Natural Gas Distribution Project for Low-Income Families in Colombia
Since the 1990s, Colombia achieved large expansion in natural gas penetration, benefiting urban households. Nevertheless many families cannot pay the high switching costs and still rely on dangerous and less efficient energy resources. The project initiated by Promigas was built on an earlier small-scale pilot program funded by the Dutch government. Facing the gap of subsidies, an output-based scheme was implemented funded by GPOBA. During 2006-2008 natural gas connections and stoves were installed for around 35,000 households (2). After a successful first phase, the second consisted of management, monitoring and evaluation of the new connections. Sustainable benefits of the project are related to the use of a safer, more environmental-friendly and less expensive substitute to previously used fuels.
The objective was to connect around 35,000 families to the natural gas distribution network.
The project targeted the poorest households in the Caribbean coast and south-west regions, classified as strata 1 and 2 (socioeconomic stratification rating system) (6).
- The project connected 35,000 households to the natural gas distribution network during 2006-2008 of which 34,138 new connections were verified (Stratum 1: 19,592; Stratum 2: 14,546). (2)
- Increase in welfare of the target population as a result of access to natural gas and a reduction in the energy bill as consequence of the substitution of more expensive energy sources.
- The Independent Verification Agent (IVA) produced six verification reports. (2)
- Only 2% of bills were unpaid within thirty days of billing. (2)
- The subsidization of natural gas connections by the project were necessary due to high connection fees.
- Application of the Estratification Soioeconomica (ESE) classification system enabled targeted subsidies to the poorest.
- Output-based aid system required from GPOBA:
It has been shown that the mechanism was suitable to the provision of natural gas services, as it offered an incentive for working efficiently and upholding quality standards. Bank funds were only paid out after the independent documentation of output delivery. The distribution companies were obliged to proof economic strata of the households, verify connections and payment of costumer bills for at least three months. This allowed reaching mang more households and stimulating a sense of ownership, when customers payed their bills. The effectiveness of output-based substitution had already been demonstrated by an earlier small-scale program from the Dutch government.
- Independent verification and certifications: Deloitte and other International Verification Agencies (IVAs) were effective to provide evidence of new connections to the funding institution.
The project of natural gas connections to poor households were initiated by Promigas based on its approach that GPOBA took charge of financing. Through funds of its donors, the International Finance Corporation (IFC) and the UK Department of International Development (DFID), GPOBA provided a grant to an amount of US$ 5.1 million for the subsidization of gas connection costs. Money from the grant was also dispersed to the four involved gas companies to provide a loan to subsidize bill payments for the urban poor households over a six year period.
The disbursement of GPOBA was contingent on three primary criteria:
• The connected families had to fall within one of Colombia´s poorest two socioeconomic strata.
• The new connections had to be certificated by an IVA.
• Promigas had to proof that newly connected households paid bills for gas consumption for at least three months.
It has been shown that the output-based mechanism used by the project was suitable to the provision of natural gas services, as it offered an incentive for working efficiently and upholding quality standards. Bank funds were only paid out after the independent documentation of output delivery. The distribution companies were obliged to proof economic strata of the households, verify connections and payment of costumer bills for at least three months. This allowed reaching mang more households and stimulating a sense of ownership, when customers payed their bills. The effectiveness of output-based substitution had already been demonstrated by an earlier small-scale program from the Dutch government.
The Colombian government made efforts to increase natural gas access among poor households since the 1990s, but without success on a large scale so far. Currently there is a system of cross subsidies whereby poor families receive a reduction of 40%-50% for the first 20m3 consumed. The legal framework is set by the law of Public Utilities Service. The allocation of cross subsidies is made by monthly consumer bills. There were no state subsidies available for connection charges. The gap between government subsidy schemes and demand of poor households was filled by the project.
Due to the characteristics of the project there was no significant impact of the development of local capacity. As natural gas was a new grid service for the beneficiaries and in some cases the first service ever that required them to regularly pay bills, a key issue was to convince households to switch from liquefied petroleum gas (LPG) or other commonly used fuels to natural gas. An education campaign was carried out, explaining the benefits of a cleaner, safer and more economic source of energy.
Community participation was important for the project in relation to demand-side risks and uncertainty to what extent consumers would use the provided fuel system. This issue was mitigated through a pilot study, outreach activities and a local media campaign in which mayors and other community representatives participated. Household buy-in was also achieved through explaining the project and the advantages of natural gas. Partial subsidies instead of full-cost subsidies created a sense of community ownership. Municipalities assisted identifying households from strata one and two, which were worthy of consideration for subsidies.
Health: The use of natural gas in comparison to other fossil fuels is safer by reducing fire hazards and smoke-induced respiratory diseases. An independent study undertaken by the University of Cartagena (5) on behalf of Fundación Promigas demonstrated significant health expenditure savings caused by the project. Natural gas connections reduced the frequency of households reporting a case of respiratory illness by 75 percent. The study also found out that the impact on respiratory illness was highly cost-effective. As a result of the implementation, it was estimated that for every US$ 100 the substitution of energy sources generated benefits in health (as reduction of costs for health care) between US$65 and US$ 96 per year. (2)
Environment: In comparison to other fuels, natural gas has lower emissions. This means reductions in nitrogen oxides (up to 63%), suspended particles (up to 66%) and carbon monoxide (up to 93%). As beneficiary households used mainly firewood before the connection to natural gas, it was estimated that the project resulted in preservation of up to 34 hectares of forest or mangrove swamp land. However, the size of the project was small; therefore the impacts on the environment were limited. (2)
Impacts on income: Switching-costs for natural gas are high, but gas is more cost effective than other energy resources. Prices of Liquefied Petroleum Gas (LPG) and electricity are around 1.4 and 4 times the price of natural gas. It was estimated that households using 20m3 of natural gas per month in stratum 2, saved between US$10 and US$ 19 per month respectively. (2)
Potential income generation: As the household members did not need to gather fuel wood any more, they spent this time for productive activities or in the case of children for education. This resulted in an increase of income.
