approaches, and available to their business: selling out, becoming owned by the same company using one business a local distribution utility, or becoming a small model can be expected to be more viable than power producer. Mini-grid operators should a collection of mini-grids owned and operated also be able to merge with one another and, if by different companies using different systems, successful, to become a successful, integrated technologies , and metering approaches. electrical utility on their own. Rural-Layout-LJ-fin-text.indd 30 6/27/17 8:49 AM Chapter 3. RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: SOLAR AND ZONAL Our desk review of concessions in Africa found the South African Department of Minerals and two cases, each unique to one country. South Energy (DME) promoted a joint venture between Africa had tried what can best be described as Eskom, the national utility, and Shell, giving the a policy experiment of using concessions as an venture exclusive rights to install up to 50,000 so- approach to providing basic electricity services lar home systems in rural areas, including parts to populations in remote areas using solar home of Kwa-Zulu Natal and the Eastern Cape (Univer- systems. Senegal—which had tried and failed to sity of Cape Town Energy Research Centre 2004). turn its power utility, SENELEC, into a concession In 1999, the government introduced a new while also implementing mini-grid concessions— policy of concessions of solar home systems began a process creating new zonal concessions to provide access to electricity in other areas and putting them out to bid for international in- that remained outside the reach of the existing vestors. Both approaches have been challenging electrical grid. Following a competitive process, to implement. Because they provide some inter- six companies were awarded concessions. These esting lessons and reinforce points raised else- companies had a five-year exclusive right to government subsidies for the installation of solar where in this report, they are reviewed below. home systems in pre-defined concession areas. Seven concession areas were covered, with one Solar home system concessions company being awarded two areas. South Africa is the only country in Sub-Saharan The subsidy provided by the government was Africa where concessions have been granted to set at 80 percent of the capital cost of each solar private companies to provide electricity to isolated home installation. The concessionaire was to fi- rural communities using solar home systems. nance the remaining 20 percent of the cost, install Following the election of South Africa’s first the system, and then maintain it for 20 years. The post-Apartheid government in 1994, concerted concessionaire would recover its 20 percent share efforts were made to increase the proportion of of the investment costs by collecting monthly fees the population with access to electricity. In 1998, from the users. In the case of poorer households, 31 Rural-Layout-LJ-fin-text.indd 31 6/27/17 8:49 AM 32 RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? the municipalities would extend subsidies pro- Table 3.1. South Africa’s solar home system vided by South Africa’s Free Basic Electricity policy concessions and their active customers to the concessionaire on behalf of these poorer Estimated users. The plan was to install 50,000 subsidized number of units in operation systems in each of the seven concession areas, Concessionaire Province (September 2015) for a total of 350,000 units. Kukhanya Energy Kwa-Zulu Natal 30,700 Services (KES) Nuon RAPS Utility Kwa-Zulu Natal 18,000 Experience with South Africa’s solar (Pty) Ltd home system concessions Solar Vision (Pty) Ltd Limpopo 6,600 Ilitha Cooperative a Eastern Cape 6,300 The Shell-Eskom concession encountered chal- Total 61,600 lenges soon after commencement and halted the Source: Consultant interviews with CEOs of each concession. installation of systems. It was formally disbanded a. Ilitha Cooperative has assumed responsibility for operation and maintenance of the solar home systems installed through the Shell and in 2006, and Eskom, which has the constitutional Eskom concession, which both partners abandoned in 2006. responsibility for providing electricity to the country, no longer participated in the concession In terms of nonpayment, South Africa’s Free of solar home systems. Responsibility for the Basic Electricity Policy committed the munici- maintenance of the systems installed by Shell-Es- palities to pay for the electricity consumed by kom was assumed by three “maintenance only” the poorest households in the community. Solar companies (Wlokas 2010). Only one of these Vision manages to collect nearly 82 percent of maintenance firms—Ilitha Cooperative—was still its revenue from the municipalities served and operating in Eastern Cape Province in 2015. the remainder from the customers themselves. In the other seven concession areas, about In contrast, Nuon RAPS was forced to recover 100,000 solar home systems were installed. the lion’s share of its fees from its customers However, for various reasons, fewer than 62,000 and estimated that its recovery rate was roughly of these systems remained in operation in 2015 70 percent. KES noted that recovering its fees (table 3.1). The low number was not linked to the from the municipality can take as long as a year. suitability of the solar home systems installed: The Ilitha Cooperative assumed responsibility for Maintained properly, the original PV systems roughly 6,300 of the solar systems originally sup- continued to operate by 2015. The problem was the business model, which proved much less plied by the Shell-Eskom concession, but it draws resilient and stable than the solar systems them- its revenue from the monthly service fees on selves. Although the reasons for the abandon- roughly 1,640 of the systems. While the coopera- ment of systems vary, two challenges loom large: tive does not fully recover its costs, it is working encroachment from the grid and nonpayment by to collect a larger fraction of the monthly fees to municipalities. which it is entitled. Meanwhile, because Ilitha is a Rural-Layout-LJ-fin-text.indd 32 6/27/17 8:49 AM CHAPTER 3. RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: SOLAR AND ZONAL 33 cooperative, it feels less pressure to achieve full exclusive right. With neither legal protection nor cost recovery than do private competitors. a right to compensation, the concessionaires On balance, the overall recovery rate for these were left holding the short end of the policy-ex- concessionaires is lower than that of a well-op- periment stick. erating utility. The situation is made more difficult The three surviving concessions still operate by the fact that a significant portion of recurrent on the basis of undertaking both installations costs is supposed to be supplied by local govern- and maintenance. However, some new commu- ments on behalf of the poorer households. None nity entities have emerged that focus only on of the concessionaires has been able to reach operating and maintaining existing systems. The the original target size of 50,000, considered government has moved away from the conces- by DME to be the sustainability threshold. Solar sion approach to a model under which it pays Vision does not even support 10,000 customers. independent service providers directly for instal- In short, while the concessionaires survive, they lations and then hands over maintenance to user do not thrive. cooperatives. So while remnants of the South With respect to encroachment, as part of the African solar home system concessions remain subsidy approval process, the concessionaires in operation, the concession approach has been were obliged to provide an application that in- deemed a failure and will no longer be part of cluded Eskom’s plans for the areas in which solar South Africa’s electrification efforts. home systems were to be installed. The DME would then confirm that this area was in need of Viability and impact of South African service and would approve the subsidies needed solar home system concessions by the concessionaire to proceed. Conces- Raising private investment resources. The sionaires then built energy stores as a base for expectation of the concession program was that contact with the local population, expecting each the winners of the seven concession agreements store to serve an area within a radius of approxi- would quickly be able to sign up and provide ser- mately 50 km. vice to 50,000 customers. With this scale in mind, However, if offered the choice, the local pop- it was assumed that the bids would be attractive ulation preferred access to the grid over solar to larger international investors. Indeed, some of home systems and thought nothing of breaking the initial concessions did attract international their 20-year contractual obligation to pay for partners. the energy delivered by the solar home system. Unfortunately, DME made the concessionaires Eskom, which has the constitutionally specified bid for village-scale projects involving 1,000 to mandate of electrifying the country, was free to 3,000 households, instead of awarding conces- expand its electrification plans to some of these sions on the basis of the originally stated scale. areas, thereby undercutting the concessionaire’s Neither exclusivity nor the 20-year contract Rural-Layout-LJ-fin-text.indd 33 6/27/17 8:49 AM 34 RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? period were fully respected by Eskom.13 With the market have made them obsolete, many of these exception of Nuon, the international investors systems continue to provide basic electricity to had all exited the market by 2010. the households and businesses using them. DME also changed the capital-cost payment Impact. South Africa never came close to its formula from a fixed amount per installation to goal of serving 350,000 rural households through a commitment to cover 80 percent of the capital concessions of solar home systems, and the ap- cost. However, even the 80 percent coverage proach is no longer being pursued by the South proved flexible in the face of individual negotia- African government. The concessionaires appear tions. Although the value of the private resources to be playing out their 20-year concession agree- invested through the solar home system conces- ment, but the consensus is that the policy experi- sion program cannot be reliably measured, there ment has failed. There are very effective business is little evidence to indicate that the program models evolving to stimulate and facilitate rural brought in any private sector investment. electrification using solar home systems, but the Maintaining financial sustainability. The concession model is not one of them. concessions in South Africa have not been able to maintain financial sustainability. The reasons Rural zonal concessions are that they never reached the anticipated scale; they were unable to effectively recover Zonal concessions grant rights to provide electri- all of their fees from their customers or the cal service within a delimited area. Senegal is the municipalities; and they suffered considerable only Sub-Saharan African country that has imple- encroachment from the grid operator. Of the mented rural zonal concessions. (Mali attempted original six firms that won concessions under the to design such a program, but abandoned the program, only three remain, and two of those are initiative.) in the hands of different owners. The Agence Sénégalaise d’Electrification Nevertheless, those operating the conces- Rurale (ASER) prepared the Programmes Priori- sions are managing to survive, even if they do tiaires d’Electrification Rurale (PPER) program in not turn a profit. However, as noted, DME is now 2003. During preparation, ASER identified 18 large pursuing another approach to off-grid electrifi- target areas not served by SENELEC, the vertically cation that contracts a firm to install solar home integrated national utility. systems and then assigns the responsibility for In 2004, the process of bidding out these con- system maintenance to a cooperative. Hence, cessions began, but not before their number was there is no likely future for the concessions reduced from the initial 18 to 10. The first agree- beyond the end of the contract period. The same ment was signed with the private partners in 2008 cannot be said about the solar home systems and became operational in March 2011. From installed. Although recent innovations in the late 2011 until late 2014, another five concessions Rural-Layout-LJ-fin-text.indd 34 6/27/17 8:49 AM CHAPTER 3. RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: SOLAR AND ZONAL 35 entered into force, bringing the total number to six of ensuring some economies of scale. Table 3.2 at the time of this review (late 2015). summarizes the approach taken in Senegal. The concessions were meant to be technology- neutral. Concessionaires were free to select the Senegal’s experience with electrification technologies—grid extension, zonal concessions mini-grids, or solar home systems—best suited to supply electricity at the lowest cost to the rural The intention of the PPER program design was to population to be served. In consultation with the identify large zones that would provide sufficient regulator, ASER drew the concession areas so numbers of customers to attract international that they would each contain between 10,000 companies. Concessions of 10,000–30,000 cus- and 30,000 potential customers in the hopes tomers were expected to be large enough to be Table 3.2. Typical features of rural zonal concessions in Senegal What is concessioned? 