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TEASER DOCUMENT

Decentralized Infrastructure for RuralTransformation Program (ERTIC)

Summary: ERTIC Phase One and its Solar PVMarket Development Program

Country: Bolivia

Contact Person:

Mrs. Eva Urquidi C.

Mr. Enrique Birhuett G.

IDTR Project

Ministry of Public Worksand Services

La Paz BOLIVIA

Repblica de BoliviaMinisterio de Servicios y Obras Pblicas

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EXECUTIVE SUMMARY

The ERTIC ProgramA ten year, three-phase adaptable program credit financed by the World Bank will increase access in rural

areas to electricity, information and communications services, by using innovative, decentralized public-private business models and focusing on productive uses and training of suppliers and users. As part ofthis program, output-based aid (OBA) subsidies for innovative Medium-Term Service Contracts (MSC)aimed at local market development for Solar Home System (SHS) will be competitively awarded in severaltenders.

SHS Program GoalsThe PV component of this program aims at servicing about 15,000 new users via SHS (in addition toschools, clinics and other social uses) during the initial Phase One (four years). A successfulimplementation of Phase One will trigger the subsequent Phases Two and Three of the overall Program,each Phase with comparable PV installation targets. In several well defined areas of Oruro, Potos,Cochabamba and Santa Cruz, MSC for 400 to 2,700 minimum users each will be bid out to private

operators in Phase One.

Who can bid as a qualified potential operator?Qualified local and international private sector players will be invited to participate. The program isflexible enough to allow for partnerships among PV equipment suppliers, local micro-credit organizations(known as IFIs), community organizations or NGOs as long as they comply with the pre-qualificationcriteria that will be defined in the bidding documents. Those that can show sound financial backing andthe necessary array of skills which appear likely to enable the firm to operate the franchise within the OBAcontract specification, will be permitted to bid.

Basic Guidelines

1. Service sustainability: Will be ensured by the MSC given that after the installation of the SFVequipment, operators will have to provide the following services and market development activities for anadditional period of 3 years: access to financing possibilities, customer after sales services, annualhousehold visits to train customers, development of a local micro-enterprise network that will sell spareparts, repair systems, and promotion of PV for productive and public uses in the area.

2. Capacity building of users and local spare part and repairs specialists: The winning bidder will have theobligation to develop the local market in his respective area via capacity building and monitoring tasks onthe supply side (e.g. training local spare part and repairs specialists who will later be able to cater to thefuture spare parts market) and demand side (e.g. training users and promoting future sales of PV fordomestic, productive and public uses). Hence, each winning bidder will reduce initial information barriersin his market area an additional service that will be checked by random audits, just as the SHSinstallations.

3. Disbursement of Subsidies: The program will provide four different types of subsidies: i) direct up-front OBA customer subsidies on the initial investment cost, paid to the supplier on the basis of actualinstallations; ii) OBA service quality subsidies, paid to supplier against installation and service performancetargets; iii) OBA market development service subsidies, paid to the supplier against training of localtechnicians, yearly visits, users training, etc.; and iv) indirect market development subsidies (aggressiveoverall promotion activities, support to the formulation of business development strategies, training andtechnical assistance).

4. Freedom to develop creative business models: To allow for cost reduction and service improvementsthrough creative business models by all bidders - while assuring service quality over time - the bidding andservice contracts will allow for a well informed freedom of choice for service providers and users, by

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BOLIVIA ERTIC PROGRAM

Table of Contents

I. INTRODUCTION 1

Program Description: ERTIC 1

The Institutions Involved in the ERTICProgram 2

The Medium-Term Service Contract(MSC) and the OBA Mechanism 2

Main Differences Between the MSC andTraditional ESCO Models 4

Previous Experiences with SHS in Bolivia4

II. PROGRAM OBJECTIVES 6

Introducing the Concept of Service 6

Flexibility for the Service Provider 7

Program Goals 8

III. MECHANISM AND METHODOLOGY 9

The Tender Process 9

Disbursement of Subsidies 10

IV. THE POTENTIAL MARKET AND

DESCRIPTION OF THE AREAS 11 Brief Description of the Areas 12

V. SCHEDULE, ACTIVITIES AND CONTACTINFORMATION 14

Meetings with Potential InterestedInvestors 14

How to Get Additional Information? 15

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I. INTRODUCTION

n Bolivia, a ten year, three-phase adaptable program credit financed bythe World Bank will increase access in rural areas to electricity,information and communications services, by using innovative,decentralized public-private business models and focusing on productive

uses and training of suppliers and users: The Decentralized Energy for RuralTransformation Program ERTIC. ERTIC has started in December 2003.

