Journal Issue

Bank activity: Rural electrification

International Monetary Fund. External Relations Dept.
Published Date:
December 1975
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A study of rural electrification

Rural electrification in the developing countries is not only here to stay, it will inevitably grow in the decades to come, a World Bank study on the subject has found (see box).

The study seeks to answer whether rural electrification projects can be justified on financial and economic grounds, whether benefits can be estimated, how good projects can be identified, and to what extent the Bank should become involved in their financing.

The Bank findings are based on a three-year study designed to increase the institution’s knowledge of the subject. Inquiries were made in over 20 countries about the extent of their programs and future plans, a major Bank study was undertaken in El Salvador, field trips were mounted in three other Central American countries and India, and projects were financed in Ecuador (Bank) and India (IDA).

Rural Electrification, 80 pages. Distributed free of charge from the Publications Unit, World Bank, 1818 H Street, N.W., Washington, D.C. 20433 or from the Bank’s European Office: 66 avenue d’léna, 75116 Paris, France.

India: number of villages electrified and irrigation pump sets, tubewells energized
Number of villages electrifiedProportion of total villages

Number of irrigation pump sets/tubewells energized


Several interesting facts have emerged from the Bank study. Though the initial costs of serving rural areas with electricity are high (up to three times more expensive than in urban areas), economies of scale are large and the unit costs decline very quickly with the growth of demand. Rural electrification projects generate a number of social and economic benefits, even if the financial performance is poor in early years. With the rise in petroleum prices, the economic benefits of rural electrification projects have tended to increase due to the higher costs of alternative power and energy sources for farms and agro-industries, such as diesel engines. Finally, pricing policies for electricity in rural areas should reflect a compromise between economic aims (which require a relation of prices to the future costs of expanding investment and output, ignoring the initial sunk costs of extending the distribution system) and financial and social aims (which may suggest higher prices for the larger and wealthier consumers).

Interestingly, the Bank study contradicts the common belief that village electrification can be a strong inducement to people to continue to live in villages rather than move to the cities.

The Bank study finds that, generally, African countries are in the early stages of rural electrification (using some auto-generation, bringing some public supplies to a few large centers of demand); Asian countries occupy a middle ground (bringing public supplies to a greater number of large centers of demand). Latin American countries, however, are in the final stages, serving smaller centers with extensions to the grid.

India provides a dramatic example of the growth of rural electrification (see table).

The Indian project, approved in July for an amount of $57 million, will support, through that country’s Rural Electrification Corporation (REC), some 140 schemes involving total investments of $114 million. It is estimated that more than 50,000 farmers, most of whom are smallholders, will benefit from the electrification of minor irrigation wells. In addition, power will be supplied for small industries and for houses and street lighting in more than 6,000 villages.

World Bank loans approved during first quarter of fiscal 1976

(Ended September 30, 1975)


($ millions)
HondurasPorts (supplement)3.0
IndonesiaFertilizer distribution68.0
Ivory Coast (2)Roads, DFC48.6
Kenya (2)Power, DFC73.0
Liberia (2)Power (supplement), highways29.3
NicaraguaPorts (supplement)5.0
PhilippinesWater control/irrigation42.0
Total loans during first quarter of fiscal 1976602.8
IDA credits during first quarter of fiscal 1976

(Ended September 30, 1975)


($ millions)
BangladeshWater transport (supplement)4.6
India (3)Rural electrification, water supply/sewerage, railways207.0
LiberiaRural development6.0
MadagascarHighways (supplement)5.6
PakistanTarbela Dam rehabilitation8.0
Sierra LeoneEducation7.3
SomaliaPort extension5.2
TanzaniaDairy development10.0
Yemen, PDRAden port3.2
Total credits during first quarter of fiscal 1976290.9

By March 1974, almost a quarter of India’s villages had been electrified. In Haryana State, there is no village which is not served with electricity. In three other states, more than half of all villages are served with electricity (Tamil Nadu, 97 per cent; Kerala, 85 per cent; and Punjab, 55 per cent).

Rural electrification projects in India were begun in the early 1950s with an emphasis on village electrification. In 1967, however, and after a series of severe droughts, the Government shifted the emphasis of its program toward well electrification for irrigation pumping to accelerate agricultural production.

India’s main channel of support for its rural electrification program is provided by the REC. Established in 1970, the REC lends money to State Electricity Boards for projects which meet specific criteria of acceptability.

The REC has found, generally, that:

• on a least-cost comparative basis, electric pumping is cheaper than diesel pumping in an average REC-financed rural electrification project;

• minor irrigation investments based on electric pumping are economically justified in the average project; and that

• the average project is economically justified.

Nevertheless, the World Bank study has found that the difficulties are many in rural electrification: uncertain response in rural areas (though the evidence is that response in most projects is much higher than usually expected at the outset), poor data, high costs, difficulty of finding local finance, and the chance of institutional failure.

The study concludes, however, that “these kinds of difficulties are one reason for aid.” It adds: “Another reason is that if the difficulties are resolved, the investments can be beneficial.”

Peter C. Muncie

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