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Designing user fees to enhance local revenues and improve service delivery. Innovations in Local Revenue Mobilization Seminar June 23-24, 2003 Sumila Gulyani Africa Urban and Water 1, World Bank. Outline. Significance of user fees in different paradigms - PowerPoint PPT Presentation
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Designing user fees to enhance local revenues and improve service delivery
Innovations in Local Revenue Mobilization SeminarJune 23-24, 2003
Sumila GulyaniAfrica Urban and Water 1, World Bank
Sumila Gulyani, June 2003
2
Outline Significance of user fees in different paradigms Case: Tariff reform & demand in Armenia Supply-side issues in improving cost recovery
– Meter, bill, collect and enforce
– Reducing costs: technical losses and theft
LG capacity & incentives: The Ethiopia CBDSD pjt Conclusions Appendix
Sumila Gulyani, June 2003
3
User fees or tariffs: A definition Prices charged for specific services to cover all or
part of the cost of provision. They include:
– Direct charges such as tolls, bills for water & electricity, bus tickets, school tuition fees
– License fee (eg. driver’s license & fishing fees)– Special assessments
- eg. surcharge on property tax to pay for paving
Issue: User contributions to projects & K costs?
Tariff reform is often central to structural adjustment, decentralization, & infrastr/social sector programs
Sumila Gulyani, June 2003
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Structural adjustment and restructuring: macro & local programs
Get prices “right” – And reduce subsidies and cross-subsidies
“Right” fees for services are crucial for:– allocative efficiency
– equity
– deficit reduction (very important goal)
With decentralization, service delivery and fee-setting are key issues in local govt restructuring
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The demand-side approach:Important in infrastructure & social sectors
Provide services that people want and
are willing to pay for Determine demand or willingness-to-pay
– Contingent valuation surveys & revealed preferences
Charge fees & recover costs- composition, QD
Reduce/eliminate subsidizes- composition, QD With revenues, investment, supply, quality
Shift to high-price high-quality service
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Fees are central to demand paradigm
Effect user behavior on the margin– cut wasteful or excess use; change composition
Provide demand information– helps improve service design & provision
Create revenues which in turn:– provide way out of low-level trap (utilities can invest in
maintenance, and in improving coverage & quality)
– increase options for private participation in sector– improve a utility’s potential for privatization
Notion: “Right” fees can transform service delivery(A magic bullet?)
II. Demand lessons from tariff reform in Armenia
Sumila Gulyani, June 2003
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Economic crisis, reform & recovery
Series of shocks; at height of crisis (1993):– GDP down to half; inflation: 10000% p.a.; fiscal
deficit: 2/3rds of GDP
Turnaround: economy stabilizes– Late 1990s, GDP growing at 5% & inflation at 1-2%
– Achieved through strict monetary policy & deficit reduction
Utilities had collapsed during crisis; their reform was central to overall economic program
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Reforming the electricity sector
Reform Program– Targeted investments– Price increases & elimination of subsidies– New energy law & creation of regulatory agency
Results– From 4 hrs of service in 1994 to 24 hr supply– Bill collection rates (from low of 10% in 1994)– Improved cost recovery– But continued political resistance to tariff hikes
How are the households, especially the poor, faring? Dec. 1999 study: sample of 1500 households
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The 1999 price increase: Followed many of the design “principles”
Elimination of increasing block tariff – ADR 15, 20, 25 per kwh
Replaced with a uniform tariff of ADR 25/kwh Seen as price increase of 30%
– From average price of ADR 19.2 to 25/kwh Actual price increase is about 47%
– HHs were actually paying on avg. ADR 17/kwh 28% + 9% get ADR 1450 as cash compensation
– only 55% of the poor received it--targeting is hard– more analysis required to assess effectiveness
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Household electricity consumption
1998 and 1999
100
125
150
175
200
Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Billing month
Mea
n h
ou
seh
old
co
nsu
mp
tio
n (
kW
h)
Non-poor 98 Poor 98Non-poor 99 Poor 99
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Average monthly bills and payments
2,000
2,500