25-year rights to provide electrical service within a defined area. General obligations on Design and build the installations, maintain and renew the equipment. the concessionaire Perform the electrical installation for new subscribers. Provide services for at least six hours per day (7 pm–1 am). Recover tariffs from users and be responsible for the operation of its assets. Specific obligations Concessions are awarded on the basis of the number of households that the private parties related to electrification propose to electrify in the first three years of the concession. The winning bidders have contractual obligations of between 7,500 and 27,000 connections each. Main sources of finance The government provides significant up-front funding of capital costs. for investment In Senegal, the share of private financing ranges from 22 to 68 percent of the total financing. How costs are recovered Concessionaires must recover their investment costs and the costs of ongoing operations and maintenance through their tariffs. How tariffs are set A tariff system is agreed with the regulator (CRSE). For small residential subscribers, the tariff is fixed depending on the number of lighting and power outlet points. For subscribers who require more power, billing is done according to measured consumption. Type and extent of subsidy The concessionaires receive a subsidy from the rural electrification agency (ASER) for a portion of their initial investment cost. They do not receive a subsidy of their ongoing operation and maintenance costs. How the concessions The concession contract is awarded following an international tender. The winner is the operator are awarded that proposes to connect the largest number of households during the concession’s first three years, in return for a pre-determined output-based subsidy. Why Senegal chose Senegal has attempted several times to increase private sector participation in electricity so as to this model reduce the burden on the state of subsidizing the operations of the national utility, SENELEC. Rural-Layout-LJ-fin-text.indd 35 6/27/17 8:49 AM 36 RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? economically attractive. The total number of cus- Small residential customers face a tariff based tomers in the concession areas was estimated to on the number of lights and power points in the be approximately 107,000. household, with three different service bands All of the six concessions have an interna- established. For consumers requiring more tional partner that is either an electrical utility power, billing is linked to metered consumption. (Morocco’s ONEE, Tunisia’s STEG, or France’s EdF) This pricing system has allowed price differences or a producer of renewable energy equipment to emerge between customers supplied by (ENCO/Isofoton14). SENELEC and those supplied by the concession- By October 2015, four of the six concessions aires. In turn, this has led to significant tensions, had begun supplying electricity to customers. The particularly in concession areas bordering total number of connections made by all conces- SENELEC’s service areas. SENELEC also views the sionaires as of late 2015 was approximately 3,700. concessionaires as competitors and has not yet More customers (approximately 2,500) were willingly negotiated off-taker agreements with connected via solar home systems than via grid distribution-only zonal concessionaires. extension (approximately 1,300). The implemen- tation of the concessions has been significantly Viability and impact of Senegal’s rural delayed and the uptake of service in the conces- zonal concessions sion areas has been slower than expected. The PPER concessionaires receive a subsidy The electricity sector regulator, the Commis- from Agence Sénégalaise pour l’Electrification sion de Régulation du Secteur de l’Electricité Rurale (ASER) that covers a portion of their initial (CRSE), has power over the PPER concessions. investment cost. The value of this subsidy was The tariffs and service standards are initially determined in negotiations that followed the specified in the concession contract but may be competitive public tender process. However, revised on a five-year cycle or on an exceptional they do not receive a subsidy of operations and basis, if the financial conditions originally estab- maintenance costs. lished in the contract have changed. For the six concessions for which contracts Concessionaires must charge cost-recovery have been signed, the program costs were tariffs for each of the electrification technologies estimated in the range of $12.67–$19.4 million deployed. If a concessionaire planned to under- (Legendre 2015). The share of private financing take grid extension and purchase power from for the concession ranges from 22.5 percent SENELEC, the tariff would be set as the national to 67.8 percent of the total financing. ASER has medium voltage tariff minus 25 percent (repre- pledged subsidies of $5.6–$12.4 million to each senting the distribution cost), plus a small royalty concessionaire. per kWh required for maintenance of the electri- cal system. Rural-Layout-LJ-fin-text.indd 36 6/27/17 8:49 AM CHAPTER 3. RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: SOLAR AND ZONAL 37 The complications that have arisen can be few connections made through September 2015, traced to (a) the complexity of the processes it is not possible to determine how much of the used in contract negotiations and stakeholder expected $29 million in private investment has or consultations; (b) the challenges that companies will actually emerge. For that matter, it is not yet face in supplying electricity through different possible to discern what share of the public sector electrification technologies; and (c) the fact that investment will emerge either. the national utility, SENELEC, has viewed conces- Maintaining financial sustainability. As of sionaires as competitors and has never signed an October 2015, the three contracted concession- off-taker agreement with any of them (Mawhood aires that had begun making connections were and Gross 2014). Table 3.3 provides a summary still in operation. The pricing formula established of the status of the PPER concessions in Senegal. in the contracts by the regulator appears to allow Raising private investment resources. the companies to adjust tariffs as economic With respect to the leveraging of private invest- conditions change. The constraint on raising ment, the bidding process did result in the winning tariffs may be public opinion: If customers feel concessionaires having an international part- that their tariffs unnecessarily exceed those ner—in contrast to the results of mini-grid bids of SENELEC’s customers, they may voice their held in Senegal and elsewhere. The negotiated unhappiness. contracts reveal that the share of private financ- As noted, two-thirds of the connections pro- ing for the six currently effective concessionaires vided by the concessionaires to date have been ranges from 11.4 percent to 67.8 percent, at least solar home systems. Two reasons likely account according to the agreement. However, with so for this. First, the installations can be made Table 3.3. Status of rural zonal concessions in Senegal Total value of Actual number concession Private share of Targeted number of connections investment investment costs Name of connections (September 2015) ($ million)a (percent) Dagana-Podor-St. Louis (COMASEL-ONEE) 19,574 2,367 18.36 67.8 Kaffrine-Tamba-Kedougou (ERA-EdF) 18,001 1,194 13.46 36.2 Kaolack-Nioro-Fatick-Gossas (ENCO 27,000 b 19.41 11.4 Senegal/ISOFOTON) Kolda Velingara (ENCO Senegal-ISOFOTON) 20,500 b 13.61 31.0 Louga-Linguere-Kebemer (COMASEL-ONEE) 11,826 165 15.64 22.5 Mbour (SCL-STEG) 7,500 b 12.67 63.4 Source: Legendre (2015). a. 1 West African CFA = $0.0017, October 2015. b. Concession agreement became effective between November 2014 and November 2015. No connections by September 2015. Rural-Layout-LJ-fin-text.indd 37 6/27/17 8:49 AM 38 RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? quickly, as their deployment is left entirely to the it has brought access to electricity to just 3,760 discretion of the concessionaire. To extend the customers. This result casts doubt on the pro- grid, by contrast, the concessionaire must ne- cesses used to establish the concession program gotiate an off-taker agreement with SENELEC, a and to identify and define the areas put out for process that has encountered complications and tender. delays. Second, one concessionaire in particular The development of the program, including notes that a solar home system connection costs the feasibility assessments, definition of zones, approximately half of the cost of a grid con- preparation of bidding packages, solicitation pro- nection. This cost differential expands as fewer cess, bid evaluation, and negotiation of contracts customers choose to connect to the grid. In this took five years (2004 to 2009) before the first case, when only 20 percent of the eligible popula- concession was granted. The two concessions tion chooses to pay the fee and connect—when that entered into force in 2011 had, by mid-2015, 70 percent were projected to do so by ASER—the connected fewer than 2,500 customers, together, unit costs to the concessionaire run even higher, out of the estimated customer bases of 19,500 making provision of solar home systems an even and 11,826 customers, respectively. This pales in more attractive option for servicing small loads in comparison to the nearly 4 million people who remote and sparsely settled areas. gained access to electricity through SENELEC The bias to date toward the installation of during the same period. However, SENELEC itself photovoltaic systems reflects badly on the complicated matters by deliberately not reach- relationship between the concessionaires and ing agreements with any of the concessionaires SENELEC, but it poses no immediate challenge to seeking off-taker arrangements in areas contigu- the sustainability of the concession operations. ous to the existing grid. Several concessions are reportedly planning to deploy more than 10,000 solar home systems. It Lessons from solar and zonal does, however, pose a challenge to the conces- concessions sionaires’ ability to supply the population in the concession areas with larger volumes