Publication: Water, Electricity, and the Poor : Who Benefits from Utility Subsidies?
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Date
2008-10
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2008-10
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Utility subsidies to consumers of water and electricity services are often justified as a mechanism for making services affordable for the poor. After all, an estimated 1.1 billion people in the developing world lack access to safe water, 2 billion are without electricity, and 2.4 billion without sanitation. But critics object that such subsidies can work against improving quality of service to existing consumers and extending access to unconnected households. Financially strapped utilities are often inefficient, provide low-quality services, and lag behind in expanding networks. During the 1990s, experts urged that water and electricity services should charge enough to fully cover costs. Households could spend 10-50 percent more on water and electricity without major effects on poverty levels, but in many countries much larger price increases are needed to recover costs. A substantial proportion of the population of lower income countries may find it difficult to pay the full cost of services.
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“Komives, Kristin; Foster, Vivien; Halpern, Jonathan; Wodon, Quentin; Abdullah, Roohi. 2008. Water, Electricity, and the Poor : Who Benefits from Utility Subsidies?. Water P-Notes; No. 20. © World Bank. http://hdl.handle.net/10986/11745 License: CC BY 3.0 IGO.”
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Publication Water, Electricity, and the Poor : Who Benefits from Utility Subsidies?(Washington, DC: World Bank, 2005-10)While consumer utility subsidies are widespread in both the water and electricity sectors, their effectiveness in reaching and distributing resources to the poor is the subject of much debate. This publication brings together empirical evidence on subsidy performance across a wide range of countries. It documents the prevalence of consumer subsidies, provides a typology of the many variants found in the developing world, and presents a number of indicators useful in assessing the degree to which such subsidies benefit the poor, focusing on three key concepts: beneficiary incidence, benefit incidence, and materiality. The findings on subsidy performance will be useful to policy makers, utility regulators, and sector practitioners who are contemplating introducing, eliminating, or modifying utility subsidies, and to those who view consumer utility subsidies as a social protection instrument.Publication The Distributional Incidence of Residential Water and Electricity Subsidies(World Bank, Washington, DC, 2006-04)Subsidies to residential utility customers are popular among policymakers, utility managers, and utility customers alike, but they are nonetheless the subject of much controversy. Utility subsidies are seen as a way to help make utility service affordable for poor households and as an alternative mechanism for income redistribution. These arguments in favor of subsidies are countered by serious concerns about their adverse effects on consumer behavior, utility operations, and the financial health of utilities. Both the affordability and redistributive arguments for subsidies are based on the presumption that poor households benefit disproportionately from water and electricity subsidies, that they are well-targeted to the poor. The authors test this assumption by examining the extent to which the poor benefit from consumption and connection subsidies for water and electricity services. Their analysis of a wide range of subsidy models from around the developing world shows that the most common form of utility subsidy-quantity-based subsidies delivered through the tariff structure-are highly regressive. Geographically targeted or means-tested subsidies do better, and in many cases have a progressive incidence, but large numbers of poor households remain excluded. Low levels of coverage and metering severely limit the effectiveness of consumption subsidy schemes to reach the poor. Simulations suggest that connection subsidies are an attractive alternative for low coverage areas, but only if utilities have the means and motivation to extend network access to poor households and only if those households choose to connect.Publication Cost Recovery, Equity, and Efficiency in Water Tariffs : Evidence from African Utilities(2010-07-01)Water and sanitation utilities in Africa operate in a high-cost environment. They also have a mandate to at least partially recover their costs of operations and maintenance (O&M). As a result, water tariffs are higher than in other regions of the world. The increasing block tariff (IBT) is the most common tariff structure in Africa. Most African utilities are able to achieve O&M cost recovery at the highest block tariffs, but not at the first-block tariffs, which are designed to provide affordable water to low-volume consumers, who are often poor. At the same time, few utilities can recover even a small part of their capital costs, even in the highest tariff