Designing user fees to enhance local revenues and improve service delivery

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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

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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

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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. drivers 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

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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 approachImportant 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 utilitys potential for privatization
• Notion Right fees can transform service
  delivery
• (A magic bullet?)

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II. Demand lessons from tariff reform in Armenia
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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
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Average monthly bills and payments
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Total arrears or unpaid balances
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Aggregate impact of change in electricity
tariff
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 gtgtgt

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III. Fixing supply-side issues to improve cost
recovery(and enable the demand approach)
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Improving cost recoveryRevenue - Costs

• Enhance revenues
• (PQ) 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 lt revenues

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Meter, Bill, Collect Enforce

• Ineffective metering inaccurate billings
• tampered/faulty meters inaccurate reading by
  staff
• Bombay 75 metered but 20 work, so 15
  effective metering
• Low collection efficiency
• collections are lower than total billing
• collection time (months1.2-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 sector
• Egs. Indonesia property tax, UP power billings

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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
  lt 20 in industrialized countries
• Transmission Distribution (TD) 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

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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

• 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
• 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

• Policy legislative reform
• Federal level policies (e.g. housing, municipal
  finance regulations)
• In emerging regions, TA to empower local
  governments
• Deepening decentralization
• In advanced regions, devp implementation of
  detailed guidelines (regional wage policies for
  munis, sub-regional transfer formulae)
• Restructuring of LGs (in advanced regions)
• 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 support
• Will be scaled-up

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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 lt 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

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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 feevolumetric 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 blocksmixed 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 OM
• 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 OM 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
• Dont give up on user fees
• But treat fees as indicator of demand
• Modest on recovery upgrading requires Govt
  subsidy