Pricing for the Poor

Special pricing and service arrangements for the poor are frequently developed in countries where the poor cannot afford the services purchased by the general public¹. The keys to these arrangements appear to be to balance quality, price levels, and payment schemes so that the needs of the poor can be met. This section examines pricing and payment scheme issues. Quality issues for the poor are addressed in Quality, Social, and Environment Issues.

Both price level and payment scheme are important for making services affordable for the poor. Sometimes customers can afford cost-based usage fees by managing their usage, 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. Customers may also prefer prepaid service, which allows customers to use only what they can afford and allows service for customers who cannot establish credit and who may be difficult to bill. Prepaid mobile service is an example of a situation where an innovative payment scheme made service affordable for the poor. The poor in many countries could not afford monthly fees for mobile service, could not establish credit for post-paid pricing schemes, and did not have mailing addresses where they could receive their bills. Operators developed prepaid cards, which made it easier for poor customers to obtain service and manage their bills. The ease of collecting from poor customers using prepaid cards actually lowered the cost of serving the poor, which made serving the poor profitable for operators.² In certain situations, it may also be possible to give customers a menu of options that provide various combinations of price and quality.

There are situations, however, where price level is a hurdle because overall costs of providing any level of service are high relative to what customers can afford. Consider for example the case of electricity distribution. The fixed costs that are currently inherent in the provision of the electricity grid are sufficiently high to make extension of the grid into poor, rural areas commercially infeasible. As a result, extensions of the grid to these people must be subsidized if the grid is to be commercially viable.³ In these situations, it may be necessary to provide subsidies to ensure affordable prices for the poor.

There is growing consensus, however, that subsidies should be avoided if possible. Research has shown that the poor rarely benefit from broadly based subsidy schemes. For example, subsidies directed at public water companies have often benefited the middle class rather than the poor, who often receive their water from sources other than the formal water utility. Some regulators have attempted to solve this problem by developing targeted, direct subsidies to customers, which have the advantages of being transparent and explicit, and minimize distortions in the behavior of water utilities and their customers. The main drawbacks are high administrative costs and the difficulty of designing suitable eligibility criteria.

It is also possible to make a case 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. Subsidy schemes can be difficult to bring to end, even after they have exhausted their usefulness, because interest groups can form to advocate the continuation of the subsidies and even find new uses for them, implying that subsidies might be subject to mission creep. Sunset provisions could decrease the influence of such interest groups by triggering a formal review of the subsidies. Furthermore management of the scheme by the infrastructure regulator might inappropriately lead the subsidy to focus on regulated services. For example electricity subsidies administered by a regulator have focused on grid electricity in some countries even though electricity by solar power might have been more cost effective for some customers.

Development of subsidies for service to the poor involves determining the amount of subsidy and funding the subsidy. Recently countries have had success with auctions to determine the amount of subsidy. One of the first successful examples of the use of auctions was with Chile, which auctioned subsidies for telecommunications projects in rural areas. Funding of below-cost prices can be done through concession bidding and external subsidies. Concession and licensing fees can provide funding for subsidies, or a requirement for internal funding of subsidized service can be built into the concession contract. In such situations, the operator either funds the subsidy by embedding cross subsidies in his price structure or he funds the subsidy by lowering what he is willing to pay for the concession contract. Sometimes regulators collect subsidy funds through percentage fees against operator turnover or revenue.

Experience has shown that subsidy schemes designed to benefit the poor can continue beyond their usefulness, perhaps because policy makers neglect to re-evaluate the schemes, the needs of the poor change, or non-poor stakeholders benefit from the subsidy process and so advocate its continuation. These possibilities point to the need to evaluate subsidy schemes on a regular basis. Evaluation criteria include how well the poor are reached, the share of the subsidy that goes to the poor, the predictability of the benefit for the poor, the extent and significance of unintended side effects, and administrative cost and difficulty.

Footnotes

1. See the reference section for the Effect of Competition on Decisions Regarding Tariff Rebalancing, Cross-Subsidization, and Funding of Social Obligations.
2. The authors thank Vice Chairman/Chief Executive Officer of Teledom, Dr. Emmanuel Ekuwem, of the Nigerian Communications Commission for this insight.
3. In some countries where grid expansion is prohibitively expensive, policy makers and regulators opt to have electricity provided off grid.