What do regulators need to do differently to tackle the needs of poor consumers?

[Response by Sophie Trémolet and Diane Binder, June 2009]

Physical conditions, economic capabilities, social patterns, land tenure arrangements, etc, mean that providing appropriate service to the poor often requires non-standard service delivery mechanisms, service types, and payment mechanisms. One-size-fits all approach to service does not function, especially for customers who are not connected to a formal network, but rather served by a wide spectrum of informal service providers. Regulatory frameworks1 can be pro-poor when they have the following objectives: create incentives for the dominant operators to extend services, allow a flexible approach to service quality, establish a tariff level and structure that encourage higher access and provide a framework for competition between the dominant operator and small-scale providers.

Within such frameworks, regulators can have a decisive influence on making infrastructure services more accessible to the poor.

In order to increase access and improve availability, affordability, and sustainability of infrastructure services, regulators should tackle the following issues:

Improve the knowledge base about the poor:

    • Identify where the poor customers are located, whether in rural areas2, peri-urban areas, or pockets of poverty within urban areas. To do so, regulators may need to partner with other organizations that have access to this type of information rather than seek to generate the information themselves, which can be costly and inefficient.
    • Map existing alternative service providers3 (small-scale independent providers or SSIPs) providing services to the poor and evaluate the service they provide, in terms of quality and price.
    • Understand what service customers expect and what they are willing to pay. This can be done by undertaking “willingness to pay4” surveys, setting up customers complaint mechanisms, and linking up with NGOs / CBOs working with poor consumers.

Address current service provision’s weaknesses:

    • Engage with SSIPs, which often serve a significant share of poor customers, to encourage them to formalise their activities and serve customers where they have a competitive advantage. For example, they could subcontract with the main operator in remote areas, thereby facilitating access to formal networks. Regulators should allow SSIPs to access bulk supplies5 of water and electricity from existing suppliers at a fair price.
    • Allow entry of potential competitors by removing exclusivity laws and licensing requirements.
    • Develop a light-handed regulation regime: regulate certain aspects of SSIPs’ services (such as quality requirements) where market competition is not enough to deliver public policies objectives, while leaving other aspects potentially unregulated, such as price, which can be determined through the market. Over-regulating SSIPs may run the risk of stifling their dynamism.
    • Adapt regulation to the needs of the poor: evaluate where constraints might be lifted to facilitate access for the poor, such as specific billing methods or land tenure required to be granted access.
    • In the case of connected customers, improve targeting of subsidies on those who really need them6: in this view, tariff levels along with tariff structure must be designed to specifically benefit the poor. This can be done through cross-subsidization, increasing block tariffs or access subsidies.

Foster service expansion:

    • Provide a framework for competition so that a wide range of service solutions is available and operators can compete within a level playing field. This may reduce the scope of regulation, when competitive areas do not need to be further regulated.
    • Set up clear coverage targets for existing operators and introduce incentives for the formal operators to reach such targets.
    • Allow for differentiated service levels and particularly for a flexible approach to service quality while maintaining basic quality requirements. The preferred level of service quality should reflect the value customers place on quality and the operator’s cost of providing service quality7.
    • Establish a tariff structure that encourages high access to service without jeopardizing financial sustainability.8

Resources

The Economics of Regulation: Principles and Institutions
Cambridge, MA: MIT Press, 1988, Reissue Edition, Chapters 2-7.
Kahn, Alfred

Taking Account of the Poor in Water Sector Regulation
World Bank: Water Supply and Sanitation Sector Board Working Note, Paper No. 11, August 2006.
World Bank

Impact of Market Structure on Service Options for the Poor
Presented at Infrastructure for Development: Private Solutions and the Poor, 31 May – 2 June 2000, London, UK.
Ehrhardt, David

Regulation of water and sanitation services: getting better services to poor people
OBA Working Papers Series, Paper n°8, June 2006, GPOBA.
Trémolet, Sophie and Halpern Jonathan

Regulating Quality
Note no. 221 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, October 2000.
Baker, Bill and Sophie Trémolet

Utility Regulation: Regulating Quality Standards to Improve Access for the Poor Utility Reform
Note no. 219 in Public Policy for the Private Sector. Washington, D.C.: World Group, October 2000.
Baker, Bill and Sophie Trémolet

Accounting for Poverty in Infrastructure Reform: Learning from Latin America’s Experience
Washington, D.C.: The World Bank, 2002.
Estache, Antonio, Vivien Foster, and Quentin Wodon

Access by the Poor in Latin America’s Utility Reform Subsidies and Service Obligations
Discussion Paper No. 2001/75, World Institute for Development Economics Research, United Nations University, Helsinki, September 2001.
Chisari, Omar O., Antonio Estache, and Catherine Waddams Price

Competition, Regulation and the Urban Poor: A Case Study of Water
Paper No. 37 for the University of Manchester, 2002.
Mitlin, Diana

Independent Water Entrepreneurs in Latin America: The Other Private Sector in Water Services
Washington, DC: World Bank, 2003.
Solo, Tova

Sustainability of Water Service Delivery in Rural Environment: Past Approaches and the Way Forward
Review of Literature, Emerging Markets Group, February 2008.
Binder, Diane

Research and Surveys Series: The Interface between Regulatory Frameworks and Tri-Sector Partnership
A publication of the BPD, Business Partners for Development, 2002.
Trémolet, Sophie & Sara Browning

Multi-Utilities and Access: Can Private Multi-Utilities Help Expand Service to Rural Areas?
Public Policy for the Private Sector, Viewpoint 248, the World Bank, June 2002.
Trémolet, Sophie

Guidance Notes on Services for the Urban Poor: A Practical Guide for Improving Water Supply and Sanitation Services
Water and Sanitation Program (WSP), August, 2009.
Water and Sanitation Program (WSP)

Public-Private Partnerships for Urban Water Utilities: A Review of Experiences in Developing Countries
Trends and Policy Options, No.8. The World Bank, PPIAF, 2009.
Philippe Marin

Footnotes

  1. “A regulatory framework consists of the set of rules and processes that bind infrastructure service providers, including formal rules (laws, contracts, bylaws, etc.) and informal rules (personal commitments, financial incentives, reputation, etc.). It also defines how the main regulatory functions are allocated to various institutions, which can include an autonomous regulatory agency, a ministry, an asset-holding company, a customer group, an independent expert, and so forth”. (adapted from Trémolet & Hunt (2006))
  2. “A rural environment is one of small towns and villages, where a sparse population lives mainly from agricultural activity. This definition may vary from one country to another, and national census bureaus determine the criteria for rural environment in terms of number of households per area. This number can however range from a few families living in a remote village in Africa to fifty thousand people or so living in small towns in India”. (Binder 2008)
  3. Alternative, or informal service providers are independent entrepreneurs who are not part of the formal economy but nevertheless provide a great part of poor consumers with access to basic infrastructure services, especially in the water and electricity sectors.
  4. Willingness to pay (WTP) generally refers to the value of a good to a person as what they are willing to pay, sacrifice or exchange for it. WTP is the maximum monetary amount that an individual would pay to obtain a good or service.
  5. See definition of “bulk power supply” in the glossary.
  6. Readers should refer to Do higher income customers benefit more from subsidies than do poorer customers? for more details.
  7. Readers should refer to To what extent does service quality need to be the same for high and low cost areas? for more details.
  8. Tariff structure benefiting the poor is tackled in more details in Do higher income customers benefit more from subsidies than do poorer customers? and What are the strength and limitations of lifeline rates? Readers should also refer to Pricing for the Poor about how tariff structure can influence the degree of service availability to the poor.