52083 NOVEMBER 2009 ABOUT THE AUTHORS ART CARIAGA is a communications officer. dsas Bringing Reliable Electricity to Rural Areas of the Philippines JED A. SEVILLA is an associate operations Electric Cooperatives (ECs) in the Philippines are generally undercapitalized, officer who heads IFC and their operational performance is poor. As a result, the supply of electricity Advisory Services' Rural Electrification program. in rural areas is unstable, with frequent outages and fluctuating voltages. IFC Philippines Advisory Services found that a principal reason was the ECs' MARIANNA FERNANDO- PACUA lack of sound capital expenditure (capex) plans, and introduced a new is a program assistant, product to address the issue. The results from the pilot training of six ECs Sustainable Energy Finance Program. in post-conflict areas of Mindanao will be replicated in all ECs in the country and ultimately bring an estimated $274 million worth of investments in WILLIAM TRANT BELOE is Head of Advisory Services, capex and power-generation, and reduce greenhouse gas emissions by IFC Philippines, and manages 600,000 metric tons per year starting in 2015. To get to this point, IFC learned the Sustainable Energy Finance Program. five key lessons about the importance of building strong relationships to "sell" ownership of the program to clients and pivotal stakeholders and ensure program sustainability through local consultants and partner organizations. Securing a reliable supply of electricity for efficiency of the ECs. The capex plan, a key rural homes and small and medium enterprises element of the ECs' broader business planning, (SMEs) is a key ingredient in bringing economic incorporates a financing and rate impact opportunities to the country's least well off. In study. Such plans match demand with supply rural parts of the Philippines, electricity is and distribution and present requests for rate delivered through a network of 119 ECs that enhancements before regulatory agencies. account for 7 million electricity connections, or The realistic rates justify new investments to 75 percent of total connections. The ECs' poor make ECs improve their operations. operational performance caused 10 percent productivity losses for SMEs. These Initially, six ECs participated in six months of inefficiencies contribute to the high cost of training, which resulted in identifying the electricity, which, at $14 per kilowatt hour, is need for $26.59 million in new capex one of the most expensive in Asia. investments in five years in these pilot ECs' electricity distribution areas. The capex plans Under its Rural Electrification program, IFC's so impressed the Energy Regulatory Advisory Services partnered with the Commission (ERC) and the National Association of Mindanao Rural Electric Electrification Administration (NEA), which Cooperatives (AMRECO), one of the country's had met with little success in getting ECs to biggest groupings of ECs. The Rural submit realistic capex plans, that they Electrification program aimed to strengthen mandated the replication of the program in the capacity of AMRECO's 33 member ECs to all the 119 ECs that make up two of every plan and manage their operations in a three electricity connections in the country. financially sustainable manner, particularly The ERC promptly approved the six ECs' capex through capex investments. plans, whereupon another group of 16 ECs began similar training, with AMRECO acting The ECs are now trained to write sound capex as project leader. Thirteen of the ECs are plans that include demand forecasting and paying the full cost. operational improvements. Capex planning refers to a five-year program that systematically On August 5, 2009, the heads of the NEA and lines up projects to improve the operating ERC signed a memorandum of agreement IFC SMARTLESSONS -- NOVEMBER 2009 1 with IFC Advisory Services, the Philippine Rural Electric and guide the ECs, step by step, through the process. Sevilla Cooperatives Association (PHILRECA), the National was previously the general manager of an EC in Sultan Association of General Managers of Electric Cooperatives, Kudarat province in central Mindanao. His technical and AMRECO to adopt the "Electric Cooperatives expertise and relevant experience were known to the clients Distribution Utility Planning Manual" based on IFC- and earned their confidence. He also had close relationships developed templates for capex plans submitted for ERC's with the relevant NEA and ERC officials. More critically, he approval and as a vital document in the NEA's supervision of got AMRECO and its member ECs to attend and produce the ECs. masterful results that won the endorsement of the NEA and ERC. He also prepared AMRECO to become the subsequent At the request of the NEA and ERC, the IFC Rural trainer of other Mindanao ECs. Electrification team is scaling up its capex planning workshops to the rest of the country. IFC has agreed to train 2) Give clients a voice in the selection of consultants. 