| |
Contributions from
the Column
Tribune
How not to bridge the digital divide
African profile for German development policy defines its course
Why user fees can make sense
Global governance and biodiversity
06/2006
|
|
[ Utilities ]
Why user fees can make sense
Development policy-makers face a dilemma. If the poor in developing countries are to have access to such basic services as water and energy, they must be spared excessive financial burdens. On the other hand, costs need to be covered for long-term supply to be secured and waste prevented. User fees make sense, provided they are properly designed. The more important challenge is to promote pro-poor growth in order to enable all strata of society to afford basic services.
[ By Philipp Lepenies and Armin Bauer ]
Water is probably the politically most sensitive commodity. For good reason, German development policy-makers view access to drinking water as a basic human right. Nobody will dispute that clean drinking water and well-functioning wastewater systems are essential for individuals as well as society as a whole. Water is considered a merit good, the provision of which society has a general interest in. After all, adequate services increase the standard of living of recipients so much that social problems (such as diseases) are reduced. Accordingly, access to drinking water is often a goal of social policy.
On the other hand, development policy-makers must focus on providing water reliably in the long run. Costs for investments and operation have to be met sustainably. Therefore, prices also have to reflect financial, technical and environmental costs. Moreover, waste has to be prevented. It therefore makes sense to have users cover the costs – the key is to keep prices affordable.
As a general rule, poor households should be able to pay five percent of their income for water. In rural areas, women and children often spend a lot of time and personal energy transporting water. In addition, residents of urban slums often pay inordinate amounts for water purchased from informal providers – more than “normal rates” would cost.
In terms of the five-percent quota, the poor in Latin America are most likely to be able to pay such cost-covering fees. In contrast, according to data from the World Bank (2005), a fifth of households in eastern Asia would not be able to do so. And in India and Africa, a third would not. It is clear, therefore, that there are drastic regional differences, and that the poorest of the poor will not be able to cover the full costs.
Subsidisation is the classic instrument used to provide water to the poor. But if consumption is subsidised for everyone, the wealthy benefit the most because they do not pay cost-covering fees for their consumption. Moreover, under such schemes the supply systems are normally not maintained well. Poor sections of the population often do not even have access to them.
Another approach is to only subsidise the amount considered a basic need and charge higher rates for all additional consumption. It may also make sense to introduce different rates for industry and households, with industry cross-subsidising private consumption. That, however, will only be sustainable if the cross-subsidies actually cover the costs of the whole system. Otherwise, the financial gap has to be bridged with external funding, such as from the already overburdened national budget or from donors, who might justifiably not want to spend assistance money on consumption.
To make things worse, these schemes really only help the poor to a very limited extent. The reason is that they do not make access more common. Improving access, however, remains the fundamental challenge. Utilities generally lack the funds needed to expand their supply systems to serve additional households.
Ways to reach the poor
Nonetheless, there are some ways to reach the poor:
– Instead of providing access to individual households, community faucets can be set up, for instant in villages and slums. The population is then organised in user groups that are responsible for these taps.
– Microcredit can allow consumers to pay for connections to supply systems. They can also be used to finance any construction needed to connect buildings to sewage systems, for example.
– Terms of payment can be adapted to users’ flows of income, for instance when the income of farmers varies greatly from season to season.
– Modernisation and investment in the efficiency of supply systems also contribute to reducing costs. Such investments can often lower the operating costs of water providers by up to 30 %. At present, losses of 40 to 60 % are unfortunately not unusual.
– Consumer costs can also be lowered when providers better utilise their capacities, employ staff more efficiently and reduce their expenses for fee collection.
What holds true for water also applies to electric power. This is another merit good that makes life better in many ways and therefore offers macroeconomic benefits. Again, the main problem is generally access to the grid. Furthermore, experience has shown that the poor generally spend even more money on candles and fuel when they do not have access to electricity than they spend on water. Furthermore, there are specific problems that go along with the scavenging for fuel wood in rural areas.
International development cooperation has learned from mistakes and successes of the past. Today, the emphasis is on sector policy. Broad reforms are essential, and programme-based funding a useful tool. In our experience, fee-based water-provision has proved a spectacular success in Tanga, Tanzania (Hartmann, 2006).
There is still no consensus on whether donors should contribute to covering operating costs – and, if so, for how long. No doubt, those who benefit from these programmes will have to become able to cover these costs themselves in the long run. It is necessary to create an environment that allows that to happen. The goal cannot be to have donors fund essential services in the long run.
In its World Development Report of 2004, the World Bank discussed providing the poor with direct cash payments to increase their purchasing power. They would then be able to shop around for the best providers, thus optimising services. This approach would go far beyond the current models of price subsidies and direct subsidies to providers. Unfortunately, such transfers are rarely practicable.
There is no doubt that the incomes both of partner countries and the poor sectors of their populations have to grow substantially if everyone is to enjoy access to reliable utilities. The new development guideline that has become known as Pro-Poor Growth (PPG) in the past few years plays a crucial role here. In terms of policy-making that could mean:
– promoting the productive capacity and potential of the poor, for instance by investing in agriculture, microfinance and infrastructures for the poor.
– support for political strategies that productively include the poor in growth processes (education, sector reforms, and social security) and
– active promotion of growth sectors while simultaneously fairly distributing economic income by means of taxes.
The question of whether the poor should pay user fees is really not the right question. Long-term progress can only come from systematic structural change, increasing institutional capacities and allowing the poor to benefit from growth. Properly designed user fees are not an obstacle to such change. Indeed, they foster it.
Dr. Philipp Lepenies
is an economist in the strategy department at KfW Development Bank.
philipp.lepenies@kfw.de
Dr. Armin Bauer
is also an economist in the same department.
armin.bauer@kfw.de.
References:
Development Assistance Committee (DAC), 2005:
Guiding Principles on Using Infrastructure to Reduce Poverty (InfraPoor), Paris: OECD
Hartmann, Jörg, 2006: “Tanzanian model case: Tanga,” in D+C, Vol. 47, March, 106 - 09
World Bank, 2005: Water, Electricity, and the Poor: Who Benefits from Utility Subsidies? Washington: World Bank.
World Bank, 2004: Making Services Work for the Poor. World Development Report. Washington: World Bank.
|
