Brazilian electricity company developed a new business model to rebuild trust with and provide services to favelas

The city of Rio de Janeiro, surrounded by the Atlantic ocean on one side and forested hills on the other, is ranked by many among the most beautiful in the world.

Rio is also known for its social and urban contrasts. Over the years, part of Rio’s low income population has settled on the city’s hills, forming the communities known as “favelas”. The city’s high income citizens usually live by the sea and in elegant planned neighbourhoods and gated communities – referred to locally as the “asphalt”, in opposition to the hills where the urban development followed little planning and often lacks proper infrastructure.

Over recent decades, the favelas became infiltrated by the drug trade. Drug lords established territorial control, often denying the population access to basic services – fresh water, sanitation, energy, or healthcare, as public utilities refused to service areas where the integrity of their infrastructure or the safety of their employees could not be guaranteed by the state.

During this period, residents often resorted to unorthodox solutions to access those basic services. In the case of electricity, the solution was to steal it directly from the overhead cables, at the risk of electrocution in the process.

Rio’s local company Light, privately owned since 1996, distributes electricity to four million people in the state of Rio de Janeiro, making it the fourth largest Brazilian power company in terms of client base. As a result of the energy theft so common in the favelas, its level of non-technical losses and default reached 64.1% and 90.4%, respectively, calling for the development of a new and sustainable business solution.

Around that time the state government of Rio de Janeiro was also implementing a new safety policy, aimed at taking back the territories lost to drug dealers. It included occupying the favelas with special police squads and setting up Units of Pacifying Police (UPPs) who would remain imbedded in the communities, making drug trafficking practically impossible and re-establishing the authority of the state in the favelas. From November 2008 until now, 37 UPPs have been installed, benefitting over 1.5 million people.

With the territory back under state control, there was an urgent need to resume the provision of basic services on a regular (and commercially sound) basis. Light’s management was asked by the government to develop new solutions. The relationship between the population of the favelas and the power distribution company was governed by a mutual lack of trust. People risked their lives to steal energy and did not take into consideration consumption levels. For the local company, these potential customers were responsible for the high level of losses and default. The social contract was broken.

To revert this vicious circle and reconstruct a stable relationship, the first step taken by the company was to call for regulatory incentives that could make energy bills affordable. The federal government developed a regulation targeted at low income populations through which local companies had to invest 0.5% of the annual operating income into “energy efficiency programs”.

These investments included both practical initiatives such as substituting older home appliance (refrigerators, light bulbs, etc) for more efficient models, and education initiatives to make people understand the need to adjust their consumption patterns to levels that would generate an affordable bill. In addition to the mandatory requirements, Light also decided to invest in the development and installation of new electricity measurement equipment, targeted to avoid future theft from the overhead cables, as well as modern and more efficient monitoring systems.

In addition to providing a high quality power service, Light turned these services into a regular and formal relationship with its customers, rebuilding the social contract that had been lost many years ago. The clients in turn began to associate having access to a good service with paying for electricity on a regular basis, while also benefitting from new and more efficient home appliances in the process.

With energy bills in hand, favela residents could now also open bank accounts and have access to a whole new set of economic and social opportunities, such as entrepreneurship training, microfinance lines, or NGO partnerships. They were no longer treated as “informal people” but as citizens who deserved better treatment.

Nowadays the average level of non-technical losses and default among the favelas that benefit from UPPs has dramatically dropped, to 11.1% and 1.5% respectively. Innovations have been recently implemented, reinforcing the benefits to the population and the service company, such as recycling waste in exchange for discounts on the electricity bill. This example of success in re-establishing a formal relationship with customers it had lost can inspire other companies to adjust their business models in a successful way.