Social Pricing and Rural Issues

Response Rating:

• Currently 1.5/5 Stars.
• 1
• 2
• 3
• 4
• 5

1.5 stars with 2 votes

Click above to rate this response.

[Response by Sophie Trémolet and Diane Binder, June 2009]

An increase in prices to move towards full-cost recovery mostly intervenes in the case of the introduction of private sector participation (although the financial viability of state-owned enterprises SOEs is receiving increasing attention). Tariff levels may increase because of cost recovery requirements of commercially-driven operators and the necessity of financing quality improvements. In the case of SOEs, state budgets cannot support the expense of generalized industry subsidies in times of tight fiscal situations. Tariff structures may also be readjusted as direct or cross-subsidies disappear, either as an explicit policy or the consequence of market forces. However, when tariffs have been maintained for a long time at an artificially low level through subsidies, increasing tariffs to cost covering levels cannot be done in a precipitated manner for risk of antagonizing water consumers, as it happened for instance in Cochabamba in Bolivia when the private operator was finally ousted out of the country following massive riots triggered by a sudden tariffs increase.

The increase in tariffs will affect all consumers, albeit in different ways. Customers who are already connected to the network, and who have been enjoying the benefits of subsidized prices, are often resistant to tariff increases. On the other hand, those not served by the utility may prefer that the utility expand coverage, as the higher tariffs charged by the utility are often going to be cheaper than the tariffs charged by alternative providers. If network tariffs were to increase but would allow them at the same time to be granted access to the network, this would result in a net gain for those customers who were not previously connected, in terms of convenience, quality and price¹.

Good reform requires careful planning and smooth transition, which includes the following steps:

• Effective consultation with stakeholders, including customer representation: involving customers in the analysis and the decision will result in greater acceptance of decisions once they are made.
• Demand-responsive approach: decisions must be made on quality standards and on network coverage, and on how the improved service will be financed. This requires analyzing various cost-quality options and consult customers to see which option they prefer depending on their preferences and willingness to pay.
• Closely monitor the operator’s performance, and make sure that changes in tariffs are introduced alongside improvements in service quality. However, the contracting authority may offer a transition period at the beginning of the contract, during which the operator can collect additional information (critical for informing decisions on tariffs and quality standards) with no immediate pressure to improve quality.
• Determine the level of subsidies and set tariffs at levels that are acceptable both for a commercially driven operator and for customers, and differentiate tariff levels depending on the ability to pay of consumers.
• Define achievable targets for cost-recovering tariffs. Whilst it is broadly acknowledged that tariffs in the water sector should cover operations and maintenance costs, it appears difficult that tariffs also cover all capital investment costs² (repair and extension of network). Rather than recommending full cost recovery, donors are now recommending sustainable cost-recovery from tariffs, taxes (i.e. government subsidies) or transfers (from external sources) to cover costs³. They argue that if government transfers are secure and consistent, they can be considered as an appropriate source to cover costs and limit the need to increase tariffs recovered from customers.

Related Questions

• What do regulators need to do differently to tackle the needs of poor consumers?
  • What should regulators do to meet social objectives set by policy-makers?
  • Should social objectives be met through funds obtained at the national level and allocated to meet the objectives in each sector and region?
  • What are the advantages and disadvantages of creating dedicated agencies or « funds » to support the development of infrastructure services in rural areas? How should the regulator relate to such funds?
  • Are successful programs for peri-urban areas appropriate for rural areas?
  • Do higher income customers benefit more from subsidies than do poorer customers?
  • How can a regulator promote investment while keeping service prices affordable?
  • What procedures should the regulator adopt in order to balance economic and social objectives (like efficiency vs. fairness)?
  • What are the strength and limitations of lifeline rates?
  • When and why would the regulator choose not to regulate the price structure, leaving the task to the operating company?
  • In an industry where an aging network and generation capacity constraints lead to poor service delivery, to what extent should consumers contribute towards capital expansion?
  • Since rates in the water sector seldom reflect full cost recovery, how can you convince citizens to accept higher prices (given their willingness to pay)?
  • To what extent does service quality need to be the same for high and low cost areas?

Footnotes

1. Poor consumers who are not connected to the network are often served by independent providers (SSIPs) and pay more for a lower standard of service. Back to Content
2. The market structure of the water sector is quasi-monopolistic and large amount of capital is sunk in the construction of infrastructure. See question 11 for more details. Back to Content
3. See OECD report. Back to Content