of electric- Neither of the concessions described in this ity for use in productive enterprises. By late 2016, chapter yields positive lessons. The solar home the government had begun considering actions system concession in South Africa faced legal to provide further resources to enable these difficulties in implementing the concessions; few concessionaires to provide electricity at prices shareholders (ESKOM or local municipalities) re- similar to those of SENELEC. spected their obligations under the agreements Impact. Senegal’s PPER concession program reached. In fact, as the South African Constitution has done little to accelerate the pace of rural grants ESKOM sole responsible for electricity electrification. Since the program began in 2004, supply in the country, once it left the concession Rural-Layout-LJ-fin-text.indd 38 6/27/17 8:49 AM CHAPTER 3. RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: SOLAR AND ZONAL 39 partnership, the legal status of concessions and the zonal concessionaires with respect to ceased—and the obligations of stakeholders to power off-taker agreements and pricing. As of respect them presumably ceased as well. Solar the time of the writing of this report, efforts were home systems are a very promising and effec- being made to resolve this impasse, in order to tive technology for rural electrification in Africa. allow these zonal concessionaires to serve as However, because concessions provide exclusive distributors of SENELEC-generated power at a re- rights to natural monopolies, they do not fit well tail tariff levels comparable to the levels at which with the solar home system approach, whose SENELEC sells power to its own customers.15 dynamism as a solution depends on competition Unless such an agreement is reached, this case and innovation. will serve as a lesson on the political sensitivity The zonal concession system established in of electricity pricing and the need to include Senegal made such slow progress that, even reasonable pricing expectations as part of the after 10 years, the connections provided were concession regulatory framework covering not significantly below expectations. The biggest ob- only the government and the concessionaire but stacle appears to have been the failure to estab- also the role of the incumbent utility. lish clear rules of interaction between SENELEC Rural-Layout-LJ-fin-text.indd 39 6/27/17 8:49 AM Rural-Layout-LJ-fin-text.indd 40 6/27/17 8:49 AM Chapter 4. NATIONAL UTILITY CONCESSIONS This chapter reviews all four national electrical Table 4.1 summarizes common features of the utility concessions operating in Sub-Saharan national utility concessions in Sub-Saharan Africa. Africa at the end of 2015: ENEO in Cameroon, CIE In nine other countries of Sub-Saharan Africa, in Côte d’Ivoire, SEEG in Gabon, and Umeme in the national electrical utility was concessioned at Uganda. The oldest of these is CIE; the youngest one time or another to a private company, either is Umeme. The first three firms operate as verti- on a lease basis (affermage) or under a strict cally integrated electric utilities, whereas Umeme concession (table 1A.1). In all nine cases the con- is purely a distribution utility with no responsi- cession was terminated early, underscoring the bility for generation or transmission in Uganda’s complexity of concessioning a national electrical unbundled electricity sector. utility and the delicate balance necessary to keep None of these concessions was established them operating profitably and effectively. The for the purpose of connecting more customers reasons for early termination of concessions are in rural areas. Instead, they were established to not well-documented. However, a few examples relieve government of the fiscal burden of poorly may shed light on the issues frequently leading operating electric utilities. Performance indica- to buyer’s remorse. tors monitored by the government in the conces- In Cape Verde, Electra was run as a conces- sion agreements normally pertain to reduction of sion from 2002 to 2006. It was subsequently outages and electricity losses, improved cus- nationalized and the concession terminated, as a tomer satisfaction, and a lighter fiscal burden for result of disagreement over raising consumer tar- the public sector. iffs and the ambitious nature of the investment All four concessions have met the objectives plan. In Mali, EDM was operated as a concession of improving sector performance and maintain- from 2000 to 2005. That concession was termi- ing fiscal sustainability. In addition they have, nated because of disagreements over proposed to various degrees, helped expand access to tariff increases and ambitious investment plans. electricity despite not having this as a primary In Senegal, SENELEC was operated as a conces- obligation. sion from 1999 to 2001. The government rejected 41 Rural-Layout-LJ-fin-text.indd 41 6/27/17 8:49 AM 42 RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? Table 4.1. Features common to national utility concessions What is concessioned? The right to operate an existing distribution grid to sell power to customers, collect revenue from customers, and extend the grid within the service area. General obligations on the To provide electricity that meets specified power quality, reliability and customer service standards. concessionaire To maintain the assets and hand them back in good condition at the end of the concession. To employ (most or all) of the staff of the state-owned utility. Specific obligations related to To connect everyone within a certain distance of the grid, provided they pay the specified electrification connection fee Often there are additional obligations related to extending the grid. These may be to connect a specified number of people in the service area (as in Gabon) or to take over and operate grid extensions financed and built by a rural electrification program (as in Cameroon). Main sources of finance for Predominantly privately financed. The owners invest equity in the concessionaire, which is usually investment a special purpose vehicle. The concessionaire (that is, a company set up specifically to operate the concession) also brings in commercial finance in the form of long term debt, both from commercial banks and international finance intermediaries such as the International Finance Corporation (IFC) or KfW. How costs are recovered Operating and maintenance costs, the cost of purchased power, and a return on capital invested are usually recovered fully through the tariff, with notable exceptions. How tariffs are set The concession contract or license sets out a detailed tariff regulatory regime that indexes tariffs to input prices, and allows for periodic resets to keep tariffs in line with reasonable costs of service. The tariff-setting rules may be applied by a regulator, or by another government entity specified in the concession. However, the regulator or government entity has only limited discretion, and disagreements about the tariff can usually be appealed to international arbitration. Type and extent of subsidy Cross subsidies toward low-use residential consumers are common. Direct output-based payments from government to cover the costs of new connections for poor households are sometimes provided. Government may build lines into new areas and hand them over to the concessionaire for operation and in-fill electrification or densification. In some cases, governments absorb part of the cost of purchased energy or fuel costs in order to reduce tariffs for all customers. How the concessions are Through international competitive bidding. awarded Why governments have The main motivation has been to solve finance and service problems with a state-owned utility. chosen this model Often this has occurred when losses at the utility have contributed to an unsustainable fiscal position. the concessionaire’s proposal to raise tariffs by again. Following elections, the new government 17 percent without making a counteroffer. The renationalized SENELEC, after determining that concessionaire responded by proposing a 5 the concessionaire had not made sufficient prog- percent increase in the tariff, only to be denied ress in reducing power outages. Subsequently, Rural-Layout-LJ-fin-text.indd 42 6/27/17 8:49 AM CHAPTER 4. NATIONAL UTILITY CONCESSIONS 43 the government unsuccessfully ventured to once (AER). In 2001, the concession for the vertically again bid out SENELEC as a concession, ulti- integrated, formerly state-owned national utility, mately deciding to allow it to remain public. SONEL, was won by AES SONEL. The contract Governments in five other countries in granted the winner a 20-year concession to Sub-Saharan Africa seriously considered creat- operate the transmission and distribution net- ing a concession arrangement for their national work, and to own and operate up to 1,000 MW utility but ultimately rejected or abandoned of generation capacity. In 2014, AES sold its stake the effort (table 1A.2). These cases in which in AES SONEL to Actis, and the company was governments developed “cold-feet” are even renamed ENEO. less well-documented than those cited above From 2000 to 2012, Cameroon’s rural elec- of agreements terminated early. In Lesotho, no trification rate has risen from approximately 11 private entity was willing to take over the elec- percent to 18 percent. The national access rate tricity utility, so the government opted to use a (including both urban and rural areas) rose from management contract structure instead of a con- 46 percent in 2000 to 54 percent in 2012. During cession approach. In Madagascar, a concession this time, AES SONEL and its successor ENEO agreement exists with the public utility JIRAMA. succeeded in extending electricity service to In Zambia, opposition to the set-up of a conces- more than 190,000 rural households and 300,000 sion became so great—including especially vocal urban households. opposition from labor leaders—that the entire At the outset, the concessionaire faced an concession idea was abandoned. obligation to connect new customers, which it originally met by focusing on densification of Experience with national utilities connections in urban and peri-urban areas. Over operating under concession time, access targets in specific regions were set and refined. The system has evolved in such a Cameroon way that the government and donors finance The Cameroonian concession is known as ENEO.16 grid extensions through AER, and then transfer It is similar in formulation and implementation to them to ENEO. In turn, this extends ENEO’s ser- the other vertically integrated national utility con- vice perimeter and enables it to continue to add cessions that have operated successfully for over customers through densification. Presently, some 15 years—those in Gabon and Côte d’Ivoire. 