As part of this program, output-based subsidies for innovative Medium-TermService Contracts aimed at local market development for Solar Home System(SHS) will be competitively awarded in several tenders. Extending cellularphone coverage, TV and radio to rural areas will increase the demand for SHS.

The PV component of this program aims at servicing about 15,000 new usersvia SHS (in addition to schools, clinics and other social uses) during the initialPhase One (four years). A successful implementation of Phase One will triggerthe subsequent Phases Two and Three of the overall Program, each Phasewith comparable PV installation targets.

Program Description: ERTIC

The purpose of the Bolivia ERTIC Program is to expand and improve the

delivery of infrastructure services through private-sector led mechanisms as acatalyst for the development of rural areas in Bolivia, with a focus ondecentralized electricity services and information and communicationtechnologies (ICT).

Since the ultimate development impact of infrastructure services depends onthe extent to which they can be harnessed for productive and social uses, theprogram will include investments in both infrastructure hardware andcomplementary software, such as training and applications. For both the

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electricity and ICT sectors, the Government of Bolivia (GOB) has developedexpansion strategies: PLABER for electricity, and PRONTER fortelecommunications.

In order to reach the development objective, the Program will concentrate on

the following activities:

(i) Increasing access to rural infrastructure services in the project areas by usinginnovative, output-based, decentralized service delivery models with increasedprivate-sector participation and community involvement;

(ii) Defining and implementing improvements in policy, regulatory, andinstitutional frameworks, and strengthening of the respective key institutions;

(iii) Identification and development of applications for productive and socialuse of electricity and ICT;

(iv) Intensive promotion, including market development and training of local

users, service providers and authorities; and(v) Intensive monitoring and evaluation programs.

The Institutions Involved in the ERTIC Program

The Bolivia ERTIC Program and the Medium-Term Service Contracts arefinanced by the World Bank. Locally, the program is technically coordinatedby the Program Coordination Unit (UCP) of the Ministry of Electricity andAlternative Energies of the Government of Bolivia.

The Medium-Term Service Contract (MSC) and

the Output-Based Aid (OBA ) Mechanism

The basis for any successful OBA-based transaction is a careful design of thesubsidy allocation, the service obligations and the enforcement mechanism.This is of special importance for off-grid projects aimed at attracting privatesector operators to remote rural markets.

The basic Program strategy is to stimulate the market by assuring the long-term availability of local support by developing selected local market areas viathe so called SHS Medium-Term Service Contracts.

In several well defined areas (lots), Medium-Term Service Contracts (MSC)for 400 to 2,700 minimum users each will be bid out to private operators inPhase One. The SHS will be installed and serviced by qualified private sectoroperators, who would probably work via networks of local micro-enterprises who are installing systems, selling spare parts and appliances, providingfinancing alternatives for users, implementing after sales O&M services,

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answering additional service calls, and developing their local markets viapromotion and training.

Some of the basic guiding principles for the transaction are:

Service sustainability will be ensured by the MSC given that after theinstallation of the SFV equipment, the service providers will have toprovide after sales services and market development activities for anadditional period of about 3 years.

The winning bidder will have the obligation to develop the local market inhis respective area via capacity building and monitoring tasks on the supplyside (e.g. training local spare part and repairs specialists who will later beable to cater to the future spare parts market) and demand side (e.g.training users and promoting future sales of PV for domestic, productiveand public uses). Hence, each winning bidder will reduce initialinformation barriers in his market area an additional service that will be

checked by random audits, just as the SHS installations.

