PPP Development Stage – Financing (Cost Recovery)

13.6 What are the key issues relating pro-poor PPPs?

For a municipality focused on improving services to the poor, the first stage is to develop an understanding of the livelihoods of the poor, and to develop links into poor communities that enable information to be channelled and institutional knowledge to be developed. Poverty assessment information is essential in cost-recovery policymaking.

Knowledge about gaps in supply mechanisms is crucial to an understanding of the impacts of change in tariff structure, subsidy policy, service delivery and service expansion. The core of this stage, in common with all pro-poor PPPs, comprises the principles of sustainable livelihoods:

• What are the implications for the poor?
• Are tariffs affordable?
• Are the poor willing to pay?
• Are there effects on livelihoods?
• How are tariffs and collection mechanisms adapted to meet the needs of the poor?
• How are negative impacts mitigated?

The concepts of affordability and willingness to pay are at the core of the debate over pro-poor tariffs. Affordability studies on tariffs should be closely linked to poverty assessments that place these costs in a range of household expenditure profiles.

The poor must either be able to pay for connections, related hardware and tariffs, or receive a subsidy for them, directly or indirectly. In fact, any tariff or subsidy should be targeted at the poor and should focus on increasing access to the service and improving of the service quality.

Low-income households should be given the freedom to decide their level of water consumption and expenditure, rather than being required to pay for amounts that they would not otherwise choose to consume.

Detailed understanding of how different poor households will behave is an essential part of the decision-making process.

Subsidies

When private provision is conceived primarily as a strategy to improve and expand an existing service, there is a greater likelihood that it will be implemented in a manner consistent with poverty reduction goals. However, the more a private provider is expected to serve the interests of poor or excluded users, the less attractive will become the opportunity to invest in the sector. The only way to turn such a disincentive into an incentive is to provide public subsidies to the private provider. However, subsidies increase the incentive of private providers to exaggerate levels of poverty or the costs of reaching the poor, thereby meriting a greater subsidy, or simply pocketing the public resources without passing the benefits along to poor users.

The larger point is not that subsidies should never be attempted, but rather that there is nothing intrinsic in PPP that overcomes the limitations on using them to address the needs of the poor, especially in countries with weak administrative capacity. Indeed, to the extent that subsidies are channelled through a private provider, monitoring and regulatory oversight may impose additional costs.

Connection costs

The greatest constraint on the poor is the lump sum payment required for service connections.

While it is certainly possible that private providers may be able to outperform government, making utility services available to the poor presents a basic market constraint that any provider must confront. In many countries, the poor represent “unprofitable” populations, either because they lack cash income needed to pay tariffs, or because they cannot afford to pay the sunk costs of connections (for example,, for water pipes or connection to the electrical grid) needed to gain access to formal infrastructure. Indeed, because the poor tend to live in outlying urban and remote rural areas, the costs of providing them with utility services may be much higher than those for wealthier people living in major cities.

Moreover, it is not enough to simply obtain a household (or village) water connection. The sanitation benefits of water require internal plumbing, toilets, drains, sinks and so on.