Karim Rushdy, For The Straits Times

Rural enterprise, not lighting, sparks prosperity

In Laos, electrification has a role to play in addressing poverty but it alone cannot improve the economic prospects for rural communities. Enterprise development is key and electricity must be affordable and sustainable, not intermittent and thus us
In Laos, electrification has a role to play in addressing poverty but it alone cannot improve the economic prospects for rural communities. Enterprise development is key and electricity must be affordable and sustainable, not intermittent and thus used only for entertainment and charging cellphones.PHOTO: AGENCE FRANCE-PRESSE

Interconnectivity is the new buzzword, touted by technology gurus as the key to many of the world's challenges. But this is just a rehash of old ideas. For decades, development experts have postulated that connecting poor rural communities with electricity spurs greater economic activity, thereby catalysing prosperity.

A peek behind the rhetoric depicts a different reality.

A good example is Laos where, despite high levels of "rural electrification", power has proved once again not to be the panacea for poverty. The same goes for other Asian countries where the irony is that electricity has allowed the rural poor to disproportionately use their limited income on mobile phones and television sets, with little prospect for overcoming barriers to economic prosperity.

For the 600 million to 700 million Asians without access to electricity, it is imperative that a different approach be taken - one that emphasises investment in rural enterprise development as the catalyst for reliable, affordable electricity and does more to nurture entrepreneurship at the grassroots.

With over 500 identified mineral deposits, vast hydropower potential and only seven million people, Laos is one of Asia's most resource-rich countries per capita. It is a paradox that despite its natural wealth, this landlocked mountainous country, similar in size to the United Kingdom but home to just one-tenth of the population, is one of the poorest in the world. Laos ranked 139 out of 187 countries in the Human Development Report last year.

Given that one in three Laotians earns just US$1.25 (S$1.70) per day and the majority rely on subsistence farming and still lack access to healthcare, clean water and adequate sanitation, it is no surprise that the country is listed in the United Nation's Least Developed Countries index.

What is surprising is that although lacking basic services, nine out of 10 homes do have access to electricity. An electrification rate of 87 per cent puts Laos well above the regional average and this figure is around three times higher than that for Cambodia or Myanmar - no small feat considering the country's population is spread across sparsely populated hilly terrain.

But the picture is not as rosy as it sounds. Rural electrification initiatives in Laos are plagued by problems, not least because the majority are donor-funded.

Development delusion

THE power sector is capital intensive and the Laotian government, which from 2005 to 2011 relied on overseas aid for a staggering 86 per cent of its capital expenditures, cannot afford to expand electricity infrastructure to the outer reaches of the national grid where there is little hope of a financial return on investment.

The country's high electrification rates betray the fact that while these efforts have ticked the right boxes for donors, they have not addressed the fundamentals. They are usually planned and implemented in isolation, with more emphasis on achieving arbitrary electrification targets than catalysing and sustaining increased economic activity.

Donor-led electrification projects have lofty goals, articulated in taglines like "Bringing the poor into the light". In reality, not being of a large enough scale to support productive uses of power, and rarely flexible enough to add capacity as demand increases, they usually miss the mark.

While there is no doubt that lighting does improve quality of life to a degree, it alone cannot improve the economic prospects for remote rural communities. To do this, rural enterprise development is key and electricity must be affordable and sustainable, not intermittent and thus used simply for entertainment and charging mobile phones.

Rethink rural power supply

IN LAOS, electrification clearly has a role to play in addressing poverty but not if it remains reliant on donors. It must go hand-in-hand with measures to attract investors, support small and medium-sized enterprises (SMEs), and promote inclusive rural economic development.

For starters, the government should offer preferential Feed-in-Tariffs (FiT) and concession terms to attract developers of rural energy utilities and subsidised power for enterprises, such as rice mills and coffee processors, which can be anchor consumers of electricity.

These measures would make grid expansion more financially viable, while providing new employment opportunities. They could be funded by increasing urban electricity charges or taxing foreign companies which generate power for export at some of Laos' largest hydropower facilities.

Preferential treatment for energy companies should be contingent on them offering "sweat equity" to communities in exchange for labour, materials and stewardship of the natural resource base - which is particularly important for hydropower. This novel way of factoring in the true cost of trees and water by paying for their ecosystem services is also a means to promote more inclusive growth.

Establishing a rural development fund would also help if it had a mandate to invest in SMEs (including energy companies) creating social as well as financial value. If capitalised by enlightened financiers, this fund could have a long-term view, and mandatory contributions from developers benefiting from preferential FiT would keep it sufficiently liquid.

These ideas are not revolutionary. Preferential FiT is the norm in many countries and some organisations are actively promoting a more commercial approach to rural electrification (the UN's Pro-Poor Public Private Partnership (5P) model, for instance).

Debate on investment in SMEs with social mandates is also gaining ground. Once a subject reserved for corporate social responsibility circles, discussions now take place at the top levels of financial institutions and sovereign wealth funds. This is long overdue as the International Finance Corporation reports that the annual funding gap for SMEs in non-OECD (Organisation for Economic Cooperation and Development) Asia is around US$2.5 trillion.

Laos has set itself the goal of graduating from the list of Least Developed Countries by 2020. Achieving this will depend on how successfully it lifts its citizens out of poverty. Light bulbs alone are not enough. Laos needs to rethink rural electrification and how it can be integrated with its overall economic development strategy to spur inclusive growth and kick-start a virtuous circle of prosperity.


The writer is head of programmes at Global Institute For Tomorrow, a think-tank.