35 percent of ENEO’s one million customers are In 1998, the government of Cameroon en- found in rural areas. acted an electricity law designed to attract Maintaining this concession in operation has private sector participation in the power sector. had some challenges. The concession contract The law also established an energy sector regu- has been reopened for negotiations at least three latory agency (ARSEL) and a rural energy agency times since 2001: in 2006, in 2011, and in 2015. A Rural-Layout-LJ-fin-text.indd 43 6/27/17 8:49 AM 44 RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? continuing area of discussion is the tariff charged reliable electricity supply even in the recent by ENEO, which is relatively high by regional period of political instability. The primary share- standards. After 2011, the government opted to holder of the CIE concession, Eranove, operates freeze tariffs and to directly compensate the con- several public utility concessions and an inde- cessionaire by paying the difference between the pendent power company in Central and West frozen tariff and the tariff that would otherwise Africa. have been permitted under the concession. CIE has not been given access targets as The government is continuing to finance part of its concession agreement. The electricity and build grid extensions into rural areas, and access rate in Côte d’Ivoire has remained fairly continuing to hand over the newly built lines steady, rising from 51 percent of the population to ENEO. It has also been trying, mostly unsuc- in 2000 to 56 percent in 2012. The rural access cessfully, to attract private sector participation rate remains low, at an estimated 29 percent in projects outside the ENEO concession area. (World Bank and IEA 2015). In 2016, the govern- As noted previously, efforts to establish mini-grid ment expressed renewed interest in expanding concessions for remote rural electrification using electricity access into rural areas, and CIE has renewable energy (including hydropower plants expressed its willingness to cooperate in this up to 5 MW) have not been successful, partly effort.17 because the proposed tariffs exceed the ENEO tariff by a margin that is considered politically Gabon unacceptable. ENEO is performing satisfactorily with respect The government of Gabon issued a 20-year con- to its obligations to improve operational effi- cession for its Société d’Energie et d’Eau (SEEG) ciency, reduce losses, expand the network where in 1997 (IFC 2010). The winning bidder proposed appropriate, and maintain fiscal sustainability. a 17 percent reduction in the combined tariffs for water and electricity service. The terms of Côte d’Ivoire the contract allow the concessionaire to adjust The government of Côte d’Ivoire selected a its tariffs on an annual basis, with the exception concessionaire to operate its vertically integrated of social tariffs, which are allowed to rise by no electric utility in 1990. After winning the compe- more than 1 percent annually (Tremolet 2002). tition for this affermage contract, the Compagnie Unlike in the other cases, Gabon had spent a Ivoirienne d’Electricité (CIE) operated the sec- decade preparing the ground for this successful tor through the first 15-year concession period concession by raising tariffs to sustainable levels (which ended in 2005) and is now two-thirds of and placing SEEG on a sustainable financial and the way through a second period, which runs operational footing before the concession solici- to 2020. CIE has been credited with maintaining tation was initiated. Good preparation is a major Rural-Layout-LJ-fin-text.indd 44 6/27/17 8:49 AM CHAPTER 4. NATIONAL UTILITY CONCESSIONS 45 reason why the concession arrangement has From 2000 to 2012, the nationwide electricity been maintained for nearly 20 years. access rate rose from 74 percent to 89 percent. Early experience was positive. The conces- About a thousand localized electrical systems sion contract established target electricity and or networks (mostly PV-powered solar home water connection rates for the four major urban systems) are found in the rural areas not served networks in Gabon for the year 2000. The newly by the grid. concessioned SEEG managed to exceed these Progress toward universal rural access targets for the four largest cities. In isolated remains slow, with only 45 percent of the rural centers with access rates of 33 percent in 1993, population having access to electricity (World SEEG managed to connect 89 percent of possible Bank and IEA 2015). The initial progress of the customers by 2000. The only initial connection concessionaire to connect customers within its target that was not reached by 2000 was for service area has continued, with the result that isolated centers with no electricity service; these urban areas have an access rate of 98 percent. remained without electricity in 2000. The SEEG concession agreement will expire in Following an amendment to the concession 2017 and will likely be extended or re-bid (African contract in 2006, sector investment responsibil- Energy 2015). ities are now shared between the government and SEEG, which have agreed that “structural Uganda investments” specifically designated by mutual Uganda’s national distribution utility concession agreement (investments in generation, transmis- differs from the other three cases as it operates sion, and distribution, whose lifespan exceeds in a common law country. Furthermore, it rep- the term of the concession contract) are the resents a case in which the distribution utility government’s responsibility. The concession pe- was put out for a concession contract in an rimeter extends 400 meters on each side of the unbundled electricity sector. existing network, and as the network expands, so In 2004, following international competitive does the concessionaire’s area of responsibility bidding, Uganda’s main state-owned distribution (World Bank 2015). grid was contracted out for 20 years to Umeme Poor households whose consumption falls Ltd, a private consortium comprising Eskom, Glo- below a lifeline level and are formally considered beleq, and later Actis. Its primary objective was to as low-income Gabonese receive free electric- relieve the government of the fiscal burden of the ity, subsidized by the government at a cost of electricity sector while reducing system losses approximately $2.5 million per year. Current and increasing collections. A complex package of estimates place the number of unelectrified rural funding was assembled by the World Bank, the villages at more than 3,000. These rural areas are Multilateral Investment Guarantee Agency, Citi- considered to be outside of SEEG’s service area. bank, Eskom, and Globeleq to enable the initial Rural-Layout-LJ-fin-text.indd 45 6/27/17 8:49 AM 46 RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? lease payment to the owner of the distribution are now in rural areas. These connections typ- network, Uganda Electricity Distribution Com- ically fall within the one-kilometer concession pany (UN Economic Commission for Africa 2011). boundary from the existing grid. As of mid-2015, Increasing electricity connections in rural areas total connections had grown to 650,000, an beyond the concession zone was not one of the increase of 124 percent over 10 years. Roughly objectives set for the concessionaire. In October 120,000 of the additional 360,000 connections 2012, Umeme held an initial public offering, float- made by Umeme are located in rural areas. ing nearly 40 percent of its shares on the Uganda Overall, Uganda’s energy access rate rose from Securities Exchange. 9 percent in 2000 to 18 percent in 2012 (IEA and When Umeme took over operations of the grid World Bank 2015). in 2005, the network comprised a total of 290,000 The main distribution grid has attracted connections. Umeme’s concession area was considerable private finance since Umeme took defined as the existing lines and the area within over operations. Actis paid a transaction fee of one kilometer on either side of the existing distri- $1.4 million to the government when the assets bution network. In the years before the creation were transferred. In 2009, Umeme signed a $25 of the concession, the state-owned utility had million loan agreement with the International been slowly expanding the grid in both urban Finance Corporation. In 2012, Umeme held an and rural areas. Therefore, Umeme’s concession initial public offering, raising about $28 million in area contained rural infrastructure that was not new capital from the issuance of primary shares. being effectively exploited. Umeme took over the Finally, in 2013, Umeme raised another $170 mil- assets and began adding connections within its lion in external financing for capital improvement service area. projects through 2018. As of 2014, Umeme’s total The Umeme concession has been successful borrowings were $265 million. in terms of improving the performance of the Umeme has been successful in raising capital Ugandan electricity distribution network. It has for investment in the distribution network. It has also been successful in connecting rural busi- also succeeded in reducing system losses from nesses and households to the grid. It maintains 38 percent in 2005 to 21 percent in 2014, and in control of about 95 percent of the country’s dis- increasing collections from 80 percent to 99.1 tribution network. One isolated mini-grid conces- percent over the same period. sion (WENRECo, described in chapter 2) accounts To quicken the pace of rural electrification, for approximately 6,800 connections, and five the Ugandan Rural Electrification Agency has other small distribution concessions account for started to subsidize the construction of new, another 31,600 connections. rural feeder lines because it is not profitable for According to Umeme managers, approxi- private entities to do so. It has also begun to mately 30 percent of Umeme’s total connections build new distribution lines and lease them out Rural-Layout-LJ-fin-text.indd 46 6/27/17 8:49 AM CHAPTER 4. NATIONAL UTILITY CONCESSIONS 47 to local concessionaires or cooperatives. The into rural areas but only to connect customers provision of these networks—which may overlap within the boundaries of existing service areas. In with Umeme’s service area—to new actors in Cameroon and, to a lesser extent, Gabon, funds the electricity sector shrinks the potential cost from donors or governments have been used to savings in administration and management that expand the grid’s reach into rural areas, thereby would be available if these same lines were increasing the concessionaire’s reach. leased to Umeme. Maintaining financial sustainability Viability and impact of national A second objective of all four national utility utility concessions concessions was to relieve the fiscal burden on Raising private investment governments of underperforming electric utili- ties. Achieving that objective has required three All four of these national utility concessions have actions over the concession period: a reduction successfully raised private sector finance—eq- in system losses, an improvement in collec- uity and debt—to achieve their objectives. In tion rates, and an ability to recover the costs of Cameroon, AES originally paid the government of electricity by adjusting tariffs. To date, all four of Cameroon $71 million for a 56 percent stake in the African national utility concessions appear SONEL. In 2006, it received €240 million in loans to be maintaining financial sustainability. That is from development finance institutions, including not to say that there are not episodes of difficulty the African Development Bank and the Interna- brought on by fuel-price spikes, regulatory or tional Finance Corporation. In 2009, AES sold its contractual disagreements, or even national se- shares in AES SONEL to Actis for €220 million. In curity issues. But in all four cases, the concession the case of Gabon’s water and electricity con- has maintained a healthy financial status. cession, Veolia invested more than $690 million The performance of the national utility con- in the company between 1997 and 2014. In 18 cessions has been found satisfactory by the host Uganda, Umeme raised roughly $28 million in pri- governments, as evidenced by the fact that they vate capital from its initial public offering in 2012 continue to operate. Performance metrics have and then obtained a private loan of $190 million been met and, in spite of potential political op- in 2013, considered the largest private loan ever position, tariffs have been maintained at a level made to a Ugandan firm. sufficient to cover the costs of electricity supply. These national utility concessions have been The case of ENEO in Cameroon is unique in able to raise private funding to ensure successful this regard, as the government pays ENEO the utility operation. Only a small fraction of the total difference between the agreed cost of supply is directed to rural electrification, as these conces- and the tariff charged. Gabon’s decade-long sions were not designed to expand connections preparation for the adoption of the concession, Rural-Layout-LJ-fin-text.indd 47 6/27/17 8:49 AM 48 RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? during which customers adapted to paying the number of grid connections by 570,000, of cost-recovery tariffs, has served the country well, which 190,000 are in rural areas. In Gabon, SEEG as the population has become accustomed to has added roughly 10,000 new connections paying the cost of supply, and the government is per year, raising the national access rate to 89 able to focus its attention on paying the electric percent and the rural access rate to 45 percent. bills of the poor. Umeme averaged 30,000 new connections annu- Over its concession period, Umeme has man- ally from 2005 to 2014, peaking with 78,000 new aged to gain approval for raising the electricity connections made in the final year of this period. tariff from $0.05/kWh in 2005 to $0.16/kWh in Altogether, Umeme has increased connections 2015. CIE has been operating the national utility by a total of 360,000, of which roughly 120,000 in Côte d’Ivoire for 25 years and has been able are in the rural areas. CIE is the only one of these to operate at a profit, continuing to supply power four utility concessions that has not yet achieved even through the politically difficult years from significant increases in rural access. 