Infrastructure and Poverty: Part 3 – What Can Be Done?

by Quentin Wodon

Infrastructure matters for poverty and development (first post in this series), but the needs of the poor are not being met (second post). In this third post, the discussion shifts to what can be done to improve infrastructure services for the poor, considering first reforms and subsidies, and next projects including those by service organizations.

Water fountain (Photo: C. Tsimpo)
Water fountain (Photo: C. Tsimpo)

Reforms and Subsidies

PPIs (private participation in infrastructure) and IRAs (independent regulatory agencies) have been among the most important reforms implemented in the past two decades. The empirical evidence reviewed in my   book with Antonio Estache suggests that these reforms have improved investment and service quality (as well as reduced corruption in the case of IRAs), but there are differences in these impacts between sectors and the effects have been relatively modest. In addition, while these reforms have helped some households, they probably have helped mostly households among better off groups since the poor simply have no access to basic infrastructure countries in low income countries.

Another area of concern is that of subsidies. Many countries have (often large) consumption subsidies for basic infrastructure services such as electricity and piped water. These subsidies prevent cost recovery by the utilities and this reduces the incentives for them to expand the networks. But in addition, while the subsidies are justified in theory by the aim to make services affordable to the poor, they are in practice very poorly targeted to the poor. In most countries the average subsidy received by a poor person is only a third (or less) of the average subsidy received by a person randomly chosen in the population as a whole.

Most existing subsidies are consumption subsidies implemented through the inverted block tariff (IBTs) structures. With IBTs the unit cost per kWh or cubic meter of water is lower for the first few blocks of consumption for all those connected to the network, and often below cost recovery levels. In low income countries, these subsidies are poorly targeted to the poor simply because most of the poor are not connected to the networks.

The targeting performance of those subsidies could be improved by reducing the lower bands of the IBTs so that only those who consume very low amounts of water or electricity benefit from the largest subsidies. Another option is to shift to Volume Differentiated Tariffs, whereby only those consuming in a tariff band receive the subsidy for that bans (under IBTs, all clients receive the subsidies in the lower bands for the part of their consumption in those bands). Both approaches tend to have a limited positive impact on targeting performance, but they help in reducing the cost of the subsidies.

Another alternative is to shift from consumption to connection subsidies. Instead of subsidizing the consumption of those already connected to the water network or the electricity grid, the idea is to subsidize the connection of new and typically poorer households to the network. Still another alternative is to target subsidies to those in need more purposefully (this can be done among others through geographic targeting or proxy means- testing). In those cases, targeting performance to the poor can under some conditions be improved significantly. These are all high priorities that governments and utilities should implement, as argued for example here.

Projects

What about the role of the nonprofit community, including NGOs and service clubs? Precisely because so many among the poor do not have access to basic infrastructure services, the role of nonprofit organizations is important to fill part of the gap in coverage of basic infrastructure services. It is important however for nonprofits, including service clubs, to operate in a highly professional and sustainable manner.

Providing access to electricity, water, sanitation, or other basic infrastructure services in poor areas is hard. Many projects are implemented in an unsustainable way, so that they ultimately fail. Research I am doing with Clarence Tsimpo on Uganda suggests that many small water projects fail in large part because of lack of infrastructure functionality (facilities stop to work properly, even shortly after being installed) or lack of local responsibility (poor local leadership or lack of proper community arrangements hinder maintenance, thereby yielding a slower but often irreversible damage in the infrastructure).

Sometimes, expensive technologies are put in place that communities have simply no way to keep up because of the high cost of parts for repairs. Training for proper maintenance may not be provided at all, or provided in a haphazard way, to beneficiary communities. These and other factors lead to the failure of many projects despite the best of intentions. So what are NGOs and especially service clubs to do? They need to get professional advice. In the Rotary family, the good news is that advice may be available from Rotarian Action Groups (RAGs). In the case of water and sanitation WASRAG is ready to help.

My Rotary club was recently considering a promising water harvesting and sanitation project in India. We got detailed specifications ready and they looked good.  But we asked for a professional review by a district Rotarian expert in the field. He raised concerns and suggested we contact WASRAG for advice. We did, and in the end we decided to subsume our own small individual project and funds into a much larger project run by WASRAG. This gave us piece of mind that the project would benefit from the professional expertise it needed.

In Rotary, on average (there are of course exceptions), larger projects are likely to be better designed than small ones. They also tend to be better managed because the stakes are higher. This means that they probably  have (again on average) more impact, and are more likely to be sustainable. Larger projects also require less administrative work than multiple smaller ones. Not all Rotary service projects need to be large projects where many clubs and districts pool resources together with professional advise from RAGs. But in some cases, when the expertise of RAGs is available, it is a good idea to work with them and pool resources.

