NOTE NUMBER 6 Octber6 LESSONS LEARNED Ocobesr 2foru -e 0 0 rChallenges in Formalizing the Supply of Electricity in Mumbai's Slums DEVELOPMENT CHALLENGE RI L was responsible for providing the upfront financing. tPOBAsubsiized S56oftheoverall costof $103 per t ondian cities have large populations of urban slum GPOBAton isd asr partnership.heaidwa wellers who lack access to basic services from tied to outputs, payable once the targeted consumers tility providers Approximately 65 million people, obtained access to electricity connections and met o17 percent of India's urban population, live in the wiring requirements. RI L was required to pay for rpercent of the city's population.' Many per connection, recoverable through the tariff To nobtain access to electricity through illegal participate in the project, the slum dwellers had to dwhich can be unsafe and contribute to provide the necessary proof of ownership or tenancy rdistribution losses at utilities. To address of the dwelling units, apply to RIL for legal connections, thschallenge, the Indian Electricity Act of 2003 use licensed contractors to install new safe internal introduced a provision to increase formal access by wiring or update existing illegal wiring, and pay their requiring electric utilities to connect and supply any utility bills on time. customer who can provide proof of residency. TH E PROJ ECT AN D ITS PARTN ERS RSLSAHEE In 2009, the Global Partnership on Output-Based OBA Lessons Learned Aid (GPOBA) approved a pilot project for S .65' The project closed in June 2013, connecting only Series is a forum million with the objective of increasing access to safe 15 households under the output-based aid (BA) for discussing and electricity supply in Indian slums through targeted subsidy scheme. Although early awareness campaigns disseminating project output-based subsides. The pilot focused on selected generated about 750 applications, many of them were insights at the conclusion urban slum areas of Mumbai, but had potential for found to be ineligible once the proof of residency of projects in supporting scale-up in other communities in Mumbai and across documents required for a legal connection were the delivery of basic India if successfully implemented. scrutinized. Residents were unwilling to change the services to the poor. The project was implemented by Reliance existing internal wiring and pay a Higher amount for GPOBA is a partnership Infrastructure Limited (RIL), a private sector utility, the safe wiring using standard quality material required established in 2003 and the sole distributor of electricity in the suburbs under the project The Slum Rehabilitation Society by the UK (DFiD) and of Mumbai. As designed, it aimed to provide 26,500 reported that many households expressed willingness the World Bank. its poor households with legal electricity connections to connect under the project, but were unwilling to other donors are the and safe internal wiring, starting with the Shivaji pay the required end-user contribution. During the life international Finance Nagar slum. The wiring had to comply with Indian of the project, RI L made about 7,000 new connections Corporation (lFQ) the govemnment standards, which would also meet inSivj Nagar (outside of the OBA subsidyscheme), Netherlands (DGIS), the basic customer needs of 4.5 points of supply,h Australia (DFAT), or enough energy to run two lights, one fan, oned and Sweden (Sida). television set, and one spare plug. The project for b1u65l For more information benefted from a community outreach and an visit www.gpoba.org education program supported by the U.S. Agency for Census India 2011; Government of India and presentation by Dr C. or email us at International Development (USAID) and implemented 2 Chandramouli, Registrar General and Census Commissioner, India. gpoba@worldbank.org. by the Slum Rehabilitation Society (SRS). All monetary amounts are in USS unless stated otherwise. Sua the soler of ctic s rs i d co.nt-ies Lessons Learned services to the poor in Africa, Asia, ard Latin America, and have succeeded in equipping households with legal connections By not adequately compensating consumers for the and reducing the commercial losses of distribution companies. additional cost of wiring, the subsidy failed to create Such approaches could extend access to the poor, especially if demand for safe electricity supply. subsidies create incentives for them to connect legally; howevei; Cost escalations during implementation increased the end-user it is essential to analyze the reality of local political dynamics to contribution to $72, which was 56 percent of the revised cost design a workable project. Regulation would also need to be of S128. This was too costly for the target households, many strengthened to penalize the illegal tapping of electricity supply of which opted to pay the full connection fee of S34 to RIL The subsidy was too small to incentivize the service and organize their own wiring through local contractors-even provider to implement the project as designed. though it was deemed to be of substandard quality. Splitting RIL is one of India's largest private sector companies, with more the limited subsidy between the connection cost and wiring did than $2 billion in annual revenues. In this context, there was not help; the subsidy paid for 25 percent of the RIL connection little incentive for the company to implement a $1.6 million fee and 50 percent of wiring from the distribution point and pro-poor subsidy scheme in India's financial capital, where the internally within the household. It was not enough to either company's core market is industrial and residential consumers. stimulate demand for safe wiring or encourage the utility to Such subsidy schemes should be designed with clear incentives connect new consumers to their network under the project. for service providers to implement them. For example, OBA The project demonstrated that in very poor areas schemes could support utilities to meet pro-poor access targets where consumers have limited disposable income, there is that they are legally obligated to attain, or support a corporate little willingness to pay for anything beyond basic access to social responsibility agenda to which a company is committed. electricity. Hence if subsidies are to incentivize access to safe It is also important to ensure that the service provider is not energy, they need to respond to the target population's needs incurring a financial loss by connecting low-income consumers and willingness to pay. Adjusting the subsidy level in response to the system. Connection and usage costs should be covered to low uptake could have allowed the project to test whether through a combination of user fees, subsidies, and tariffs. In higher subsidies actually encourage households in urban slums cases in which lenders are partially financing projects, there to acquire safe electricity and stay legally connected over the should be enough revenue generated to repay loans. medium to long term. medim tolongter4 The project was designed in such a way that the utility 2 Failure to manage the strong informal network hampered Company, RIL, took financial risk without return; even efforts to connect consumers to the utility network. though the amounts were minor, it was an additional There is a strong informal network of service providers in Mumbai deterrent to implementing the project. slums that provide a range of services to residents, including RIL was responsible for financing and implementing the overall electricity. These providers tap into the distributor's network and project but, like most electric utilities, does not have the charge households a flat monthly rate of $2-S4 per month for mandate to carry out any wiring beyond the meter. Hence RIL three to four points of electricity, which would cost S7-S 10 for engaged licensed electrical contractors to carry out the internal 50-100 kilowatt hours from the utility. The lower cost of service wiring, and made upfront payments for the subsidized portion from informal service providers coupled with weak enforcement of wiring costs. The OBA subsidy was payable to RIL in phases of a legal connection policy hampered efforts to connect target once the outputs were achieved, and was staggered over a consumers to the RIL network. one-year period with no compensation for financing costs. To Future slum electrification projects could explore the work, the project needed the utility to engage contractors and option of partnering with local governments and the target assume a payment risk if the outputs were not fully achieved. communities to manage energy distribution in slums. Varying The absence of a financial incentive to compensate for such degrees of delegated management and participatory risk was an additional deterrent for the utility to connect users approaches have been used to extend water and energy under the project. Thecae tuiesar cosn ad reened yheauho subsidires et incetie s fBApora macnnemeteayhwvr tea an ar no tobeattibued o GOB's onos, heordesg Ban wruorae poet Reglation oulanstonee ob no d ay f hecoclsinsrereenofiiapliottle netiforethoed opanyztonpeens.16ilo pro-poor~. S S 55 *ssd shm in Ini. financia caitl whrh c S S *~- . o mpan.s.cre.mrke isidsra an eietalcnues