30 of 86 rural ECs in Luzon and Visayas, the two other island groups that, together with Mindanao, form the Philippine IFC knows the right type of consultants for specific projects, archipelago. IFC will partner with PHILRECA, the "mother" usually more than the clients do, so IFC brings this value as association of Philippine ECs, and ensure its capability to it makes the final choice of consultants. But it is helpful for train the ECs. The ECs are paying the full cost, as they expect IFC to shortlist the consultants and get the clients' input the gains to far outweigh the costs. As a result of systems confidentially before making the final choice. The clients improvement from the training, the ECs' total systems losses will then feel they have a bigger stake in the consultants' alone could be reduced by 2 percent, saving them $28 success and exert more effort to work harmoniously with million per year. them. The following five lessons from the project may help Contrary to initial beliefs that, if they were given a greater facilitate capacity-building projects in other areas. voice in choosing consultants, the ECs would be likely to choose consultants who were more congenial than Lessons Learned technically competent, this did not happen. The ECs preferred consultants whose technical capabilities they 1) Find a project leader who can secure client buy-in. were familiar with, having met them at the NEA- sponsored competency training for ECs conducted by the University of Understanding the problem and coming up with the correct the Philippines College of Engineering. solution are essential to any intervention, but they are not enough. In rural settings, where decision making originates In another IFC business line, a foreign consultant was chosen from or revolves around the dominant personality of one by IFC for his specific expertise, but he and the clients could person, finding that particular opinion leader is paramount. not work harmoniously with one another, and a replacement In AMRECO, for instance, the views of the president carry so had to be found. much weight in decision making that the Rural Electrification team made sure that he was briefed first and his suggestions 3) Choose consultants and partner organizations that heeded before a proposal would be made to the entire know the clients' specific culture and can be more board. In PHILRECA, the general manager was the one who accessible to them over the long term. had to be convinced first of a proposal's merits. The Rural Electrification team's work with the ECs proved After a thorough study of why ECs were not delivering that it is critical for consultants to have a good understanding stable and lower-priced electricity to rural areas, IFC of the cultural makeup and dynamics of clients. People from determined that ECs lacked the expertise, particularly in the West have a rather strict interpretation of time. Filipinos, engineering analysis and system planning, to come up with on the other hand, have a more fluid concept of time. Local appropriate capex plans. This, together with the ECs' managers, particularly those from rural environments, often inability to perform appropriate tariff analysis and their appear to be prognosticating or even negligent when, in inexperience in justifying proposals for rate increases, fact, they are operating on a different psychological clock. prevented them from recovering legitimate costs. Knowing this, IFC adjusted project time frames to factor this in. If they wanted the EC trainees to come in at 8 o'clock in The ECs were ill-positioned to secure long-term financing the morning, the program had to say it would begin at 7 for their capex needs. Commercial banks have little o'clock, because attendees would habitually come in an understanding of ECs, and the ECs could neither package hour late, with the senior managers arriving even later. IFC their requests with adequate feasibility support nor describe staff from Manila would avoid booking a night flight for to the banks the true nature of EC credit risks and the return home; they knew the proceedings would be strengths. delayed, and they were better off departing the next morning. Often, the EC manager would say, "I will dig up The key, therefore, was to train the ECs in capex planning those papers and sign them tomorrow; what's the hurry?" and in remedies for other critical deficiencies. IFC, however, So the Rural Electrification team would work beforehand took care not to impose the solution on the prospective with his staff to prepare the papers and present them to the client ECs. It searched for a competent trainer and found manager at the right moment, and he would sign them. the ideal "relationship builder" in Jed Sevilla, who would "No problem. Let's go have dinner," the manager would later organize and manage the capex planning workshops say. 2 IFC SMARTLESSONS -- NOVEMBER 2009 In some ECs, the managers have