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Ensuring Sustainability of Access to Utilities for All
Girish Sant
Prayas Energy Group, Pune – India
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• Summary of Discussion Paper
• Additional Issues
• Suggestion for Consultations
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Introduction
• In 1990s’ arguments of economic efficiency used to reduce subsidies– Result was increases in prices, poor hurt the most
– Yet, tariffs still well below costs. For developing countries – in 39% cases water tariffs do not even cover O&M, 30% do not cover capital costs. In electricity, it is 50% and 44%
• Data highlights the challenge of making basic services accessible and affordable for all
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Reasons for Subsidies
• Equity considerations
• Cost structure of basic utilities– High common costs difficult to allocate– High capital costs– Mismatch between Marginal Cost and Average
Cost
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Lessons about Subsidies
Increased acceptance that subsidies may remain Question is how to limit / target them and make
them efficient? Keep tariffs simple but maintain economic
incentives Tune to local context Explore output/performance based subsidies
Only a section of population pays for subsidies (through tariff, taxes, or reduced services)
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Subsidy tools …1
• Cross-subsidy: Usually from urban/industrial to rural/residentialNeed to be contained within a band
Tariff of High paying consumers need to be below alternate sources, or
Limit set by allocation of low cost resources (such as old dam)
• Direct subsidy by government (central/state/local)Can have large welfare impact (through budget
allocations). Indian case – 1.5% of GNP
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Subsidy tools …2
• Consumption v/s connection subsidy:Consumption subsidy can be regressive (poor may not
be connected) [ agri subsidy in India]Connection subsidies can help increase access (thus
reach poor). However, benefits can be constrained by cost of expansion & obstacles such as poor not having property title
• Incentive based subsidy: Linked to performance (can be targeted to poor, better allow private participation)Similar to output based aid. Problems are:
Difficult to design – bad design can lead to perverse incentivesRequires administrative strengthening [Delhi e.g.]
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Invoicing and Collection
• Getting people to pay is a challenge due to:– History of non-payment– Inconvenient payment locations– Organizational/administrative problems
• Strategies– Prepaid meters– Payment only for properly functioning utilities– Franchisee/Village/Community Committee
responsible for collection
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Interlinkages – Example from India
• Flat tariff to agriculture since late 1980s– Resulted in utility hiding its inefficiency ($ 2-3
Billion / yr misallocated)– A small fraction of consumers benefited – it set
up a economy that is difficult to disturb– Government subsidies increased – as cross-
subsidy is reduced by regulators– Issues of utility efficiency and cost reduction
through good planning yet to be addressed …
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Tax Revenue as security for debt
• Since government financing is the most important aspect – need for increased discussion on– Ways to increase government resources
– Efficient use and proper allocation government budget
• Special allowances / concessions need to be classified as subsidies – rationalization can be a gold mine!
• Need for cautious forecasts – errors can be costly, result in unsustainable decisions by governments in desperation
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PART II:
Additional Critical Issues
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Impact of other issues on affordability
• Inappropriate schemes– Low cost options or alternate scheme design
can be ignored– Scheme for services that are a not priority of
the majority
• Inefficiency in delivery
• Inefficiency in utilization
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Examples Inappropriate Schemes…1
Urban Dev & Costal Environment Management Project of ADB (Karwar, Karnataka, India)
75% (of $ 24 Mn) spent on piped water, but:– Local body had a revenue of $ 0.6 Mn/yr !– Only 15-20% (of 20,000) families needed water – Critical problem of sanitation, sewage (potentially
polluting water source for 80%) was not addressed!– Alternative low cost option of water from close-by
river not explored (public barrier of potential radiation leak in river not addressed)
• Result = incomplete scheme with heavy financial burden!
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Examples Inappropriate Schemes…2
• Several local bodies refusing to take over water supply schemes (under Water-self governance scheme of WB) in Maharashtra (India), despite 90% capital subsidy! Even O&M costs are perceived as unaffordable by local bodies
• Rural electrification in India – under pressure for quick results – system optimization ignored, no level playing field for distributed generation, no effort to help poor use efficient lamps. If this is done:– Supply cost ($/kWh) can be reduced,
– Consumption (kWh / month) can be reduced, Gap in ‘cost’ & ‘willingness to pay’ can be reduced
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Implications of such shortcomings
• People do not get what they want
• People are expected to pay high cost
– Priority services not delivered barrier to development
– Lack of ownership of projects,– Large gap in revenue & costs
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Genesis of the problem
• Top down design, implementation – without real involvement of users
• Large dependence on urban / external consultants
• At times vested interests, including local elites support high cost schemes (kick-backs, fascination for grandeur, etc.)
• Lack of space / process for marginalized groups to voice their opinion, priorities.
Part III:Suggestion for Consultations
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Proposed agenda for consultations…1
• Communicate menu of options (for tariff design, subsidy targeting, etc.) to policy makers and civil society– Real life examples may help
• Help them move towards consensus on appropriate options
• Bring focus on increase and appropriate use of government funding
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Proposed agenda for consultations…2
• Explore ways to ensure that least-cost systems, for priority service are taken up.– Identify priority needs (esp. of poor)– Identify menu of options to meet the needs– Identify paying capacity / willingness– Give voice to ‘under-privileged’ as they should
be the focus of development efforts
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Conclusion
Meeting MDGs requires that
• Process and institutions come up with schemes that are desired by people & are affordable
• Such institutions and process should be implementable under present political milieu
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T&D Losses,Theft hidden under Agri use (e.g. Maharashtra)
0%
10%
20%
30%
40%
50%
60%
1975 1980 1985 1990 1995 2000
% o
f Ene
rgy
Ava
ilabl
e
T&D loss Agri. Unmetered Share
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Rapid reduction in cross-subsidy in Maharashtra power sector
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L a rg e In c re a s e in G o v e rn m e n t S u b s id y
0
250
500
750
1000
1250
1500
1750
1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02
Mill
ion
Euro
s
AP G u jara t K arn a taka M P R a jas th an
G rown to a quarter of expenses on A ll soc ia l services (that inc ludes R evenue & C apita l expenses on E ducation, M edica l, W ater-supply / sanitation, H ous ing, U rban development, L abor welfare, S ocia l s ecurity, etc .)
G rown to a quarter of expenses on A ll soc ia l services (that inc ludes R evenue & C apita l expenses on E ducation, M edica l, W ater-supply / sanitation, H ous ing, U rban development, L abor welfare, S ocia l s ecurity, etc .)
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Problems of Monitoring and ControlBYPL
0
100
200
300
400
500
600
700
800
900
02-03An 03-04 04-05
MU
sNDPL
0
100
200
300
400
500
600
700
800
900
02-03An 03-04 04-05
MU
s
0-200 201-400 > 400
BRPL0
200
400
600
800
1000
1200
02-03An 03-04 04-05
MU
sRandom changes in consumption pattern in domestic consumption – case of Delhi !
Little action by RC.
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S earch fo r finance(from G ov t andP riv a te S ources)
T o expand cen tra lisedgenera tion
Ignore cheaper op tions o fD S M and D e-cen tra lised
genera tion
H igh energyin tens ity
W astage , F inanc ia lLosses
H igh cos to f pow er
N eed fo r subs idy,N o accoun tab ility
H igh energydem and fo recas ts