Subsidies will be paid against outputs (i.e. users provided with satisfactoryservice plus local market development services successfully delivered).

Qualified local and international private sector players will be invited toparticipate. The chosen lot sizes will be interesting and manageable forlocal and international SME, large multinationals, and various types ofconsortia between those.

To allow for cost reduction and service improvements through creativebusiness models by all bidders - while assuring service quality over time -the bidding and service contracts will allow for a well informed freedomof choice for service providers and users, by permitting for different waysof reaching the desired outputs (e.g. system sizes and payment options),while fixing minimum service standards.

Productive and public uses will be facilitated with additional targetedsubsidies.

The MSC service obligation will set the local market development pattern viaspecific TA activities which will mostly be part of the winning biddersobligations:

(i) household visits (about once or twice a year) for checking the systems,training users and perform basic monitoring tasks via simple questionnaires tobe signed by the users (this decentralization of monitoring will allow for closemonitoring of compliance by the Project Coordination Unit (UCP) via auditsat low costs);

(ii) ongoing promotion of PV for domestic, productive and public uses in theservice area; and

(iii) establishment of a local micro-enterprise network that will sell spare partsand repair systems (all operators and technicians will participate in a yearly

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ERTIC training seminar where early lessons are discussed and capacity will bechecked).

Main Differences Between the MSC and TraditionalESCO Concession Models

The SHS Medium-Term Service Contracts (MSC) are not a traditional ESCOconcession scheme since:

(i) Operators are not forced to a fee-for-service scheme - they also can sellcash or credit, whichever they (and their users) prefer, so that the user can ownthe system at the outset;

(ii) However there is more attention to long term service sustainability than in

a pure dealer model, by paying OBA subsidies to the dealer for building a localservice and users training network and establishing M&E systems;

(iii) Users pay fully (and ad hoc) for replacements after the initial guaranteeperiod, so they get used to preparing for payments they will face in the future;

(iv) After about 3 to 5 years, it is expected that these local markets cangraduate into free SHS sales and commercial O&M.

In other words, if one would aim at improving a pure dealer model (by addingmandatory O&M services of 2-5 years and local market development to reduceinformation barriers), or if one would aim at improving an exclusiveconcession scheme (by limiting obligations to only 2-5 years and opening it to

a broader menu of ownership/payment options), the MSC model is whereboth would meet.

To bid areas for minimum subsidy and provide initial exclusivity for subsidypayments therein has the advantage that transaction costs can be keptcontrollable for all players, including government and auditors (this is keyconsidering the extreme dispersion of population in rural Bolivia, below onehousehold per km in many areas). On the other hand, yardstick competitionbetween the areas as well as opening the markets after the initial period ofexclusive subsidy access will improve efficiency.

Previous Experiences with SHS in Bolivia

Roughly 20,000 equivalent SHS, or about 7% of the total national market,have been installed since 1992 (many through projects partially subsidized bydonors or local authorities). Yearly installations have grown to about 3,000SHS. While PV modules are imported, solar batteries are produced locally(about 2,500 solar batteries sold inside Bolivia per year, plus exports to Brazil),and several local companies are producing or assembling efficient light bulbs

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and charge controllers. The prevailing supply chain has three levels: (i) moduleproviders; (ii) system integrators; (iii) installers/operators. There about tenqualified local system integrators and many trained technicians today.

In the medium to long term, there are significant opportunities for cost

reduction through increase in sales volumes and establishment of commerciallinks with suppliers elsewhere. In the short-term, assistance to the industry isneeded to establish a rural sales-and-service network and to stimulateconsumer demand by reducing unit prices. To that extent, the ERTIC program will involve subsidies that are justified on social equity grounds. Localproduction or assembly of equipment may be spurred by the potential offuture sales beyond Bolivia.