Despite abundant available resources of natural gas in Colombia, many communities were not able to pay the amount of $370 for the installation of gas stoves and the connection to the pipeline. It is found that high upfront costs are the chief barrier to cleaner energy access. Addressing the gap, GPOBA provided funds from a US$5.1 million grant to finance 38% of the connection costs. To help families to cover the remaining costs, the four local distribution companies provided financing over a period of six years. Customers had to pay tariffs for operation and maintenance of the services (in some cases these can be subsidized by the Solidarity Fund for Subsidies and Income Redistribution FSSRI). A payment rate of 98% of bills indicates that the prices are affordable to the target group and the existence of demand. (1)
The project was championed primarily by the social commitment of the Fundación Promigas for the development of communities. The corporate foundation promotes educational and business development, as well as other actions that improve life quality of low-income families. In GPOBA the foundation found a partner for the natural gas project, contributing with expertise and funds and conceptualizing the project. Its participation was especially significant for the implementation of an output-based aid approach.
Throughout the whole connecting phase the Fundación Promigas took a key role, administrating and coordinating activities and funds. It sub-contracted distribution companies and worked then as an interface between them, the households and GPOBA. The regional distribution companies provided resources, financing and technical know-how to realize the connections. The Fundación Promigas, with its large expertise in natural gas connections, oversaw the work, secured high quality and supported the companies for example in the selection of recipient communities.
Further activities carried out from the foundation included contracting IVAs, conducting field visits, ordering a health study et cetera. Throughout the second operational phase of the project, the foundation was responsible for monitoring and evaluation of the performance of the connections and allocating funds. The success gained by the project is on a large scale as a result of the efforts, good coordination and the expertise of the Fundación Promigas.
The output-based scheme requires a reliable monitoring system for the disbursement of funds. The Fundación Promigas as the recipient of the grant money was primary responsible for monitoring of project progress. For the verification of new connections and services, independent verification agencies (IVA) like Deloitte were hired. The IVAs performed technical and financial audits. They also visited 300 households to physically verify the presence of connections and stoves, as well as three months of billed consumption. A further study was realized by the University of Cartagena to assess the impacts of the project on indoor air pollution and respiratory diseases.
The experience with an output-based aid approach for the distribution of basic services demonstrated to be efficient and effective. Nevertheless similar projects based on this approach were not always successful to the same extent. It has been found that especially the role of Fundación Promigas was critical to the success of the project. The foundation managed the project and acted as an interface between GPOBA and the local distribution companies.
There are a lot of possibilities in Colombia to scale-up the project in other parts of the country and provide basic energy service to the low-income population. It has also been shown that natural gas is a cost-effective method to achieve substantive healthcare savings.
A successful replication of the project internationally relies on different factors such as the availability of natural gas or a similar economical and clean energy resource. Furthermore effective implementation partners, setting of specific targets and early risk mitigation are important for project success. It has also been shown that an antecedent pilot project is advisable to check the feasibility and benefits over time.
- World Bank ESMAP (2011): Improving Energy Access to the urban poor in developing countries, Washington. link
- World Bank (2008): Implementation Completion and Results Report on a Grant in the Amount of $ 5.1 Million Equivalent to the Fundación Promigas for a Natural Gas Distribution for Low Income Families in the Caribbean Coast Project. link
- Mandri‐Perrott C. (2010): Connecting Colombia's Poor to Natural Gas Services: Lessons Learned from a Completed Output‐Based Aid Project. link
- Mandri‐Perrott C and Patella D. (2007): Output‐based Aid in Colombia: Connecting Poor Households to Natural Gas Service. link
- Nelson Alvis-Guzmán, Luis Alvis-Estrada y Fernando de La Hoz (2011): The cost of connecting poor households to natural gas in Colombia and its impact on health, 2007, Colombia. link
- World Bank ESMAP (2012): Innovative Approaches to Energy Access for the Urban Poor: Summaries of Best Practices. link
- GPOBA (2008): Annual Report 2008, Washington. link
- Homepage GPOBA: link
- Homepage Fundación Promigas: link
- World Bank Project Homepage: link
Name:Natural Gas Distribution Project for Low-Income Families in Colombia
The project was initiated by Fundación Promigas, which worked closely with the Global Partnership for Output Based Aid (GPOBA) and regional distribution companies to implement the project.
Fundación Promigas: Promigas is the largest transmission and distribution company in Colombia. The charitable arm of the company, Fudación Promigas, was implementer and coordinator of the project.
GPOBA: The partnership of donors and international organizations supports output-based aid approaches. GPOBA is actively involved in different projects on basic infrastructure and social services in poor developing countries. Operations under the project were granted from the partnership.
Implementing agencies: Four companies, in which Promigas is stakeholder, consisting of Surtigas, Gases del Caribe, Gases de la Guajira and Gases del Occidente, provide the new gas stoves and connections.
- Natural Gas
- National Grid
Project status:Operational project