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
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
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
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.
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
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.