3,000
3,500
4,000
1998-poor 1999-poor 1998-non-poor 1999-non-poor
AR
D p
er h
ouse
hold
per
mon
th Avg. bill Avg. payment
Sumila Gulyani, June 2003
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Total arrears or unpaid balances
0
1
2
3
4
5
6
Mar-Nov 1998 Mar-Nov 1999
Mill
ion
AR
D
Non-poor Poor
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Aggregate impact of
change in electricity tariff*
Household 1998 1999 Change between 1998 and 1999
Consumption—million
kWh (a) 2.22 1.83 -0.38 -17%
Billings—million ARD (b) 39.57 45.79 6.22 16%
Payments—million ARD (c) 38.22 40.33 2.11 6%
Collection rate—percent
(c/b) 97% 88% -9 pp.**
*For sample households only, **Percentage points
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Study impact and implications
Structural Adjustment Credit (SAC) IV– No new increase in electricity price
– Privatization conditionality kept; 2001 public protests
Implications: Prices are a powerful tool but results depend on
both demand- and supply-side variables– Demand elasticity & affordability effect quantity &
composition
– Supply-side issues >>>
III. Fixing supply-side issues to
improve cost recovery(and enable the “demand” approach)
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Improving cost recovery:Revenue - Costs
Enhance revenues:– (P*Q) Charge for service & set rates to recover cost
– Requires metering, billing, & enforcement
Cut costs:– reduce non-technical losses especially theft
– invest in maintenance
– improve operational efficiency & management
– improve staff productivity, shed excess staff
Ensure admin & collection cost < revenues
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Meter, Bill, Collect & Enforce
Ineffective metering & inaccurate billings– tampered/faulty meters; inaccurate reading by staffBombay: 75% metered but 20% work, so 15% effective metering
Low collection efficiency– collections are lower than total billing– collection time (months:1.2-Seoul, 3.3-Bogota, 7.6-Karachi)
Make it easier for users to pay Enforce full/timely payments (disconnection threat)
Option: Contracting-out to private sectorEgs. Indonesia property tax, UP power billings
Bill collection time in water utilities
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Costs: High technical & non-tech losses
Unaccounted for water (UfW)– 30-60% in developing countries (37% average while < 20%
in industrialized countries
Transmission & Distribution (T&D) losses – Higher than “normal” losses of 8-10%; In Colombia, rose
from 17% to 25% (1970-87); in Buenos Aires, fell from 30% to 10.6% (1992-98)
Reasons– distribution leaks, poor transmission infrastructure– partial metering; inaccurate meter reading/bills; theft by
meter tampering, illegal connections- 20% in Haryana, India
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Reducing theft in Brazil & Argentina
Utilities in Rio & Buenos Aires privatized– In Rio reduced losses from 15.7% to 14.6% (1% loss = US$ 20 million in revenue)
– In Buenos Aires, reduced from 30% to 10.6%(1% loss = US$ 9 million in revenue)
Steps taken to reduce losses– re-registration of all users (3 million in Rio)– random inspections (especially industrial users)– slum normalization program– tall poles (11-12m) & shields on distribution lines
Unintended effect of high fees: incentive for theft
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Cost recovery & service quality
Key assumptions in tariff & infra reform literature:– higher fee will raise revenues and cost recovery– higher revenues will facilitate quantity and quality
improvements by utility Evidence: It depends on demand, design & other
factors– Armenia: 47% higher fee raised revenues by 6%– Telekom, Indonesia, hi-profits but poor service– In Ghana, health centers did not spend revenues
Cannot ignore institutional capacity & incentives
IV. Changing incentives & building capacity of LGs:
Example of the CBDSD project in Ethiopia
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Ethiopia: CBDSD Project Capacity bldg for decentralized service delivery
1. Civil service reform component– Restructuring of selected ministries, agencies & bureaus (MABs)
– To: facilitate & support service delivery by local entities
– Includes: wage policy, budget reform, systems etc
2. LG (esp. municipal) restructuring component– Goal: To create entities that deliver services in a demand-
responsive, financially-sustainable & accountable manner
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Capacity Building as:
Organizational restructuring & empowerment of LGs
Institutional reforms– Improving incentives for performance (wages,
accountability, performance evaluation etc)
Systems Development– E.g. financial & expenditure management systems,
budget monitoring Training