2008 to 2010.19 In fact, ENEO,20 SEEG (African En- ergy 2015), and Umeme (2014) all declared profits Prospects for national in 2014, indicating that their profitability goal was utility concessions in being met for at least that year. rural electrification Only four companies in Africa have success- Impact fully developed concession arrangements for All four of these national utility concessions have the management and expansion of the national been operating for at least a decade and have distribution utilities. All four have demonstrated faced tariff rises and renegotiated elements of a willingness to be constructively involved in their initial concession agreements. One has expanding energy access and have continuously even been renewed for a second 15-year con- engaged with the concessionaires. cession term. Whatever their original perfor- Moving forward, the challenge is to reach mance metrics, the four concessionaires have agreements whereby the strengths of the con- met them well enough to stay in business. cessions are brought to bear on expanding rural None of these concessions was established access without compromising the primary goal with a primary objective of increasing rural of improving utility performance. Perhaps the access to electricity, but three of the four conces- simplest way to do this would be to negotiate sions have shown an ability to increase access to a specialized set of agreements related to rural electricity within the concessionaire’s designated electrification within the overall concession service areas. In Cameroon, ENEO (and its prede- framework agreement. This subset could include cessors) have added an average of about 40,000 cost-sharing arrangements between the gov- connections per year and succeeded in raising ernment and concessionaires or government Rural-Layout-LJ-fin-text.indd 48 6/27/17 8:49 AM CHAPTER 4. NATIONAL UTILITY CONCESSIONS 49 guarantees of loans to the concessionaires financial strength of these relatively large actors for grid extensions not expected to contribute to play a greater and more constructive role in immediately to the health of the concessionaire’s expanding access to electricity in rural areas. short-term balance sheet. Such arrangements might be the most direct way of harnessing the Rural-Layout-LJ-fin-text.indd 49 6/27/17 8:49 AM Rural-Layout-LJ-fin-text.indd 50 6/27/17 8:49 AM Chapter 5. LESSONS FROM OTHER REGIONS The previous chapters have focused on electric- a prequalification process, mandatory testing of ity concessions in Sub-Saharan Africa. Outside equipment, and stricter supervision. the region, other countries have used conces- One key to the success of the project lay in sions to achieve near-complete electrification, the management practices of the Sri Lankan while others have successfully used alternative DFCC Bank, which functioned as RERED’s ad- approaches. This chapter presents a few suc- ministrative unit (AU). In effect, the AU was both cessful examples from Asia and Latin America a regulator and a promoter, acting as a de facto that may be useful to bear in mind when ponder- rural electrification agency. Other power sector ing concessions in Sub-Saharan Africa. entities essentially allowed the AU to carry out the project alone, perhaps because it did not Mini-grids in Sri Lanka and encroach on their turf and did its job successfully, Cambodia or possibly because the AU was being closely Under the World Bank–supported Energy for Sus- supervised by the World Bank. tainable Development project, which ended in By design, the AU was established as a 2002, 35 village hydropower schemes were built separate entity from DFCC Bank’s main lending in Sri Lanka. With a total capacity of 350 kW, the function in order to avoid a possible conflict of schemes benefitted 1,732 households. interest and to provide transparency to other Based on the success of the program, these banks that were competing with DFCC Bank to schemes were expanded in the subsequent refinance sub-loans. The AU was staffed with pro- Renewable Energy for Rural Economic Develop- fessionals (including engineers), many of whom ment (RERED) project. This project, which ended had gained considerable experience from the in 2012, deployed additional village hydro systems implementation of the earlier Energy for Sustain- to electrify approximately more 6,000 households. able Development project. No major issues were reported during the A typical village hydro scheme had approxi- implementation of the village hydro component mately 10 kW of capacity and provided electricity of the RERED project. The capability and tech- to about 40 households, each receiving approx- nical capacity of some of the developers and imately 250 W of power. This generally proved equipment suppliers posed a minor challenge sufficient to light an average home with several that was addressed through the introduction of compact fluorescent bulbs and to operate small 51 Rural-Layout-LJ-fin-text.indd 51 6/27/17 8:49 AM 52 RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? appliances, such as a small TV set or a radio. While cash equivalent of construction labor). The proj- household electricity supply was the primary pur- ect provided loan financing, grant support, and pose of a village hydro scheme, additional benefits technical assistance to the electricity consumer accrued through productive use of electricity by societies.  small businesses, particularly during the day, when Each successfully completed village hydro household demand was low. scheme received from the Global Environment From the days of the Energy for Sustainable Facility a co-financing grant of $600 per kW of in- Development project, each village hydro proj- stalled capacity. Grant assistance to village hydro ect was implemented, owned, and maintained projects was also provided by provincial councils by a village-based electricity consumer society. under their decentralized budgets. Potential project developers received a grant The Sri Lanka village hydro projects were not to develop the projects. This grant was paid in formal concessions but schemes run by local installments as agreed milestones were reached. people who formed a society to own and operate The lure of support brought an increase in the their power system. In this effort, they received number of village hydro developers, some of significant financial assistance from the govern- whom lacked the required knowledge and ment and other external agencies. However, the skills, during the latter stages of the Energy conditions for transitioning from the mini-grids for Sustainable Development project. To avoid to the main grid were never formalized or even this, the RERED project introduced a prequali- clearly defined. fication process under which only developers When the main grid eventually arrived, many and equipment suppliers with a minimum level households opted to switch to grid-based elec- of knowledge and experience could receive tricity, neglecting the local generation assets. In project-development grants. This reduced the certain cases, the villagers continued to operate number of incomplete projects and dissatisfied the village-hydro scheme in parallel to the grid end users. Mandatory testing of turbines prior to connection, primarily with the aim of reducing installation improved the quality of equipment their grid electricity consumption. However, such and reduced conflicts with suppliers. schemes were not formally regulated or main- A typical village hydro scheme was financed tained, and they eventually ceased to function. It through a combination of bank loans (approxi- is true that the abandoned assets were relatively mately 35 percent), equity from beneficiaries (ap- low in value and by then had already served a proximately 18 percent), and grant support from significant function. At present, only a few village RERED (approximately 29 percent) and provincial hydro schemes remain in operation. But while councils (approximately 18 percent). Equity from they operated, the village mini-grids provided re- beneficiaries comprised a cash contribution and liable electricity to villagers at affordable prices— shramadana or sweat equity (measured as the and that can be considered a success. Rural-Layout-LJ-fin-text.indd 52 6/27/17 8:49 AM CHAPTER 5. LESSONS FROM OTHER REGIONS 53 Several aspects of the Sri Lankan experience by cross-subsidies provided by the national were keys to success. In many of the villages, utility, Electricité du Cambodge. the people had experience in organizing them- In addition to tariff standardization, the pro- selves to achieve a social goal. There was also gram also encompasses tariff reduction for cus- a nascent “credit culture,” under which villagers tomers connected to the national grid. Thus, while were used to repaying loans. And the banking the retail tariff for distribution franchisees before sector was mature enough to embrace small the program ranged from 1,000 to 1,250 riels per loans under the banner of corporate social kWh ($0.25 to $0.30 cents), since March 2016 it responsibility. has been set at 800 riels per kWh for domestic Finally, the fundamentals of the power sector metered consumption and 420 riels per kWh for and of the economy as a whole were stronger residential consumers requiring less than 10 kWh. in Sri Lanka than they are in most Sub-Saharan It is too early to tell whether this arrangement will African countries. In order to ensure the success remain viable. of the two village hydro projects, experienced consultants were hired to assist the village de- Solar home system concessions: velopers, and a dedicated agency (the AU) was Argentina’s PERMER set up to manage the RERED project. As a result, the mini-grids offered a reliable and sustainable Starting in 1998, Argentina began to encourage option for Sri Lankan villagers in anticipation of the development of small rural electricity con- the arrival of the main grid. cessions to deploy off-grid systems to reach Cambodia has developed a franchise model remote households, businesses, and government of mini-grid distribution that has connected buildings. Argentina was largely electrified at the more than 250 formerly isolated mini-grids to time (> 90 percent access), and the remaining the national grid as “distribution licensees.” The settlements requiring electricity service were franchisees (private companies) purchase elec- very remote and extremely expensive to connect tricity at wholesale prices and resell it to retail to the grid. customers through their distribution networks. As Between 1999 and 2012, the government of late 2015, the country also had 40–45 isolated obtained support from the World Bank to im- mini-grids. plement this rural