Social Pricing and Rural Issues

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

The definition of programs to reach difficult to serve areas (such as peri-urban or rural areas) is strictly speaking more of a policy question than a regulatory question. However, the regulator also needs to assess whether its regulatory approach should differ between peri-urban and rural areas.

Peri-urban and rural areas share common features. For instance, inhabitants often lack freehold title, which can be an issue to get access to infrastructure services. In many slums and rural communities, billing and collection of payment can also be an issue as liability for bills may be uncertain: registered households may also provide services for extended family and neighbours. However, there are critical differences between peri-urban and rural areas, which means that all actors in the sector, including regulators, need to understand the specific needs of these areas.

• Access to services in rural areas is complicated by “remoteness”: whereas it may be cost-effective for an existing service provider to expand into peri-urban areas through extending existing networks, reaching out to rural areas will require entirely new infrastructure (for example, isolated power generation plants rather than plants on the interconnected network). Given that population density is often low in rural areas and that consumption levels are likely to be minimal, revenues per connection are unlikely to cover the costs per connection. In order to avoid “cherry-picking” from operators, which may seek to serve only the most profitable areas, regulators may need to use a “stick-and-carrots” approach to make it the best interest of the operator to expand service in rural areas and make sure that social objectives are met. This may include providing subsidies to cover the differentials between the cost of service and potential revenues in those areas¹.
• Rural areas may be more cohesive from a social standpoint, which means that community-managed schemes would have a higher chance of success. Regulation must adapt to this reality. Service provision may be performed by village committees or their private sector subcontractor, or by clustered villages and towns. Clustering is a way to alleviate the weaknesses of the community management model, such as the lack of capacity of community-based organizations (i.e. water committees), the lack of equipment and difficulties in fundraising. In such a case, the scope for aggregation² will depend on government policy and regulations.
• Poor people in rural areas often operate outside the traditional cash economy. This means that contributions in-kind rather than in cash may relieve the affordability constraint. Informal providers are usually more likely to design payment mechanisms that can accommodate non-cash transactions. However, competition and regulation can push even the dominant operator to authorize alternative types of payment that will allow the best recovery performance. This requires developing an understanding of the local economy. Even though the service provider should be primarily responsible for its charging policies, it is the responsibility of the regulator to provide an enabling environment which gives service providers the leeway to experiment with alternative tariff-setting and billing mechanisms.
• In rural areas where people are particularly attached to traditional systems of service provision, technologies must be chosen with due consideration of the community’s ability to operate, maintain and repair the system, as well as its willingness to pay for a certain service. For instance, Argentina has pioneered a new approach to provide electricity to rural areas. Under this approach, concessions are granted to private bidders who require the lowest subsidies, with the objective of creating incentives to identify cost-effective technological and commercial solutions for supplying low-income consumers. This model is slightly different than the one implemented in Chile³. Whereas in Chile, subsidies are granted on the basis of past performance and a cost-benefit analysis, including the amount of investments covered by the companies and social impacts, the mechanism in place in Argentina force the companies to be creative in order to reduce their costs requirements.

Successful programs in peri-urban would be all the more effective in rural areas that they also take into account the specificities mentioned above. This would widen the range of possibilities in terms of technologies, institutional and financing arrangements, to provide sustainable and affordable services to the poor in those areas.

Programs for peri-urban and rural areas have been dictated by market reforms: whilst in telecommunications, liberalization and privatization have facilitated access in rural areas, incomplete restructuring in the electricity and water sector has not allowed similar success, leading to a growing divergence between peri-urban and rural areas⁴.

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. See question 4 on universal service funds. Back to Content
2. “Aggregation is defined as the grouping of several municipalities into a single administrative structure for the provision of a particular service. Such aggregated structures can vary widely along with three dimensions: the scale, the scope and the process. The scale of aggregation is the number of villages or towns included in this partnership. The scope is the range of services aggregated, from administrative management to full operation and merging of assets and staff. The process is either temporary and answers a specific challenge or permanent and addresses long-term sustainability of operation” (See Binder (2008) and ERM, Stephen Myers and Hydroconseil (2005)). Back to Content
3. This example is developed in question 4. Back to Content
4. Readers should refer to Chapter 1 of the BoKIR. Back to Content