Social Pricing and Rural Issues

Response Rating:

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

3 stars with 1 vote

Click above to rate this response.

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

Physical conditions, economic capabilities, social patterns, land tenure arrangements, etc, mean that providing appropriate service to the poor often requires non-standard service delivery mechanisms, service types, and payment mechanisms. One-size-fits all approach to service does not function, especially for customers who are not connected to a formal network, but rather served by a wide spectrum of informal service providers. Regulatory frameworks¹ can be pro-poor when they have the following objectives: create incentives for the dominant operators to extend services, allow a flexible approach to service quality, establish a tariff level and structure that encourage higher access and provide a framework for competition between the dominant operator and small-scale providers.

Within such frameworks, regulators can have a decisive influence on making infrastructure services more accessible to the poor.

In order to increase access and improve availability, affordability, and sustainability of infrastructure services, regulators should tackle the following issues:

Improve the knowledge base about the poor:

• Identify where the poor customers are located, whether in rural areas², peri-urban areas, or pockets of poverty within urban areas. To do so, regulators may need to partner with other organizations that have access to this type of information rather than seek to generate the information themselves, which can be costly and inefficient.
• Map existing alternative service providers³ (small-scale independent providers or SSIPs) providing services to the poor and evaluate the service they provide, in terms of quality and price.
• Understand what service customers expect and what they are willing to pay. This can be done by undertaking "willingness to pay⁴" surveys, setting up customers complaint mechanisms, and linking up with NGOs / CBOs working with poor consumers.

Address current service provision’s weaknesses:

• Engage with SSIPs, which often serve a significant share of poor customers, to encourage them to formalise their activities and serve customers where they have a competitive advantage. For example, they could subcontract with the main operator in remote areas, thereby facilitating access to formal networks. Regulators should allow SSIPs to access bulk supplies⁵ of water and electricity from existing suppliers at a fair price.
• Allow entry of potential competitors by removing exclusivity laws and licensing requirements.
• Develop a light-handed regulation regime: regulate certain aspects of SSIPs’ services (such as quality requirements) where market competition is not enough to deliver public policies objectives, while leaving other aspects potentially unregulated, such as price, which can be determined through the market. Over-regulating SSIPs may run the risk of stifling their dynamism.
• Adapt regulation to the needs of the poor: evaluate where constraints might be lifted to facilitate access for the poor, such as specific billing methods or land tenure required to be granted access.
• In the case of connected customers, improve targeting of subsidies on those who really need them⁶: in this view, tariff levels along with tariff structure must be designed to specifically benefit the poor. This can be done through cross-subsidization, increasing block tariffs or access subsidies.

Foster service expansion:

• Provide a framework for competition so that a wide range of service solutions is available and operators can compete within a level playing field. This may reduce the scope of regulation, when competitive areas do not need to be further regulated.
• Set up clear coverage targets for existing operators and introduce incentives for the formal operators to reach such targets.
• Allow for differentiated service levels and particularly for a flexible approach to service quality while maintaining basic quality requirements. The preferred level of service quality should reflect the value customers place on quality and the operator’s cost of providing service quality⁷.
• Establish a tariff structure that encourages high access to service without jeopardizing financial sustainability.⁸

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. “A regulatory framework consists of the set of rules and processes that bind infrastructure service providers, including formal rules (laws, contracts, bylaws, etc.) and informal rules (personal commitments, financial incentives, reputation, etc.). It also defines how the main regulatory functions are allocated to various institutions, which can include an autonomous regulatory agency, a ministry, an asset-holding company, a customer group, an independent expert, and so forth”. (adapted from Trémolet & Hunt (2006)) Back to Content
2. “A rural environment is one of small towns and villages, where a sparse population lives mainly from agricultural activity. This definition may vary from one country to another, and national census bureaus determine the criteria for rural environment in terms of number of households per area. This number can however range from a few families living in a remote village in Africa to fifty thousand people or so living in small towns in India”. (Binder 2008) Back to Content
3. Alternative, or informal service providers are independent entrepreneurs who are not part of the formal economy but nevertheless provide a great part of poor consumers with access to basic infrastructure services, especially in the water and electricity sectors. Back to Content
4. Willingness to pay (WTP) generally refers to the value of a good to a person as what they are willing to pay, sacrifice or exchange for it. WTP is the maximum monetary amount that an individual would pay to obtain a good or service. Back to Content
5. See definition of "bulk power supply" in the glossary. Back to Content
6. Readers should refer to question 6 for more details. Back to Content
7. Readers should refer to question 13 for more details. Back to Content
8. Tariff structure benefiting the poor is tackled in more details in questions 6 and 9. Readers should also refer to Chapter 5 Section C about how tariff structure can influence the degree of service availability to the poor. Back to Content