energy strategy under the In March 2016, the government of Cambodia Proyecto de Energías Renovables en Mercados and the Electricity Authority of Cambodia intro- Rurales (PERMER). duced a comprehensive program to lower the The government chose a private conces- retail tariffs charged by these distribution fran- sion approach to provide the necessary off-grid chises to standard levels, with the difference be- services, intending that private entities seek tween them and the franchisees’ costs covered concessions would be willing to invest significant Rural-Layout-LJ-fin-text.indd 53 6/27/17 8:49 AM 54 RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? amounts of private capital to install and operate Argentina’s off-grid program succeeded in the systems, recovering their investment and electrifying 25,000 rural households, or approxi- operating costs through fees and tariffs. mately 100,000 people, mostly using solar home However, the private sector was not con- systems. This fell well short of the original target vinced that acceptable returns could be obtained of 65,000 solar home systems. The difference is from these “last-mile” connections using solar explained by the reduced contributions allocated home systems. As a result, the expectations for to the project by local sources, especially private private investment and return were lowered. capital. Instead, donors and the government provided The Argentine experience appears to have almost all of the up-front capital. The conces- two implications for the implementation of such sionaires were required to install, operate, and programs in Sub-Saharan Africa. First, the case maintain the systems using a fee-for-service highlights the importance of adopting a flexible, model. They were also responsible for collecting open-minded, and goal-oriented approach. Even a regulated tariff from users. Provincial govern- though the original means identified to reach the ments subsidized some or all of this tariff, with goal of electrifying the remote areas was shown the subsidy varying from 10 percent to 100 per- to be unrealistic, the goal was (partially) achieved cent of the total depending on the province and through a changed delivery. the location within the province. Second, the provision of electricity service The original financing plan for the off-grid to the most remote areas of the country can be concessions called for private concessionaires achieved using solar technology, whether or not to contribute $43 million, or 36 percent of the expectations of significant private sector invest- total project costs. However, the economic crisis ments prove realistic. Argentina, an upper-middle of 2001 led to the abandonment of the private income country, increased the government’s financing approach. Public entities and coopera- contribution so that the remote access was tives were allowed to participate as concession- eventually provided without the private sector aires, and the World Bank increased its financing contribution. Lower-income countries may not contribution to the projects. Ultimately, the have that level of financial flexibility. private concessionaires contributed $0.61 million, or approximately 1 percent of the actual project National utility concessions: costs. In 2008, five private concessionaires were Peru and Guatemala offering off-grid energy services; by 2012, the Experience from Latin America, notably Peru and number had increased to eight. However, these Guatemala, demonstrates how the concession- companies were assuming less operating risk ing of a national utility can be combined with the and investment risk than was originally intended. goal of increasing connections. Rural-Layout-LJ-fin-text.indd 54 6/27/17 8:49 AM CHAPTER 5. LESSONS FROM OTHER REGIONS 55 In Peru, the government pays the bulk of the Main lessons from other regions costs of extending the grid into new areas, but as the grid expands, the areas managed by conces- Concessions may have been helpful in increas- sionaires expand as well. Through the combina- ing rural access to electricity in Latin America; tion of government-financed grid extension and in Asia, they played virtually no role. In Sri Lanka concessionaire-financed customer connections, and Cambodia, local initiatives—from both the utility concessions in Peru connected more than community and entrepreneurial sides—helped 700,000 households to the grid between 2004 provide basic electricity when the government and 2013, raising the national electricity access was unable to do so. In neither case were con- rate from 26 to 70 percent.21 cessions deployed. In Guatemala, the government used receipts In the Latin American cases reviewed, con- from the sale of two distribution concessions to cessions proved useful, albeit not necessarily in establish an electrification fund that was used to leveraging large sums of private financing. The create a scheme under which concessionaires Argentina case is instructive, as the concessions were required to connect all customers within deployed under PERMER were tasked with truly their 200-meter service area. For those living “last-mile” electrification, which is very costly. outside that area, the concessionaire was pro- Given the remoteness of the communities and vided a grant of $650 for each connection made. limited demand for electricity, expectations about The scheme contributed to raising the national private sector contributions were not met. Al- electrification rate from 64 percent in 1998 to 90 though private investment was not attracted, the percent in 2004 (Harris 2002). private sector did provide the services and con- These examples show that national utility nections needed to provide service to these last, concessions can be effective at increasing rural unelectrified communities at a time when the access to electricity, provided the government national utilities were not able to do so. Conces- demonstrates a firm commitment to pay a signif- sions also proved useful in Peru and Guatemala, icant share of the costs of expanding grid infra- but it neither involved a turn-key solution that the structure into rural areas. This strategy has not government (either national or local) could walk been tried by any of the national utility conces- away and leave to self-manage. Governments sions now operating in Africa. Cost-sharing and a remained involved and committed to working mandate from the public side of the partnership with the concessionaires in order to help them may be necessary if national utility concessions increase access in remote communities. are to increase rural access. Rural-Layout-LJ-fin-text.indd 55 6/27/17 8:49 AM Rural-Layout-LJ-fin-text.indd 56 6/27/17 8:49 AM CHAPTER 6. THE CONTRIBUTION OF CONCESSIONS TO RURAL ELECTRIFICATION This report has reviewed experience with the use Mini-grid concessions of four different concession models—mini-grids, solar home systems, zonal concessions, and na- The mini-grid concession model can contribute tional utility concessions—to expand rural elec- real value to the electrification of rural areas trification in Sub-Saharan Africa and elsewhere. in Africa. In the cases that were identified and Our goal has been to help countries grappling studied in this report, mini-grid concessions have with rural electrification to decide whether a brought local private financing into an arena that concession approach may be appropriate and to has in the past been financed solely by public design an effective framework for concessions. means. In itself, that is a significant gain. Stron- Table 6.1 summarizes the experience of con- ger designs and clearer planning of concession cessions in Sub-Saharan Africa in terms of the arrangements may make it possible to increase conditions outlined in Chapter 1. the share of financing raised from the private Of the cases where electricity concessions sector. Beyond financial leverage, other benefits have been prepared for implementation in from such an arrangement include increased Sub-Saharan African countries, more have failed responsiveness to local service challenges, more (during preparation or implementation) than have efficient and effective management, and greater been implemented (see the annex to chapter 1). local ownership and participation. Of those implemented, none can be considered Given an enabling regulatory and policy envi- an unequivocal success. The discussion that ronment, mini-grid concessions can successfully follows outlines the more promising opportuni- co-exist with and complement the national grid, ties and initiatives and draws lessons that can be providing affordable electricity service to those used to make concessions a more effective and not yet reached by the grid. If properly structured better-defined tool for bringing private resources and incentivized, concession arrangements can to bear on the vast electrification challenge fac- offer economies of scope to mini-grid operators ing Sub-Saharan Africa. and enable them to make up a significant share of the overall rural electrification effort.22 57 Rural-Layout-LJ-fin-text.indd 57 6/27/17 8:49 AM 58 RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? Failure to adhere to two of the conditions resources often represent a small share of outlined in table 6.1—consistency of rules and the total investment cost, they supplement financial viability—created problems with mini- the limited public resources available for rural grid concessions in several countries. electrification. Mini-grids have been key to the rapid growth of rural electrification in several Asian coun- Disadvantages tries, such as Sri Lanka and Cambodia. However, • Owners/operators often lack capital, because the circumstances of these cases differed in the local businesses and entrepreneurs who key respects from those obtaining in most of are best positioned to undertake mini-grid Sub-Saharan Africa. Moreover, most of the cases projects have limited access to debt and emerged without the protections provided by a equity. legal concession structure. • The financial viability of mini-grid concessions The analysis in this report identified the can be marginal, as local concessionaires following advantages and disadvantages of the have proven unable to recover from custom- mini-grid concession model: ers the high upfront capital costs of tapping renewable generation sources or the costs of Advantages unforeseen increases in expenses, such as • Mini-grids are a technically and economically diesel fuel costs. optimal solution in some areas, particularly • Future integration with the grid is often not when connecting small and geographically adequately planned for, with concession guide- remote settlements over the short to medium lines frequently not explicitly stating the tech- term. nical standards and the compensation formula • Mini-grids often tap market forces, engag- for the anticipated fold of the mini-grid into the ing local entrepreneurs and business lead- main grid. ers willing to invest in them to serve their • Planning for mini-grid bidding has not yet communities. attracted large international investors, who • Mini-grids develop local entrepreneurial talent could operate multiple mini-grids in the same and local solutions, with local operators hav- country and thus take advantage of econo- ing a good understanding of local challenges mies of scope. With recent advances in geo- and strong incentives to reach commercial vi- spatial analysis, governments should be able ability in order to serve their neighbors’ needs. to identify and bid out multiple sites ripe for • Mini-grids attract private sources of financing mini-grid concessions. from local sources. Although these private Rural-Layout-LJ-fin-text.indd 58 6/27/17 8:49 AM Table 6.1. Necessary conditions for concessions: Examples from the case studies Regulatory Financial Rural-Layout-LJ-fin-text.indd 59 Timely Category of Consistency of Pre-investment disbursement of concession Clarity of roles rules Flexibility over time Compliance support