close kinship supply so as to bring down the cost of or long-standing personal ties with one electricity. Incentives were given to another. This colors decision making and independent power producers, but for years requires consultants who know how to work there was little private-sector investment in in this "family" environment. establishing more independent power producers or improving their generation, Local consultants also provide the advantage because the main off-takers for the electricity of being available to work with the clients for supply, the ECs, were seen as poor financial a longer time than the IFC intervention. This risks. helps ensure the sustainability of the program and its benefits. The Rural Electrification team synergized with the Sustainable Energy Finance team to create 4) Identify pivotal stakeholders and give a two-pronged approach to bring a stable them a sense of "ownership" of the project. electric supply to rural areas and, in the process, to mitigate the effects on climate The two regulatory agencies supervising ECs, change. As the Rural Electrification team was the NEA and ERC, were pivotal. For some time, helping the ECs prepare sound capex plans, they had been trying with limited success to the Sustainable Energy Finance team was get the ECs to submit sound five-year supporting a leading bank in its plan to provide comprehensive capex plans. Knowing these financing to the ECs' capex requirements. With past attempts, the Rural Electrification team these capex plans being approved by ERC, it made sure that both agencies, as well as all would be easier for the bank to establish the previous players who had been helping the risk profile or creditworthiness of the ECs' loan ECs, remained on board during the applications. implementation of the project. In the case of the Philippine archipelago's IFC presented the two agencies with the island groups and remote villages, the Small project design, objectives, and benefits and Power Utility Group (SPUG) of the National gave top officials regular updates, while Power Corporation provides them electricity seeking their suggestions and active through small generating units that are either participation. When the capex plans were connected to the main grid or are off-grid. A completed, they were presented during an number of the ECs in the SPUG areas also take "ERC Engagement Workshop" to the ERC the capex plan training so they can become commissioners as well as to the NEA reliable and creditworthy distributors of rural administrator and senior managers. Their electricity, and there is more incentive for inputs were sought and incorporated into the generators under SPUG to operate in remote plans, giving the officials "ownership" of the areas. project. This facilitated their approval of the ECs' capex plans and their adoption of the It's All About Relationships training outputs as the official template for training all 119 ECs. Relationships are seen almost everywhere as being critical to the success of IFC programs. Another major improvement, which the But the diversity of cultures and country regulatory officials appreciated, was the fact situations requires that IFC choose program that the capex plans were made comprehensive leaders and consultants who are sensitive, to cover five years, unlike the dozens of adaptable, and accessible in working with DISCLAIMER individual capex decisions that the ECs used to clients. Relationships also help in identifying IFC SmartLessons is an awards submit year after year for the ERC's approval. synergies among IFC programs that would program to share lessons learned in development-oriented advisory Before the IFC-supported templates, each EC greatly contribute to their combined services and investment submitted individual projects in various styles development impact. As IFC moves on to operations. The findings, for every year. The ERC commissioners and create other opportunities, the good, interpretations, and conclusions technical staff had to pore over the submissions productive relationships it creates along the expressed in this paper are those of 119 ECs, and this resulted in all sorts of way ensure the sustainability of intended of the author(s) and do not necessarily reflect the views of IFC regulatory delays and disapprovals. program benefits. or its partner organizations, the Executive Directors of The World 5) Synergies with other IFC programs can Bank or the governments they extend the development impact and represent. IFC does not assume any responsibility for the sustainability of projects. completeness or accuracy of the information contained in this The Electric Power Industry Reform Act was document. Please see the terms passed in 2001 to end government dominance and conditions at www.ifc.org/ of the industry in favor of the private sector. smartlessons or contact the program at smartlessons@ifc.org. The law sought to ensure adequate power IFC SMARTLESSONS -- NOVEMBER 2009 3