 

Infrastructure and Poverty: Part 2 – Are Household Needs Being Met?

by Quentin Wodon

The first post in this series asked whether infrastructure matters for poverty reduction and other development outcomes. It does. This second post asks whether the infrastructure needs of households are being met. They are not. Part of the analysis relies on my new  book with Antonio Estache on infrastructure and poverty in Africa.

Solar panels in Karamoja, Uganda (Photo: C. Tsimpo)
Solar panels in Karamoja, Uganda (Photo: C. Tsimpo)

Challenges in Low Income Countries

Infrastructure does matter for growth and poverty reduction, but there is probably a difference in that relationship between low and middle or high income countries. In low income countries, there is no guarantee that investments in infrastructure will benefit the poor in a straightforward way, unless the investments are designed from the start to do so.

Consider it this way. The priorities of private investors and households in poverty are likely to differ in low income countries. In the African context especially, the number of the poor is rather large, with many living in rural areas and having no access to basic infrastructure services. Only the better off tend to have access to those services, and even at the margin, new investments in infrastructure may not necessarily benefit the poor, simply because they live too far away from the electricity grid or the piped water network. Incentives for private utilities to reach the poor are limited.

What about the links between infrastructure and employment? There is no doubt that lack of infrastructure is an obstacle for firms to operate. In enterprise surveys, close to half of firms declare that lack of electricity is a constraint for them, and one fourth cites lack of telecom and transportation services. This compares to 40 percent of firms citing corruption as a major obstacle to doing business. These rates are high, suggesting that lack of infrastructure is indeed a major constraint to investments and growth. But at the same time, in low income countries only a small minority of workers is engaged in the formal sector where these firms operate. Even if the firms would do better, this still may not have a direct immediate impact on the poor, apart from trickle down effects.

Another challenge relates to the cost and quality of service provision – such as the generation, transmission, and distribution of electricity. In part because the networks are small in many countries, operating costs tend to be higher in Africa than in other regions of the world. In some cases high costs result from over-engineering of projects. As for quality, in part due to capacity constraints, service is often provided only intermittently. These and other challenges make it difficult to serve the poor, especially in Africa.

Gains in Coverage?

 Organizations such as NGOs and service clubs are not engaged in large infrastructure projects. But they can play an important role in meeting household demand for basic infrastructure – including for off-grid electricity, water, and sanitation. In the case of Rotary for example, the Water and Sanitation Rotarian Action Group (WASRAG) is actively involved in providing access to water and sanitation in local communities. The question of whether household demand for basic services is being met is thus important not only for governments and utilities, but also for nonprofit organizations.

Progress in meeting household demand has unfortunately been very slow, especially in Africa. In telecoms there has been dramatic progress thanks to the mobile cell phone revolution. But in other sectors, with the exception of gains in rural electrification in some countries, coverage rates have not improved much (see this paper). For piped water, coverage rates have remained below 20 percent on average across countries with no clear gain over time. For electricity, there has been an increase in coverage rates from a fourth of households to about a third thanks as just mentioned to gains in rural areas. For flush toilets as for piped water, access has also remained flat with only about one in ten household being served. Even when gains in coverage are being achieved, these tend to benefit mostly better off households.

Cost, Affordability, and Supply

In urban and peri-urban areas small-scale providers are filling some of the gaps left by national or regional utilities, but they often have high costs and substantial margins, and are thus expensive for households. In Niger, a study suggests that the cost of water per liter from street vendors could be up to five times higher than the cost from the piped network.

Is the lack of coverage of infrastructure in the population a demand or supply issue? Lack of affordability of modern infrastructure services is an issue for the poor, and it may reduce the demand for those services. Yet the main constraint is lack of supply, not lack of demand (see this paper). The fact is that it is often more expensive for households to meet infrastructure needs through small scale providers or alternative sources than through the networks. For electricity and lighting, the cost of batteries, candles, or kerosene lamps is often higher, at least per unit of efficient energy, than the cost of an electricity bill.

The problem is not that households do not want to connect to networks. It is that even though households would benefit from a connection to existing networks, the opportunity to do so is often not available. This may be because households live too far from the networks. But it may also be because connection costs requested by utilities are often high, especially for the poor and when the costs have to be paid in a single installment.

This quick diagnostic suggests that a lot of work remains to be done to provide basic infrastructure services to the poor in Africa and many other developing countries. In the third post of this series, the record of the reforms and policies of the past two decades will be discussed, together with their implications for projects by organizations such as Rotary.