Financial viability funds Mini-grid Several cases (–) Madagascar: (–) Uganda: No compliance (+) Mali: The Most governments No issues concessions demonstrate government did WENRECo’s burden problems government of provided at least with timely lack of clear legal not pay universal completion of were identified by Mali provided 75 some public disbursement of responsibilities access subsidy a diesel plant the study within percent of mini- funds to promote funds for mini- for both partners as all funds were allowed it to reviewed mini-grid grid capital costs financial viability. grid concession under the PPP devoted to a maintain service, concessions. as grants. financing were (–) Madagascar: framework, if one poorly managed but necessary tariff identified by the During the was adopted at incumbent utility, increases were not study. concession period, the time of the Jirama negotiated until the the government concession’s Nyagak small hydro (–) Uganda: removed the establishment. was completed WENRECo to be diesel subsidy, in 2012, despite (–) Uganda: connected to which formed the financial duress WENRECo’s the national grid basis for most faced by WENRECo. responsibilities and in 2019, 5 years concessionaires’ terms were not before the end of generation. fully clarified from the concession As a result, 17 the outset of the period, with weak concessionaires project. definition of stopped operating. responsibilities. Solar home system (–) South Africa: (–) South Africa: (–) South Africa: (+) South Africa: (+) South Africa: (–) South Africa: (–) South Africa: concessions The roles of the Eskom never fully The rules were not The compliance Pre-investment The financial The public national utility and bought into the modified during the responsibility support viability of funds for energy local authorities arrangement and concession period placed on the provided to the concessionaires payments were not were not clearly extended grid in spite of changing concessionaires concessionaires was a concern but made available in a delineated. into concession sector and industry was reasonable was acceptable not implemented timely manner. areas, undermining conditions. and measured. and played a in a workable concessions. significant role. manner. (continued) CHAPTER 6. THE CONTRIBUTION OF CONCESSIONS TO RURAL ELECTRIFICATION 59 6/27/17 8:49 AM 60 Rural-Layout-LJ-fin-text.indd 60 Regulatory Financial Timely Category of Consistency of Pre-investment disbursement of concession Clarity of roles rules Flexibility over time Compliance support Financial viability funds Rural zonal (–) Senegal (PPER): (+) Senegal (PPER): (+) Senegal (PPER): (–) Senegal (PPER): (-) Senegal (PPER): (–) Senegal (+) Senegal (PPER): concessions Not all roles were There appears There was evidence The definition Pre-investment (PPER): The public funds, clearly defined, to have been of flexibility in of the rules was support through distribution-only where called for, particularly those consistency in the the course of cumbersome, the bidding concessionaires were provided on of the main utility, rules. implementation and not all the process was self- were unable time and posed no SENELEC, and - some terms of actors had a clear corrected. to purchase obstacle. its relationship bidding were revised understanding of or produce Bidders did not to distribution and renegotiated. how to comply. reasonably priced respond to earlier concessionaires. electricity from bids, lengthening SENELEC. the procurement and enrollment period. National utility (+) Cameroon: (+) Gabon: (+) Cameroon: concessions Concessionaire Concession The government accepted new implementation agreed to pay distribution areas, was preceded with electricity cost thereby increasing a ten-year period increases rather its service areas in wherein cost- than have them RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? increasingly rural reflective tariffs passed along areas. became the rule to consumers, (also relevant for ensuring (–) Uganda: financial viability). SEEG’s viability Umeme could and political have operated new acceptance. rural distribution networks but were not selected to do so, reducing potential economies of scale. Note: “(+)” signifies positive example; “(–)” denotes negative example 6/27/17 8:49 AM CHAPTER 6. THE CONTRIBUTION OF CONCESSIONS TO RURAL ELECTRIFICATION 61 Based on the review of the mini-grid conces- Concessions of solar home sions, this study makes the following suggestions systems and zonal concessions to improve their design and implementation: • Improving access to outside financing, par- In Sub-Saharan Africa, concessions of solar home ticularly longer-term financing, is key to systems have been undertaken only in South providing mini-grid start-up operators or Africa, and the experience is not regarded as a concessionaires with sufficient working capital success. The reasons most commonly cited for to maintain affordable tariffs. its failure are the following: • Providing significant subsidies to bring mini- • Lack of tariff subsidies. The South African grid systems to financial viability is vital in authorities did not pay the tariff subsidies overcoming the lack of ready financing and they were required to provide to the solar the limited willingness and ability to pay found companies. in many rural communities. • Lack of exclusivity. The concession agree- • Implementing tariffs that promote financial ments conferred no legal right of exclusivity viability and allowing mini-grid operators to to the concessionaire, with the result that adjust prices as needed, through tariff hikes or the national utility, Eskom, could offer grid recurrent subsidies, will ensure that mini-grid electricity to consumers in the concession concessions meet the risk-reward require- area without paying any compensation to the ments of potential investors. concessionaires. Once offered access to grid • Developing a regulatory transition path for power, many customers chose to breach their mini-grids to reach utility scale and connect to payment obligations to the concessionaires, the national grid is fundamental in promoting leaving several facing bankruptcy. the long-term financial stability of operators. • Lack of a natural monopoly. Solar home • Encouraging common ownership/manage- systems remain a very dynamic market, re- ment of several mini-grids will help operators lying upon technological innovation, differing take advantage of economies of scope and service levels, and cost competition. Together, potentially reap significant savings in admin- these factors mean that markets for solar istrative functions, engineering design, and home systems are not geographically defined repetition. natural monopolies and thus are a suitable fit for concessions. Rural-Layout-LJ-fin-text.indd 61 6/27/17 8:49 AM 62 RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? Concessions for deploying solar home sys- concessionaires in areas contiguous to the tems in remote rural areas far from the national existing grid, has made it next to impossible grid have also been attempted in Argentina, for concessionaires to purchase power from where, despite early hopes and intentions, little SENELEC, leaving their proposed mini-grid private funding materialized. The government distribution networks without power. This ob- of Argentina ultimately paid the full costs of the stacle did result in progress in the deployment systems, but the program’s design may have of solar home systems within the concession- been unrealistic in expecting “last mile” electri- aires’ service areas. When unable to purchase fication to be an attractive business proposition power from SENELEC, these zonal conces- for private concessionaires. sionaires deployed solar home systems as the The zonal concession model has been at- quickest and cheapest way to achieve their tempted only in Senegal. Although the scheme basic service obligations, despite the limita- continues to operate, its progress has been tions of solar home systems in terms of cost, limited. The key lessons gleaned from this review capacity, and time of day. Although several of the model are as follows: concessions are reportedly planning to deploy • Design and implementation time were too more than 10,000 solar home systems, the lengthy. Work on the concession model began technology choice poses a challenge to the in 2004, but implementation of feasibility concessionaires’ ability to supply the popula- assessments, definition of zones, preparation tion in concession areas with larger volumes of bidding packages, solicitation process, of electricity for use in productive enterprises. To address this constraint, by late 2016 the bid evaluation, and negotiation of contracts government of Senegal had begun consid- took five years before the first concession ering actions to provide further resources to was granted in 2009. By the end of 2015, only enable these concessionaires to provide elec- 3,760 connections had been made, approxi- tricity at prices similar to those of SENELEC. mately two-thirds of them through the instal- lation of solar home systems. • Clarity on coordination with the national utility National utility concessions was lacking. The presence of the program National utility concessions have been consid- appears to have induced the national utility, ered in many countries in Sub-Saharan Africa, SENELEC, to step up its electrification efforts: generally as part of utility reform processes. The national electrification rate increased by Many of those considered were never imple- 115 percent between 2000 and 2012. But the mented. And of those implemented, only four implicit competition between SENELEC and remain in operation: ENEO in Cameroon, CIE the concessionaires, and SENELEC’s resis- in Côte d’Ivoire, SEEG in Gabon, and Umeme in tance to reaching off-taker agreements with Uganda. The evidence presented in this report Rural-Layout-LJ-fin-text.indd 62 6/27/17 8:49 AM CHAPTER 6. THE CONTRIBUTION OF CONCESSIONS TO RURAL ELECTRIFICATION 63 suggests that these concessions have been ef- designated service areas. They were able to fective at electrifying areas within a defined ser- encompass improving access within or near vice area surrounding the existing grid, but have the existing grid alongside their chief role of had a mixed record in expanding connections reducing financial and physical losses while beyond those service areas. Where governments increasing the operational efficiency of the have engaged with concessionaires to increase utility. In Uganda, for example, Umeme’s expe- electricity access beyond their service areas, the rience has demonstrated that a national utility latter have responded favorably and coopera- concession can be very effective at increasing tively, helping rural populations gain access to access within its defined service area. In Cam- grid electricity. eroon, the government has built distribution Elsewhere in the world, national utility con- networks in previously underserved areas be- cessions are most common in Latin America. In fore turning the new networks over to ENEO the two cases discussed in the report—Guate- to include in its service areas; ENEO then mala and Peru—the concessions, one public, becomes responsible for making new connec- one private (with public support), have increased tions. In Gabon, SEEG added roughly 10,000 rural access significantly. In Peru, concessioned new connections per year, raising the national utilities connected more than 700,000 customers access rate to 89 percent and the rural access to the grid, increasing the rural electrification rate rate to 45 percent. In short, where provi- from 26 percent in 2004 to 70 percent in 2013. In sions are made to extend the grid (through Guatemala, the government set up an electrifica- cost-sharing or government guarantees for tion fund using the proceeds from sales of two grid-extension loans) utility concessions can distribution concessions that helped boost the become capable and cost-effective