Ensuring Sustainability of Access to Utilities for All Girish Sant Prayas Energy Group, Pune – India

FES-UN meeting2 Summary of Discussion Paper Additional Issues Suggestion for Consultations

FES-UN meeting3 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

FES-UN meeting4 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

FES-UN meeting5 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)

FES-UN meeting6 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

FES-UN meeting7 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.]

FES-UN meeting8 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

FES-UN meeting9 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 …

FES-UN meeting10 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

FES-UN meeting11 PART II: Additional Critical Issues

FES-UN meeting12 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

FES-UN meeting13 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!

FES-UN meeting14 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

FES-UN meeting15 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

FES-UN meeting16 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

FES-UN meeting18 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

FES-UN meeting19 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

FES-UN meeting20 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

FES-UN meeting21 Girish Sant Prayas Energy Group – Pune, India

FES-UN meeting22 T&D Losses,Theft hidden under Agri use (e.g. Maharashtra)

FES-UN meeting23 Rapid reduction in cross-subsidy in Maharashtra power sector

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FES-UN meeting25 Problems of Monitoring and Control Random changes in consumption pattern in domestic consumption – case of Delhi ! Little action by RC.

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