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II. PROGRAM

OBJECTIVES

he ERTIC Program will provide direct benefits to households andbusinesses in remote areas which would receive improved service(lighting and operation of small appliances such as cell phones, radio,

TV, etc.) for small productive uses as well as for quality of life enhancement.Quality of life benefits of PV electrification include: (i) improved indoor airquality due to decreased use of traditional lightening fuels; (ii) higher qualitylighting, facilitating reading, cottage industry, etc.; (iii) improved safety throughreduced potential of accidents like fires, etc.; therefore resulting in anextension of the social and productive use of the day for rural families and

communities. There are also indirect benefits of improved service delivery (e.g. by healthcenters, schools, telecom) to those too poor or otherwise unable to receivedirect benefits. Indirect benefits also include increased economic activity in theelectrified areas, leading to improved access to commercial services andincreased employment opportunities.

The ERTIC program will provide subsidies to bring consumer payments closeto willingness to pay levels for a significant segment of the market, as inferredfrom the current substitutable expenditures on traditional energy sources forlighting and basic communication.

Introducing the Concept of Service

In the ERTIC program, emphasis will be placed in a scheme oriented towardsthe service provided. Thus, the attention - and the subsidy payments - aregeared to what is really relevant: the final product delivered. A generaldifficulty in service specification arises from tensions that exist between the

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need to lay down a precise description of the service to be provided by thesuccessful supplier and the need to allow for flexibility and scope forinnovation after the award of the OBA franchise. By focusing to the extendpossible on desired outputs and not on the particular characteristics of the

equipment/service supplier and his business plan, a more flexible framework isprovided, which will leave service providers as much freedom as possible forresponding to customer demands in an innovative way. Providing thisflexibility while assuring quality is a program objective.

For example, PV equipment suppliers would be allowed to join local micro-credit organizations (known as IFIs), community organizations or NGOs in apartnership for providing the services under the necessary quality standardsand conditions.

These partnerships will be paid subsidies upon meeting at least three basicobjectives:

(a) A portion of the subsidies (direct customer subsidies) is paid to theprovider / the provider consortium based on actual installations;

(b) Another portion is paid against meeting performance targets related toservice quality; training of local technicians; yearly visits; user training; andsubmitting regular monitoring protocols (as mentioned above); and

(c) A third portion is paid based on meeting market development goals, suchas creating a local spare parts market.

As a results oriented program, the minimum characteristics of the serviceto be delivered will be defined in the bidding documents. Therefore, thebidding documents will specify a series of obligations that the winning bidder

must comply with, such as:a) Minimum number of users to be connected,

b) Quality of service that must be achieved, as well as quality of PV systemsallowed under the Program,

c) Minimum conditions for managing and maintaining the service,

d) Capacity building and training of local technicians and users in themanagement and maintenance of the service,

e) Other obligations related to the development of the market and the creationof a sustainable service.

Flexibility for the Service Provider

As mentioned above, the program is flexible enough to allow for theparticipation of organizations different to the traditional equipment suppliers. This flexibility also allows for partnerships among PV equipment suppliers,local micro-credit organizations, community organizations or NGOs as long as

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they comply with the pre-qualification criteria that will be defined in thebidding documents. Those that can show sound financial backing and thenecessary array of skills which appear likely to enable the firm to operate thefranchise within the OBA contract specification, will be permitted to bid.

Given that micro-credit services have been identified as a potential tool forexpanding the number of potential users in the areas to be served,recommendations will be provided to bidders for offering different kinds ofshort and medium term financing to the users. There are several existingfinancial intermediaries in Bolivia who are interested in or already active in providing micro-credits for SHS.

Program Goals

The installation of 20,000 equivalent Solar Home Systems (for the purposeof this project, the PV systems to be installed in the target areas to serveproductive and public uses will be counted as multiples of a standard SHS) aretargeted by Phase One of the Solar PV Program (first four years). A successfulimplementation of Phase One will trigger the subsequent Phases Two and Three of the overall Program, each Phase with comparable PV installationtargets.

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III. MECHANISM AND

METHODOLOGY

The Tender Processocal and international bidders will be invited in 2004 to bid for output-based subsidies in several predefined areas (lots). The bidding variablewill be the number of SHS installed (in 3 years) and serviced at a fixed

total subsidy per area (i.e. the winning bid would result in the lowest subsidyper unit).