partners national electrification rate from 64 percent in in increasing access to electricity among rural 1998 to 90 percent in 2012. populations. The report draws several key lessons about • Government involvement is key to ensur- national utility concessions: ing successful functioning of national utility • National utility concessions are not designed concessions. The national utility concessions primarily to widen rural access to grid power, examined in this report did not encounter but they can support extension of electric- significant problems with any of the condi- ity access to rural areas. While none of the tions displayed in table 6.1, possibly because national utility concessions examined in the they were carefully designed. The same care report was established with the primary ob- would be needed in any future concessions jective of increasing rural access to electricity, that may have rural electrification as one of three of the four concessions increased ac- their objectives. Fortunately, utility-scale con- cess to electricity within the concessionaire’s cession models and agreements from around Rural-Layout-LJ-fin-text.indd 63 6/27/17 8:49 AM 64 RURAL ELECTRIFICATION CONCESSIONS IN AFRICA: WHAT DOES EXPERIENCE TELL US? the world are available for consultation. One Concluding remarks element favoring the use of national utility concessions as an instrument of rural elec- This report has reviewed electricity concession trification is that the national utility is nearly arrangements in Sub-Saharan Africa during a always important enough to demand govern- period when electrification lagged behind pop- ment’s attention when issues need resolving. ulation growth. As African populations, govern- Even so, national utility concessions do not al- ments, and the international community place ways survive in Africa: nine such concessions greater emphasis on universal electrification, the have been terminated after just a few years of pressure will grow to find ways to tap private operation (see table 1A.1). investment and expertise to meet the chal- The key challenge to ensuring success of na- lenge—notably through mini-grids. As part of this tional utility concessions is reaching an process, concession arrangements that reflect agreement between the public sector and the lessons identified in this report will play the company whereby the strengths of the an important part in stimulating public-private concessions are harnessed to expand rural cooperation in the service of universal access to access without compromising the primary electric power. goal of improving utility performance. This Concessions have proven themselves useful report proposes that the most appropriate in improving utility performance and in eliciting approach to achieve this is the explicit stip- private investment in the development of mini- ulation of a specialized set of agreements or grids in several African countries. At the same clauses covering rural electrification within the time, some national utility concessions have overall concession framework agreement may proved able to adapt their operations to expand be the most appropriate and direct approach electricity service to customers beyond their to harnessing the financial strengths of these original service areas. In general, where gov- private actors. The clauses would be expected ernments and national utility concessions have to cover potential cost-sharing arrangements a good working relationship, they have been between the government and concession- able to negotiate terms sufficiently favorable to aires, or alternatively offer government concessionaires to encourage them to extend guarantees of loans to the concessionaires for service deeper into the rural areas. grid extensions not expected to immediately This review has shown that concessions in contribute to the concessionaire’s short-term different forms can serve as useful public-private balance sheet. instruments to accelerate rural electrification beyond the range of what either partner—public or private—might be expected to accomplish on its own. Rural-Layout-LJ-fin-text.indd 64 6/27/17 8:49 AM CHAPTER 6. THE CONTRIBUTION OF CONCESSIONS TO RURAL ELECTRIFICATION 65 If properly conceived and implemented, con- renewable energy technology—especially solar cessions provide a legal structure for effective photovoltaics—have multiplied the options for functioning as a public-private-partnership in the generating power in rural areas. Through GIS, electricity sector. Of couse, they do not alter the through stand-alone solar home systems (likely fundamental economics of rural electrification or under conditions of competition rather than reduce overall costs; rather, they provide oppor- concession), and through cost-reducing hybrid- tunities to bring private resources to bear. What ization of mini-grid generation, rural electrifica- should be clearly understood is that concession tion is evolving rapidly, making it easier to plan arrangements are not an end in themselves, but and manage and more appealing to public and a means to provide incentives and protections private investors alike. Concessions can be a that can attract private resources and expertise useful option for attracting private resources and to the challenge of accelerating electrification in expertise to address the enormous challenge of rural Africa. rural electrification, but interested governments Advances in electrification planning made need to be prepared to actively engage in their possible by geographic information systems will implementation, setting an overall regulatory allow mini-grid concessions to be designed so framework and lining up appropriate incentives that they afford greater economies of scope and to bring in and retain the private sector. cost-recovery tariffs. Simultaneous advances in Rural-Layout-LJ-fin-text.indd 65 6/27/17 8:49 AM Rural-Layout-LJ-fin-text.indd 66 6/27/17 8:49 AM NOTES 1. The six case study countries were Cameroon, Mad- kWh, or a total of $2.92 per month—roughly $26 for the agascar, Mali, Senegal, South Africa, and Uganda. In year. But because the 480 kWh that the customer con- addition, a brief review was done on the case of Burkina sumes actually costs about $0.25/kWh, or $120, the utility Faso, where the concession arrangement is unique, as incurs a loss of $94 per year for the power supply alone. the concessionaires are cooperatives rather than private The capital costs of establishing new connections in rural companies. areas typically exceed $1,000 per new connection. See Kojima and others (2016) and World Bank (2016). 2. In nine other countries of Sub-Saharan Africa, the national electrical utility was concessioned at one time 4. For an assessment of meeting financing gaps in pub- or another to a private company, either on a lease basis lic-private partnerships, see Partnerships IQ (2016). (affermage) or under a strict concession. In all nine cases 5. The case studies may be downloaded seven case stud- the concession was terminated early, underscoring the ies can be found at: complexity of concessioning a national electrical util- Cameroon: http://documents.worldbank.org/curated/ ity and the delicate balance necessary to keep them en/361311498151364762/Evaluation-of-rural-elec- operating profitably and effectively. Governments in five trification-concessions-in-sub-Saharan-Africa-de- other countries of the subcontinent seriously considered tailed-case-study-Cameroon. concessioning the national utility but ultimately rejected Madagascar: http://documents.worldbank.org/ or abandoned the idea. curated/en/781221498152348689/Evaluation-of-ru- 3. Partly for reasons of affordability and partly because ral-electrification-concessions-in-sub-Saharan-Afri- they lack electrical appliances and other devices, rural ca-detailed-case-study-Madagascar. consumers initially consume only small amounts of elec- Mali: http://documents.worldbank.org/curated/ tricity, frequently falling within the subsidized segment of en/839491498159507682/Evaluation-of-rural-elec- the tariff structure often referred to as the “lifeline” tariff. trification-concessions-in-sub-Saharan-Africa-de- The lifeline tariff does not begin to meet the capital costs tailed-case-study-Mali. of establishing new connections in rural areas. Thus rural electrification must be viewed as a long-term investment Senegal: http://documents.worldbank.org/curated/ in social welfare. It is not profitable within the time frames en/710071498161444599/Evaluation-of-rural-elec- normally considered attractive to the private sector. For trification-concessions-in-sub-Saharan-Africa-de- example, in Tanzania, a customer using 40 kWh of elec- tailed-case-study-Senegal. tricity each month will pay an effective tariff of $0.073 per 67 Rural-Layout-LJ-fin-text.indd 67 6/27/17 8:49 AM 68 NOTES South African Solar Home Systems: http://documents. 12. A detailed discussion of this can be found in chapter worldbank.org/curated/en/708211498162775424/Eval- 10 of Tenenbaum and others (2014). uation-of-rural-electrification-concessions-in-sub-Sa- 13. In fact, South Africa’s constitution assigns to Eskom haran-Africa-detailed-case-study-The-South-Afri- monopolistic rights to supply electricity to the country, so can-Solar-Home-System-SHS-Concessions. there was no legally binding way to make Eskom respect Uganda: http://documents.worldbank.org/curated/ the agreements with other entities. en/354661498163378835/Evaluation-of-rural-elec- 14. Isofoton, a manufacturer of solar photovoltaic panels, trification-concessions-in-sub-Saharan-Africa-de- filed for bankruptcy in 2015. tailed-case-study-Uganda. 15. These agreements were still under discussion as of Burkina Faso: http://documents.worldbank.org/ March 2017. curated/en/357991498163872158/Evaluation-of-ru- 16. Case study of ENEO in Cameroon, available ral-electrification-concessions-in-sub-Saharan-Afri- from http://documents.worldbank.org/curated/ ca-short-case-study-Burkina-Faso. en/361311498151364762/Evaluation-of-rural-elec- 6. Guinea Decentralized Rural Electrification Project. trification-concessions-in-sub-Saharan-Africa-de- 7. Only in the case studies is documentation of private tailed-case-study-Cameroon. investments presented. 17. http://www.cie.ci/notregroupe/index.php 8. Case study on Mali, available from http://documents. 18. http://www.veolia.com/africa/our-ser- worldbank.org/curated/en/839491498159507682/Eval- vices/achievements/municipalities/ve- uation-of-rural-electrification-concessions-in-sub-Saha- olia-optimized-resource-management/ ran-Africa-detailed-case-study-Mali. societe-d-energie-et-d-eau-du-gabon-seeg-gabon 9. It is possible that a single entity operating a number 19. http://www.cie.ci/notregroupe/index.php of mini-grids might enjoy economies that would reduce 20. http://eneocameroon.cm/in- some costs. dex.php/en/eneo-annual-report-2014/ 10. Uganda established all of its concessions under the eneo-annual-report-2014-highlights-finances framework of the Electricity Act. In 2015, it finally adopted 21. Personal communication from Miguel Revolo, sum- the Public-Private Partnership Act. marized in the unpublished report “Evaluation of Rural 11. The performance of these service providers is Electrification Concessions in sub-Saharan Africa: Short currently under review by the government of Uganda. Case Study: Peru” (Revolo 2015.) Ferdsult recently terminated its concession contract, with 22. As the mini- and micro-grid industry in OECD coun- the government subsequently requesting the owner of tries grows, some of the scale economies encountered in the distribution assets, the Uganda Electricity Distribution equipment production will doubtless transfer to devel- Company Limited (UEDCL), to take over the operation of oping countries, perhaps through a franchise model. the distribution grid that was Ferdsult’s service territory. However, by definition, mini-grids installations cannot demonstrate grid-like economies of scale. 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