Social issues1 generally focus on access to and affordability of a service.2 Some countries address these issues by including access or connection targets in concession contracts. This avoids trying to set up subsidy mechanisms later because the operator can consider the cost of the obligation at the time of bidding on the contract. However, once the contract is given the operator has an incentive to try to renegotiate or renege on the obligation, so monitoring and enforcement procedures, as well as evaluation criteria for the scheme itself, should be set out at the time of bidding.3 The service obligation is generally based on what customers need and would be willing to pay, but for their poverty.
Sometimes service can be made affordable by changing price structures, as Tariff Design discusses. For example, poor customers can sometimes afford cost-based usage fees, but not cost-based initial connection fees. In these situations, it may be optimal for the operator to provide customers with the option of paying their connection fee over time, perhaps through usage fees.4 Customers may also prefer prepaid service, which allows customers to use only what they can afford. This has proven successful with mobile telephone service.
In other instances, the social policy for the poor uses an explicit subsidy. Not disconnecting households for non-payment is a form of subsidy. When the subsidy is included in a concession contract, the operator commits to a certain number of connections and a retail tariff in exchange for a subsidy. The concession, which may not be exclusive, is awarded to the operator asking for the lowest subsidy. Chile and other countries have applied this for establishing telecommunications in remote areas. Another strategy is for the country to provide consumption subsidies directly to customers.
Some regulators have found that, ceteris paribus, it is better to subsidize access than consumption. These regulators have found that access subsidies are superior to usage subsidies for encouraging poor customers to obtain access. It also encourages efficient usage because consumers base their consumption decisions on prices that reflect marginal costs. If consumption is subsidized, regulators generally limit the subsidy to a specified level of usage considered adequate to promote universal access.5
If subsidies are to be used, the regulator or policy maker should establish methods for determining the amount of the subsidy, how funding for the subsidy will be collected, and how the subsidy will be distributed. It is generally accepted that the amount of subsidy should be the difference between the incremental cost of providing the service and the customer’s ability to pay. In other words, the amount of subsidy should be just enough to ensure that the service provider does not receive a negative profit from serving the targeted customer, including any cross-elastic effects.6 Funds should be collected and distributed in the least distortive manner. If markets are competitive, this means that the fund collection and distribution should be done in a competitively neutral manner. In monopoly markets, operators can efficiently internalize the subsidy, but the competition for the market should be competitively neutral. A transparent subsidy system may be more necessary than in monopoly markets.
As explained previously, a case can be made that subsidy schemes should have sunset provisions, be separately funded from the regulatory system, and be administered by an agency separate from the regulatory agency. The sunset provision forces a conscious decision to continue the scheme, which should be more effective at ensuring a substantive review than would be allowing the scheme to continue indefinitely. Furthermore management and funding of the scheme by the infrastructure regulator might inappropriately tie the subsidy to regulated services, which may not be the most cost effective for serving the poor.
- See Social Aspects.
- See Tariff Design sections Pricing for the Poor and Effects of Competition on Decisions Regarding Tariff Rebalancing, Cross Subsidization, and Funding of Social Obligations for information on pricing for the poor and funding subsidies for the poor.
- See Competition for the Market for information on renegotiation of concessions and franchises. See Regulatory Process for information on negotiation processes.
- See Tariff Design sections Principles, Options and considerations in Rate Design, Including Conditions for Deciding When Tariff Design is a Regulatory Concern and Economics of Alternative Price Structures (Linear and Non-Linear Rates, Peak-Load Pricing, Multi-Part Tariff, Price Discrimination, etc.) for information on optional tariffs.
- The authors thank Winston Hay for this insight.
- A cross-elastic effect occurs when a change in the output of one service changes the demand or cost of another service. For example, an increase in the output of telecommunications sometimes causes an increase in the demand for electricity.