– On-the-job and short-term courses– Development & implementation of a strategic plan
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LG restructuring: 4 windows Capacity bldg for decentralized service delivery
1. Policy & legislative reform – Federal level policies (e.g. housing, municipal finance
regulations)
– In emerging regions, TA to empower local governments
2. Deepening decentralization– In “advanced” regions, devp & implementation of detailed
guidelines (regional wage policies for munis, sub-regional transfer formulae)
3. Restructuring of LGs (in “advanced” regions)
4. Infrastructure investments in restructured LGs
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Design Principles
Demand-driven & flexible– Not pre-determined (wrt content)
Based on rules of access (supply-side constraints)– Defined in Operational Manual
Open to all LGs that meet criteria Programmatic approach
CBDSD is first leg of long-term Bank supportWill be scaled-up
V. Conclusions
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Demand, Tariff Design & Goals Determine demand -- i.e. what people want
– people are willing-to-pay for a certain level of service
Fees can play a crucial role in:– breaking low-level infrastructure trap
– preparing sector for private participation
Introduce volumetric tariffs with fixed fee– but ensure that administrative costs < revenues
Fees may be regressive; options for targeting poor:– free or amortized connection charge; “negative”
charge; special approaches such as public standpipes
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Improving financial viability
Cost recovery can and should be :– high in electricity & water; medium in urban transport;
low in basic education and health
Financial viability depends not only on tariffs but also on:– billing, collection rate & time, enforcement
– reducing theft/non-technical losses
– reducing production costs, enhancing staff productivity
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Do fees improve service provision?
Fees, in themselves, do not ensure: – more services or coverage (quantity)
– better services (quality)
– financially viable utilities (cost recovery)
At times, quality may be a pre-requisite for increasing fee & improving collections
Institutional incentives & capacity are key to better quantity, quality, and financial viability
Focus on fees and institutional issues together
Appendix
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Public finance rationale for user fees
1) Allocative efficiency-Prices will signal correct quantity & quality of services
that citizens demand
2) Revenue generation-Becomes increasingly important as governments’
budgets are constrained and/or deficits are high
3) Equity and fairness-Users pay for benefits rather than all tax payers
-If designed progressively, poor pay proportionally less (vertical equity)
These Depend on Elasticity of Demand
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Recommended tariff designFor the idealistic practitioner : )
Connection fee (including metering cost) Bill = Fixed fee+volumetric charge (2-part tariff)
– Fixed fee designed to recover capital costs– Volumetric charge should be set at MC
Peak load pricing & seasonal surcharge Reduce cross-subsidies Increasing or decreasing blocks—mixed results
– Many recommend uniform rate– But if you use a block structure, keep it simple
Achieves 2 basic goals: Enables cost recovery & affects user behavior
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User fees: Experience from Africa User fees and market price of services are often high
and quantity used is low (e.g. water in Kenya)
Few users now expect service for free; are willing to pay User contributions to capital (K) costs & O&M
– Upfront contributions are increasingly required for pjt (e.g. CDD, social funds, water pjts)
– Upfront contributions have worked & are a good proxy for demand; but usually not sufficient to cover K costs
– Overall, contributions to & recovery levels in projects tend to be below target (e.g. 5-10% vs targets of 25-38% in upgrading)
– More reasonable to aim for recovery of O&M costs; grant financing of 80-90% of K costs is common
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User Fees & Slum Upgrading in Africa Mechanisms
– Up-front deposits, community bank accounts, monthly payments before service, scheduled payments before title
Track record mostly unsatisfactory– Overall cost recovery levels are low & below target
– e.g. 5-10% vs. targets of 25-38%
– Property tax revenues did not materialize
Upfront fees & contributions have worked better– e.g. GIE in Senegal; project oversubscribed in Mali
Don’t give up on user fees– But treat fees as indicator of “demand”
– Modest on recovery; upgrading requires Govt subsidy