What are the advantages and disadvantages of creating dedicated agencies or funds to support the development of infrastructure services in rural areas? How should the regulator relate to such funds?

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

Meeting social objectives set by policy makers in the provision of infrastructure services may require external funding1, especially in rural areas where service expansion is more costly and resources more scarce. A possibility is to create dedicated agencies or funds to support the development of infrastructure in rural areas. Those agencies can channel subsidies and contract local operators for service delivery with a clear incentive to foster expansion. Such funds or agencies can increase predictability, timing and frequency of the funding to allow for proper planning and constancy in universal access to service2 implementation.

Specific examples from the electricity and telecommunication sectors show advantages and drawbacks of such funds.

The electrification program in Chile launched in the 1990s is a good example, where the central government contribution is delivered through a special fund set up to competitively allocate a one-time direct subsidy to private electricity distribution companies to cover part of their investment costs in rural electrification projects. To apply for a subsidy, local communities along with local distribution companies, present their project to the regional government, who allocate funds to those scoring best on cost-benefit analysis and social impact.

This system presents several advantages:

  • Commitment of communities: users participate in identifying and defining the projects, and in financing investments3.
  • Private sector participation: companies have invested resources as a strategic move to expand market coverage. Private investment in the program so far has totalled US$ 60 million.
  • Efficient use of funds: governments use competition to allocate performance-based subsidies, which allow for better value for money.

Another approach used in Colombia at the municipality level is to apply a universal percentage levy on all bills (except those who pay social tariffs4). The money raised then goes into a special fund from which subsidies can be paid to households that apply and meet the eligibility criteria.

 

In telecommunications, social objectives have been translated into Universal Access and Service5 policies. The primary financing instrument is a mainly industry-financed Universal Access and Service Fund (USAF) using the principles of Output-Based Aid (OBA) to finance investments targeted under those policies. UASFs are generally financed from one or more of the following sources:

  • Government general budget;
  • Industry levy, as a percentage of annual revenue, on certain classes of licences operators: this is the main source of financing for such funds;
  • Various other regulatory sources such as the proceeds of license competitions, frequency spectrum auctions and fees;
  • One-off contributions from government, financed by loans or grants from international donors.

The perceived advantage of a UASF financed mainly by operator levies is that it is independent from government funding, which is important to fulfil long-term UAS objectives and to focus on long-term sustainable solutions6. In addition, it avoids the added administrative burden linked to government’s participation.

However, such funds also have drawbacks. An inadequate collection mechanism may affect the competition process through payment conditions that hinder long-term incentives. For instance, if the fund absorbs a significant proportion of revenue and entrants have large fixed costs, this will reduce incentive to enter the market. Furthermore, it can potentially curtail competition, especially if incumbents use funds to cross-subsidize more competitive urban areas. Finally, payments may be distributed in a way that encourages rural phone carriers to be inefficiently small and incur high corporate overhead costs supported by the taxpayers.

In the telecoms sector, UASF could be a specific department of the regulator. However, it is generally preferred that the two institutions are kept separate. The regulator can play a role of supervising the activities of the fund in their quasi-regulatory functions, such as the definition of service areas and the preparation of service contracts.

 

Resources

Promoting Private Investment in Rural Electrification—The Case of Chile
Note n° 214 in Public Policy for the Private Sector. Washington, D.C.: World Bank Group, 2000.
Jadresic, Alejandro

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

Emerging Lessons in Private Provision of Infrastructure Services in Rural Areas: Water and Electricity Services in Gabon
The World Bank, Reference No. 8524, September 2002.
Tremolet, Sophie and Joanna Neale

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

ICT Regulation Toolkit
Washington, D.C.: infoDev and the International Telecommunications Union, 2007.

Universal Service: An Economic Perspective
Annals of Public and Cooperative Economics 72(1): 2001, pp. 5-43.
Cremer, H., F. Gasmi, A. Grimaud, and J.J. Laffont

Universal Service Telephone Subsidies: What $7 billion Buy?
June 2006.
Hazlett, Thomas

Footnotes

  1. Readers should refer to Should social objectives be met through funds obtained at the national level and allocated to meet the objectives in each sector and region?
  2. See definition of “universal service” in the glossary.
  3. 10% of the costs of total expenditures to cover in-house wiring, electric meter and coupling to the grid, initially financed by the distribution company and later repaid by users over time.
  4. Special tariffs directed to low-income consumers in order to facilitate their access to infrastructure services. Social tariffs do not reflect the full cost of service delivery and are financed through various mechanisms such as cross-subsidization or government transfers.
  5. The term universal access is used in a wide variety of contexts to describe or demonstrate objectives and policies that governments implement to ensure that all their citizens have access to the benefits of modern economic life. It refers to the ability of everyone, regardless of region or location, socio-economic status, ethnicity, gender, disability, or any other factor, to access necessities (ICT Regulation Toolkit).
  6. See Should social objectives be met through funds obtained at the national level and allocated to meet the objectives in each sector and region? on drawbacks of funds obtained at the national level.