blocks. Unfortunately, the equity objectives of the IBT structure are not met in many countries. The subsidy to the lowest tariff-block does not benefit the poor exclusively, and the minimum consumption charge is often burdensome for the poorest customers. Many poor households cannot even afford a connection to the piped water network. This can be a significant barrier to expansion for utilities. Therefore, many countries have begun to subsidize household connections. For many households, standposts managed by utilities, donors, or private operators have emerged as an alternative to piped water. Those managed by utilities or that supply utility water are expected to use the formal utility tariffs, which are kept low to make water affordable for low-income households. The price for water that is resold through informal channels, however, is much more expensive than piped water.Publication Designing Direct Subsidies for Water and Sanitation Services : Panama—A Case Study(World Bank, Washington, DC, 2000-05)As an alternative to traditional subsidy schemes in utility sectors, direct subsidy programs have several advantages: they are transparent, they are explicit, and they minimize distortions of the behavior of both the utility, and the customers. At the same time, defining practical eligibility criteria for direct subsidy schemes is difficult, and identifying eligible households may entail substantial administrative costs. The authors, using a case study from Panama, discuss some of the issues associated with the design of direct subsidy systems for water services. The conclude that: 1) There is a need to assess - rather than assume - the need for a subsidy. A key test of affordability, and thus of the need for a subsidy, is to compare the cost of the service, with some measure of household willingness to pay. 2) The initial assessment must consider the affordability of connection costs as well as the affordability of the service itself. Connection costs may be prohibitive for poor households with no credit, suggesting a need to focus subsidies on providing access, rather than ongoing water consumption. 3) A key issue in designing a direct subsidy scheme is its targeting properties. Poverty is a complex phenomenon, and difficult to measure. Eligibility must therefore be based on easily measurable proxy variables, and good proxies are hard to find. In choosing eligibility criteria for a subsidy, it is essential to verify what proportion of the target group fails to meet the criteria (errors of exclusion) and what proportion of non-target groups is inadvertently eligible for the benefits (errors of inclusion). 4) administrative costs are roughly the same no matter what the level of individual subsidies, so a scheme that pays beneficiaries very little, will tend not to be cost-effective. It is important to determine what proportion of total program costs will be absorbed by administrative expenses. 5) Subsidies should not cover the full cost of the service, and should be contingent on beneficiaries paying their share of the bill. Subsidies for consumption above a minimum subsistence level, should be avoided. Subsidies should be provided long enough before eligibility is reassessed to avoid "poverty trap" problems. 6) The utility or concessionaire can be helpful in identifying eligible candidates, because of its superior information on the payment histories of customers. It will also have an incentive to do so, since it has an interest in improving poor payment records. Thought should therefore be given at the design stage to the role of the service provider in the implementation of the subsidy scheme. 7) The administrative agency's responsibilities, the sources of funding, and the general principles guiding the subsidy system should have a clear legal basis, backed by regulations governing administrative procedures. 8) To reduce administrative costs, and avoid duplication of effort, it would be desirable for a single set of institutional arrangements to be used to determine eligibility for all welfare, and subsidy programs in a given jurisdiction, whether sub-national, or national.Publication Infrastructure Reform, Better Subsidies, and the Information Deficit(World Bank, Washington, DC, 2000-06)In developing countries the provision of water and sanitation services is often subsidized. These subsidies take the form of a general underpricing of water, numerous cross-subsidies, and inefficient billing and collection. An essential part of infrastructure reform is the redesign of subsidies. In the design of an optimal subsidy scheme the key decisions are the choice of eligibility criteria, the level of the subsidy and the budgetary requirements. However, the lack of consistent and reliable data sets which combine socioeconomic and water consumption information may be an important obstacle to making good decisions, undermining efforts to provide affordable water services for the poor. This Note discusses the type of information required, where it can be found, and ways to deal with shortcomings in the data. To illustrate, the Note draws on data from World Bank work in Panama.
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