1. Cross-Border Infrastructure: A Toolkit Universal Service Session on Regulation & Accountability Max Bradford Castalia The views expressed here are those of the presenter and do not necessarily reflect the views or policies of the Asian Development Bank (ADB), or its Board of Directors, or the governments they represent.

2. Cross-Border Infrastructure: A Toolkit Universal Service An obligation in return for monopoly right  e.g. country-wide service for telecoms A requirement of regulator or contract for service  e.g. condition of contract A “public good” for national unity purposes  e.g. rural electrification, national roading system A goal of poverty reduction strategy  e.g. ADB/WB or National government

3. Cross-Border Infrastructure: A Toolkit Importance of Access to Infrastructure Infrastructure often regarded as a “right” Affects most citizens Sizeable part of household expenditure Critical component of poverty reduction Universal access to services may be politically desirable or unavoidable.

4. Cross-Border Infrastructure: A Toolkit Rationale for Subsidization Universal access desirable but full cost-recovery rates may not be affordable, especially for poor Subsidization of essential services = form of income redistribution  Consumer  consumer  Tariff on high income users subsidizes low income users  Taxpayer  consumer  Government subsidy paid to service provider or consumer  Provider  consumer (failure?)  Provider subsidizes through too-low tariffs allowed by regulator

5. Cross-Border Infrastructure: A Toolkit Government or Donor pays CAPITAL costs Revenue recovered is less than full cost Designing Subsidies Need to decide: Who pays, and how? Access or consumption subsidized? What are incentive effects on providers & consumers? Will effectiveness of subsidization be monitored / reviewed? BUT Be clear WHY subsidies are being paid and for how long.

6. Cross-Border Infrastructure: A Toolkit Forms of Subsidization Explicit Government / donor subsidies  Lump-sum paid to provider  Output-based  Consumers not disconnected for non-payment  Income supplements (welfare approach) Implicit Government subsidies  Tariffs suppressed, utilities in financial difficulty turn to Government for help…

7. Cross-Border Infrastructure: A Toolkit Forms of Subsidization ( continued ) Cross subsidies  Consumers with higher ability to pay / lower cost of service pay more than cost of service  Selected group of consumers pay less than cost of service  Aim for full cost recovery across all consumer groups

8. Cross-Border Infrastructure: A Toolkit Level of Subsidization Ideally, consumers should pay as much as they are able to pay - give them choice and options Subsidy should cover difference between consumer payments and incremental cost of providing service Subsidy can be targeted to particular consumer groups to ensure “best bang for your buck” i.e. subsidize only  Tariffs for consumers with lower ability to pay  Tariffs for consumers in areas where cost of service is high  Extensions to ‘unviable’ areas

9. Cross-Border Infrastructure: A Toolkit Subsidy Targeting Example: Government could subsidize provision of public taps in some areas Customer’s choice less expensive $$$ Public tap more expensive $$$ House connection

10. Cross-Border Infrastructure: A Toolkit Service Standards and Access ( 1 ) Offering different levels of service can help consumers self-select the service that best meets their needs and willingness to pay Offering lower levels of service  Costs less for providers  Can make it more profitable to serve low-income areas  higher uptake of services  higher collection rates  Better coverage But, need to ensure minimum service standards for health, safety and environmental reasons

11. Cross-Border Infrastructure: A Toolkit Service Standards and Access ( 2 ) Excellent Service e.g. high continuity & pressure More expensive ? Need to identify what people really need and can afford Poor Service e.g. low continuity & pressure Cheaper ?

12. Cross-Border Infrastructure: A Toolkit Regulation and Access Ultimately, universal service is a policy decision - especially if Government subsidies required Regulator can play a role by  Reviewing costs of service  Assessing consumer willingness to pay  Setting and monitoring appropriate service standards  Monitoring provider performance against agreed coverage goals Competitive markets will not always deliver Universal Service

13. Cross-Border Infrastructure: A Toolkit Once established, subsidies are difficult to remove. To Summarize… Universal service is ultimately a policy decision  A poverty reduction strategy  Obligation in return for monopoly right  A contractual condition  A national unity objective - public good Competitive markets will not always deliver it Governments or classes of consumer subsidize Subsidy design critically important for sustainability of infrastructure Be clear why subsidy is needed and for how long.