Subsidies would be paid against output upon (i) initial business set-up, (ii)successful installation of SHS, (iii) satisfactory medium-term service (3 yearsfor each user after installation), as well as (iv) specified local marketdevelopment activities, such as promotion and training (see section 1.3). Each

area (lot) would be assigned to its respective qualified winning bidder, and thatbidder would have exclusive access to ERTIC subsidies during the initialmarket development period.

The winning bidders will be allowed to agree on a combination of paymentoptions with their users, and will offer a basic menu of user finance options aspart of their service package. To this end, bidders will be allowed to formconsortia of SHS providers/operators and microfinance institutions asmentioned in section 2.2.

Bidders will be allowed to apply for various areas, and to decide later for jointprocurement of PV panels, to save through bulk purchase. Users and supplierswill be free to chose between all possible payment options (cash, micro-credit,

finance), based on clear and simple standard contracts approved by the ProjectCoordination Unit. Users will be able to choose amongst a range of systemsizes (probably 20 to 100 Wp). Technical Specifications for the SHS have beenprepared based on the current national Bolivian standard (NB1056), in anupdated version (e.g. for direct compatibility with PV GAP ).

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Disbursement of Subsidies

The subsidies provided by the Project will facilitate an accelerated - but

sustainable - market development, allow a positive IRR for operators (in spiteof the very low user density in rural Bolivia) and close the affordability gapbetween rural users willingness to pay and SHS costs. The bidding documentswill include a description of different payment options (e.g. maximum valuesfor upfront cash, monthly payments, quarterly payments), each of which willbe related to the system size chosen by the customer and to his ability andwillingness to pay.

As mentioned earlier the project will provide several types of subsidies:

Direct up-front OBA customer subsidies on the initial investment cost,paid to the supplier on the basis of actual installations;

OBA service quality subsidies, paid to supplier against installation andservice performance targets;

OBA market development service subsidies, paid to the supplier againsttraining of local technicians, yearly visits, users training, etc.; and

Indirect market development subsidies (aggressive overall promotionactivities, support to the formulation of business development strategies,training and technical assistance), as well as the benefits from ERTICcentral TA activities.

No additional subsidies or specific TA whatsoever will be provided to aspecific winning bidder on top of the total amount assigned to the respectivearea in the bidding document therefore each bidder will have to calculatewell and in detail all costs involved in providing the services required under theservice contract, when preparing his offer.

It is important to notice that the planned payment of OBA subsidies over amedium term period would be against installation and basic serviceperformance targets and would not cover replacement costs (which would notbe subsidized in any way, except for the replacement of the first battery). Thesame would apply to any irregular service visits on demand that the usermight require - as long as they dont result from system failures under the

operators responsibility.

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IV. THE POTENTIALMARKET AND

DESCRIPTION OF THE

AREAS

he potential rural market for PV systems in Bolivia includes

households, commercial and productive users (retail stores, ruralrestaurants, micro-enterprises, etc.), as well as institutional clients(schools, health centers, community centers, etc) in dispersed off-grid areas.Most Solar Home Systems (SHS) currently have 50 Wp PV modules thatprovide power for about four efficient light bulbs for about five hours per day,and for operating a radio and small TV.

The total potential rural market has been estimated on the basis of a detailed2002 demand study which was implemented during project preparation (asample of more than 4,000 households, representative for both the nationallevel and the Projects target area in its first Phase) the full database as well asan analysis of current substitutable energy expenditures will be provided as

part of the data room during the bidding preparation process.It has been estimated that about 700,000 households in the country are un-electrified and that 600,000 of these are in the rural areas. Assuming that amaximum of 50% of these households could be served by grid extension ormini-grid connections, about 300,000 households are left that could becategorized as dispersed (note that far more households in Bolivia aredispersed than in other countries, data on degree dispersion will be available inthe data room). Out of these, about 50% are currently paying at least 5 US$

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per month for energy expenditures that could be replaced by solar PV systems.This scenario represents about 150,000 households potentially able to affordPV services soon. Of these, about 40,000 households are in the three initialtarget zones of Phase One.

