June 2016 Note Number 52 Output-based Aid for Energy Access Image: Stefan Gara/Flickr G OBA is a form of results-based financing (RBF) that links lobally, around 1.1 billion people live without access the payment of subsidies—generally designed to comple- to electricity. Ensuring universal access to afford- ment or replace access fees—to the delivery of specific able, reliable, sustainable and modern energy by services, or outputs. Under OBA schemes, service delivery 2030 is one of the Sustainable Development Goals adopted is contracted out to a third party, public or private, who in 2015. The Global Partnership on Output-based Aid is responsible for pre-financing the project and is reim- (GPOBA) supports this energy access goal through the use of bursed once services have been delivered and indepen- output-based approaches to service delivery. Output-based dently verified. aid (OBA) is an innovative financing mechanism designed to Although subsidies are common in the energy sector, increase access to basic services for poor populations through many of the poorest households do not benefit from them subsidies linked to specified outputs. This note looks at the as they are not connected to networks in the first place. key components of designing OBA projects in the energy Because OBA specifically targets poor populations, it helps sector, and presents two projects in Kenya and Uganda that to ensure that the benefits of infrastructure investment support access to grid electricity. reach those most in need. Supporting the delivery of basic services in developing countries GPOBA has been working in the energy sector since Additionally, sound assessment of users’ capacity 2006, and energy now comprises almost half of GPOBA’s to pay can confirm the project’s viability and enable entire portfolio, with 17 projects in 15 countries. These design of effective subsidy schemes. projects are implemented in urban and rural settings, • Clear assessment of sector challenges. As well as in- and support grid and mini-grid electrification, as well as adequate regulatory frameworks, limited power supply, renewable energy solutions such as solar home systems. or low capacity of utilities, socio-political constraints This technological and regional diversity has allowed new (such as the presence of informal/illegal energy ser- approaches to be tested in meeting a range of needs. OBA vices run by cartels) can also impede implementation. approaches have demonstrated that they can ensure qual- Potential difficulties should be identified upfront and ity and service delivery, while making energy affordable programs and targets designed accordingly. for poor households. To date, GPOBA has disbursed more • Flexibility. Pilot projects by nature explore new ap- than $57 million supporting energy provision. proaches and are implemented amidst considerable uncertainty. As projects advance, for instance, subsidy Designing Projects in the Energy Sector requirements may change due to evolving technolo- gies, economies of scale, market development, or GPOBA’s experience confirms that projects can succeed the bidding process. Flexible project design that can even in challenging environments if enabling conditions respond to unforeseen changes increases the likeli- exist on the ground and project design is solid. At the hood of project success, as experience in both Kenya local or country level, factors that support results include: and Uganda shows. strong government commitment to a national energy ac- • Pre-financing capacity of service providers. Pre- cess program that is adequately resourced and focused on financing requirements can be met by service provid- the poor; sound institutional and regulatory frameworks ers through micro-financing, supplier credit, user supporting energy access; and, for grid-based projects, a down payment, donor grants or credits, or a combina- power sector performing well enough that critical prob- tion of these options. Pre-financing remains one of lems such as power shortages would not undermine a the main challenges OBA projects face in low-income project’s capacity to achieve its objectives. Within project countries. Sound project design recognizes risks design, factors that support the successful use of OBA that are beyond the control of the provider, such as include: exchange fluctuations in financially unstable environ- ments, and assesses how much risk service providers • Solid, thorough preparation. Adequate time is need- can realistically bear without hampering their ability ed to adapt models to new conditions or countries, to deliver outputs or creating unaffordable user tariffs. identify implementing agencies and service provid- • A strong implementing agency. Given the innova- ers with sufficient capacity, and develop institutional tive nature of OBA, implementing agencies tend to arrangements in an environment where a specific require substantial technical assistance, particularly in technology or subsidy scheme has never been used. environments where capacity is weak. But an imple- menting agency that is dedicated to the project, and has appropriate technical and managerial capability, will be crucial to project success. • Extensive public outreach. Outreach activities can help train customers in the use of unfamiliar tech- nologies and ensure local commitment to a project. Early public outreach can also support the productive involvement of local governments. Kenya Kenya is one of the fastest urbanizing countries in sub- Saharan Africa, but only about a quarter of slum house- holds have electricity connections. Many slum residents rely for electricity on informal networks, often controlled by criminal cartels, which add another layer of vulnerabili- ty and insecurity to their lives. These informal connections are usually more expensive and of poorer quality than legal connections. June 2016 Note Number 52 In 2012, GPOBA provided a $5.15 million grant to support expansion of the Kenyan electricity grid into slum areas. The GPOBA project is part of the larger World Bank-financed Kenya Electricity Expansion Project (KEEP), which includes IDA financing of $10 million for the slum electrification component. The Kenya Power and Lighting Company (KPLC) is the implementing partner. Prior to the GPOBA project, the Government of Kenya and KPLC introduced a special reduced fee for slum residents of $15 per connection, substantially below the actual cost per connection (estimated at $395) incurred by KPLC. The gap between connection costs and cus- tomer contributions was to be financed by output-based subsidies from KPLC ($155 per connection), IDA credit ($150 per connection), and GPOBA subsidies ($75 per connection), which would be disbursed once the indepen- dent verification agent (IVA) confirmed working connec- Image: Luigi Guarino/Flickr tions with pre-paid meters. The project faced initial implementation challenges. After the project commenced, the average cost of each Financing (KEEP-AF) will enable KPLC to maintain the connection increased to around $900 due to the inflation momentum of the KEEP program. The slum electrification of input costs. In order to adjust to this increase, GPOBA component of KEEP-AF is financed by the IDA ($10.5 mil- raised its subsidy from $75 to $125 per connection; IDA lion) and GPOBA ($3 million) and will connect an addi- and KPLC also increased their subsidies to $250 and tional 54,000 low-income households in Kenya’s slums. $510 respectively. The connection target was revised from 66,000 households to 40,000. The disbursement of subsi- Uganda dies was amended from the original two-tranche schedule to a one-time payment triggered by the verification of In Uganda, where the electricity access rate is about working connections with pre-paid meters. 