Social Pricing and Rural Issues

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

Meeting social objectives set by policy makers in the provision of infrastructure services may require external funding¹, especially in rural areas where service expansion is more costly and resources more scarce. A possibility is to create dedicated agencies or funds to support the development of infrastructure in rural areas. Those agencies can channel subsidies and contract local operators for service delivery with a clear incentive to foster expansion. Such funds or agencies can increase predictability, timing and frequency of the funding to allow for proper planning and constancy in universal access to service² implementation.

Specific examples from the electricity and telecommunication sectors show advantages and drawbacks of such funds.

The electrification program in Chile launched in the 1990s is a good example, where the central government contribution is delivered through a special fund set up to competitively allocate a one-time direct subsidy to private electricity distribution companies to cover part of their investment costs in rural electrification projects. To apply for a subsidy, local communities along with local distribution companies, present their project to the regional government, who allocate funds to those scoring best on cost-benefit analysis and social impact.

This system presents several advantages:

• Commitment of communities: users participate in identifying and defining the projects, and in financing investments³.
• Private sector participation: companies have invested resources as a strategic move to expand market coverage. Private investment in the program so far has totalled US$ 60 million.
• Efficient use of funds: governments use competition to allocate performance-based subsidies, which allow for better value for money.

Another approach used in Colombia at the municipality level is to apply a universal percentage levy on all bills (except those who pay social tariffs⁴). The money raised then goes into a special fund from which subsidies can be paid to households that apply and meet the eligibility criteria.

In telecommunications, social objectives have been translated into Universal Access and Service⁵ policies. The primary financing instrument is a mainly industry-financed Universal Access and Service Fund (USAF) using the principles of Output-Based Aid (OBA) to finance investments targeted under those policies. UASFs are generally financed from one or more of the following sources:

• Government general budget;
• Industry levy, as a percentage of annual revenue, on certain classes of licences operators: this is the main source of financing for such funds;
• Various other regulatory sources such as the proceeds of license competitions, frequency spectrum auctions and fees;
• One-off contributions from government, financed by loans or grants from international donors.

The perceived advantage of a UASF financed mainly by operator levies is that it is independent from government funding, which is important to fulfil long-term UAS objectives and to focus on long-term sustainable solutions⁶. In addition, it avoids the added administrative burden linked to government’s participation.

However, such funds also have drawbacks. An inadequate collection mechanism may affect the competition process through payment conditions that hinder long-term incentives. For instance, if the fund absorbs a significant proportion of revenue and entrants have large fixed costs, this will reduce incentive to enter the market. Furthermore, it can potentially curtail competition, especially if incumbents use funds to cross-subsidize more competitive urban areas. Finally, payments may be distributed in a way that encourages rural phone carriers to be inefficiently small and incur high corporate overhead costs supported by the taxpayers.

In the telecoms sector, UASF could be a specific department of the regulator. However, it is generally preferred that the two institutions are kept separate. The regulator can play a role of supervising the activities of the fund in their quasi-regulatory functions, such as the definition of service areas and the preparation of service contracts.

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. Readers should refer to question 3. Back to Content
2. See definition of “universal service” in the glossary. Back to Content
3. 10% of the costs of total expenditures to cover in-house wiring, electric meter and coupling to the grid, initially financed by the distribution company and later repaid by users over time. Back to Content
4. Special tariffs directed to low-income consumers in order to facilitate their access to infrastructure services. Social tariffs do not reflect the full cost of service delivery and are financed through various mechanisms such as cross-subsidization or government transfers. Back to Content
5. The term universal access is used in a wide variety of contexts to describe or demonstrate objectives and policies that governments implement to ensure that all their citizens have access to the benefits of modern economic life. It refers to the ability of everyone, regardless of region or location, socio-economic status, ethnicity, gender, disability, or any other factor, to access necessities (ICT Regulation Toolkit). Back to Content
6. See question 3 on drawbacks of funds obtained at the national level. Back to Content