Additionally, a recent survey of non-electrified rural households in the ERTICtarget regions shows that average energy expenditures (for kerosene lamps,candles, dry cells, etc.) are over US$ 5 per month for 50% of the population,suggesting that this percentage of households could afford at least the sameamount for SHS or equivalent service. About 25% of the households currentlyspend over US$ 8 per month on household energy, and about 10% alreadyspend more than US$ 15.

This and other considerations led to the setting of about 20,000 equivalentSolar Home Systems as the Phase One target of the Solar PV Program.Particular attention will be paid to developing the productive uses sector forthe obvious economic benefits electrification would bring. As mentioned

earlier, a key driving factor for increasing the local demand for SHS in thisproject will probably be the rapid parallel implementation of the overallprograms ICT component in the same target areas, which will install TV,radio and cell phone repeater stations in order to cover most of the targetareas with new signal.

Brief Description of the Areas

The project will take place in the rural areas of four different States of Bolivia, which offer particularly good potential for PV: Oruro (10 municipalities),Potos (16 municipalities), Cochabamba (9 municipalities) and Santa Cruz (11

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municipalities. The main characteristics of the areas are summarized in the Table below. Within these areas, 81.969 households (equivalent to 317.046people) live in dispersed zones, and 71.310 of these households do not haveaccess to electricity services today. PV solutions are the most promising energy

alternative for these households, as they are disseminated in an area of143.249 km.

Table 4.1. Main characteristics of the Project areas

AREASAreakm2

Totalrural

popul.

Totalrural HH

WithElectric.

WithoutElectric.

Oruro(Camlidos)

23.208,3 47.894 14.189 1.111 13.078

Potos (Quinua) 91.989,8 151.079 39.071 5.357 33.714

Cochabamba(wheat, fruits,

potatoes)14.218,3 82.504 19.719 2.692 17.027

Santa Cruz(vegetables)

13.833,0 35.569 8.990 1.499 7.491

Total 143.249,3 317.046 81.969 10.659 71.310

Fuente: INE-Censo de Poblacin y Vivienda 2001.

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V. SCHEDULE,

ACTIVITIES AND

CONTACT

INFORMATION

he first bidding round will allocate about fourteen areas to the winningbidders in 2005. The exact bidding schedule will be explained in the various information meetings that will take place with potential

investors starting February 2005. During these meetings, information will beprovided about the Program and about the key dates of the process related tothe Data Room opening, sale of bidding documents, presentation ofproposals, pre-selection criteria, and awarding procedures. Those who cannotattend the meetings but might be interested in bidding can get additionalinformation by contacting the persons listed at the end of this section.

Meetings with Potential Interested Investors

A series of multilateral and bilateral meetings with potential interestedinvestors will be held. The first international meeting was held in Frankfurtduring the 23rd and 24th of February, 2004, and the second national meetingwill be in La Paz during the 2nd week of February, 2005.

During the meetings with potential interested investors, a presentation of theProgram will be made as well as of the basic structure of the tender processand tender documents. The aim of these meetings is to clarify doubts andanswer questions related to the Program.

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How to get additional information?

Additional information can be requested to the following project contacts:

Eva Urquidi CollinsDirector del ProyectoUnidad Coordinadora del ProyectoMinisterio de Servicios y Obras PblicasRepblica de Boliviae-mail: eurquidi@oopp.gov.boTel: + 591-2-211-0887 / +591-2- 231-1010

Dana RysankovaThe World Bank

1818 H Street, NWWashington, DC 20433

e-mail drysankova@worldbank.orgTel: +1-202-473-0412

Enrique Birhuett GarciaUnidad Coordinadora del ProyectoVice-Ministerio de Electricidad y EnergasAlternativasRepblica de Boliviae-mail: ebirhuett@oopp.gov.boTel: + 591-2-211-0887 / +591-2- 231-1010

Kilian ReicheThe World Bank

1818 H Street, NWWashington, DC 20433

e-mail: kreiche@worldbank.orgTel: +49-69-66058851