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Ensuring Sustainability of Access to Utilities for All. Girish Sant Prayas Energy Group, Pune – India. Summary of Discussion Paper Additional Issues Suggestion for Consultations. Introduction. In 1990s’ arguments of economic efficiency used to reduce subsidies

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Ensuring Sustainability of Access to Utilities for All

Girish Sant

Prayas Energy Group, Pune – India


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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/residential

    • Need 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 incentives

      • Requires 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.

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    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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    Girish Sant

    Prayas Energy Group – Pune, India

    girish@prayaspune.org

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    T&D Losses,Theft hidden under Agri use (e.g. Maharashtra)

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    Problems of Monitoring and Control

    Random changes in consumption pattern in domestic consumption – case of Delhi !

    Little action by RC.

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