18 percent, GPOBA is supporting provision of grid con- Another challenge was that slum residents in certain nections to 115,700 poor households (578,000 residents) areas were reluctant to switch to legal connections due in rural and peri-urban areas, representing about ten per- to issues of trust, payment barriers, and fear of reprisals cent of the electrification rate. The $5.5 million GPOBA from local cartels. To address this issue, KPLC prepared an contribution is part of a larger $18.2 million OBA facil- implementation acceleration plan, a two-track approach ity funded by the World Bank, the European Union, the differentiating between those slums with rampant illegal Government of Germany through the German Financial connections and strong cartel presence, and informal Cooperation (KfW), and the Government of Uganda. settlements designated under the World Bank’s Kenya Managed by the Rural Electrification Agency (REA) on Informal Settlement Improvement Project. In the informal behalf of the Ugandan government, the GPOBA project settlements, KPLC prepared for infrastructure improve- is implemented by eight service providers licensed by the ments; in the slums where residents were reluctant to Electricity Regulatory Authority. This project pilots the convert to legal connections, KPLC used a community- OBA approach in grid-based electrification in Uganda, supportive approach. Their outreach involved strengthen- while also creating an OBA facility, embedded within ing communication with residents through collaboration the REA, which provides for output-based subsidies for with youth groups, civil society organizations, and social utilities that provide pro-poor connections. The facility scientists, and preparation of educational materials and will enable flexibility for future generations of electrifica- contact points, such as kiosks. tion through, for example, additional funding from other Having made these adjustments, KPLC has to date con- development partners and the government. nected 40,323 households (161,630 people) in the project The project subsidizes the full cost of connection area, exceeding the revised target of 40,000. The project for (i) poor households in the vicinity of a low-voltage is enabling KPLC to expand its customer base; since the network who need no pole service and can pay for company’s investment has begun yielding results, it has re- internal house wiring and energy consumption but have ceived requests from several slums for legal power supply. not connected their premises for at least 18 months after The new Kenya Electricity Expansion Project-Additional commissioning of the power lines, and (ii) eligible poor households identified in newly electrified areas where The continuous engagement of Umeme, the major poverty mapping has been undertaken. Following instal- utility operator in Uganda and the main project service lation of pre-paid metered connections, GPOBA disburses provider, has been critical for project progress, while the 100 percent of the agreed subsidy. OBA financing instrument has incentivized the REA to fo- The project faced initial implementation challenges, cus on quality of connections and accountability of service including low payment capacity of households for internal providers. wiring, shortage of connection materials (particularly for small service providers), and delays in poverty mapping Conclusion and in verification/subsidy disbursement. These chal- lenges have been addressed by offering partial wiring and The provision of safe, reliable, and clean energy presents ready board options to address barriers related to internal enormous challenges that require innovative development wiring; accelerating and finalizing poverty mapping; and approaches. OBA has proved to be a versatile and flexible streamlining disbursement procedures. Project restruc- financing mechanism that can succeed even when country turing allowed for a change in the subsidy disbursement conditions are challenging. Going forward, GPOBA will schedule to a one-time payment to accommodate pre-paid continue to focus on implementing results-based solu- meter technology (the only technology used), which con- tions in support of the SDGs, working in the energy, water, tributed significantly to connection uptake due to service sanitation, and other sectors to increase access to basic providers being more strongly incentivized. REA has also services for poor populations in order to create sustainable pursued an active mobilization and public outreach cam- communities. paign to inform residents of the benefits of the project and accelerate connection uptake. Since these steps were taken, the project has pro- SOURCES gressed quickly, supporting 102,205 new connections International Energy Agency: benefitting approximately 511,000 people (88 percent of http://www.worldenergyoutlook.org/resources/ener- the project target). Informal feedback from consumers gydevelopment/energyaccessdatabase/#d.en.8609. has emphasized the benefits of electrification: lighting has Fact Sheet: The World Bank and Energy in Africa (http:// replaced kerosene and allowed children to study at night web.worldbank.org/WBSITE/EXTERNAL/COUN- and adults to use TVs, radio and phones; increased ease TRIES/AFRICAEXT/0,,contentMDK:21935594~pageP of women’s household chores with electric appliances; K:146736~piPK:146830~theSitePK:258644,00.html). and improved community safety. Service providers have Results-based Aid in the Energy Sector: An Analytical emphasized the project’s role in reducing illegal connec- Guide. tions and growing the customer base, which has encour- Energy Sector Management Assistance Program aged support within management of the service providers (ESMAP), Technical Report 2015. for the OBA facility and for mainstreaming connection Energy Sector Experience of Output-based Aid. GPOBA. application procedures. June 2016. About OBApproaches OBApproaches is a forum for discussing and disseminating have been chosen and presented by the authors in agreement recent experiences and innovations in supporting the delivery with the GPOBA management team and are not to be attribut- of basic services to the poor. The series focuses on the provi- ed to GPOBA’s donors, the World Bank, or any other affiliated sion of water, energy, telecommunications, transport, health, organizations. Nor do any of the conclusions represent official and education in developing countries, in particular through policy of GPOBA, the World Bank, or the countries they output- or performance-based approaches. The case studies represent. To learn more, visit www.gpoba.org e Global e Partnership on Global Partnership Output-Based Aid on Output-Based Aid Supporting the delivery of basic services in developing countries