ASi" kUCTURE FlOR DEVELOPMENT

The best way of reducing the gap between costs ities. This pricing strategy focuses on recovenng the
and revenues is to c-lt costs and achieve productive three main cost components of most infrastructure
efficiency-perhaps the most important lesson of utilities: connection, usage,-and peak-capacity costs.
the Bank's experience in infrastructure. Costs due to The cost of connecting a customer and maintainpoor
debt management are excessive in about one- ing that connection to distribution or collection netthird
of World Bank-supported infrastructure proj- works is typically levied as a periodic flat fee, often
ects. Maintenance problems that cause water or linked to charges based on usage in a two-part tariff.
power losses are even more common and costly. In The usage cost is easiest to recover when metering is
Costa Rica the national water company estimates an available to measure use and charges are based on
annual loss of income from such losses equivalent to actual consumption. Such charges reduce waste and
24 percent of investment planned for the next five encourage more efficient use. In Bogor, Indonesia,
years. In Mexico City at the end of the 1980s, neglect raising tariffs to meet crosts reduced water consumpof
maintenance and the lags between tariff increases tion by 30 percent -i less than a year without any
and cost increases in the water sector required a fed- obvious impact on health or economnic production.
eral subsidy amounting to about 0.6 percent of GDP Where metering has not been introduced, estimates
a year.
of usage are the mle. In Colombia and Thailand,
Once costs are controlled, well-established pric- fees rise with the diameter of the pipe- En India, the
ing principles can help achieve financial autonomy. fee increases with the value of the connected propand
reduce distortions in the allocation of re- erty. These soLutions axe not perfect and require fresources-reflected
in the success of countries as dif- quent monitoring, but they often are the best option
ferent as Botswana, Chile, Korea, and Singapore available. The move to metering depends on the pri-
(Box 2.7). The infrastructure pricing strategy in ority given to recoverng costs. One outcome of the
these countries aims at cost recovery suffcient to end of subsidies to Ghana's water utility in 1988
giuarantee the financial independence of public util- was an increase in meter coverage from less than 30
Box 2.7 Designing tariffs to achieve financial autonomy while addressing multiple goals
The geeral princple for pricing public services to re- vices (usually water or power) is priced at a low initial
cover costs without distorting the allocation of
rate reources up to a specified volume of use (block) and at a
is to set the price equal to all short-run costs incaured in higher rate per blodc thereafter The number of blocks
efficienty producing an additionlal unit of output (for ex- varies from tHree to as many as terL The most effective
ample, an extra gallon of water or a cubic meter of gas) structure is the simplest in particular when monitoring
while keeping productive capacity constant-that is, and administrative capacity are constraining.
price equals the sbort-run marginal cost. However, Under the time-of-use rate structure, users pay a pretelecommunications,
power, and water systems periodi- mium during periods of high demand. This structure encally
require large investmnents. In such cases, average courages users to shift demand to the off-peak period
costs fal as production is increased, and the efficient and has the added advantage of increasing the overall
price is below the average cost Charging that price utblization of capacity-and it often imcreases profits.
would result in a deficit and hence a loss of financial au- rune-of-use rates have been applied to railways, urban
tonomy- But even when there are no such economies of buses, and subways, but they are more common in utiliscale,
financial autonomy is at risk when public pro- ties such- as power, water, and telecommunications.
viders have ais obEgation to address social concems lime-of-use rates are practical for inrastructure supply
(Chapter 4).
networks in which the product cannot be stored cheaply
Adjustnents in the general pricing formula can be and its use can be partitioned by time slices into multiple
used to avoid an operational deficit and minimize the products. rune-of-use rates often vary by time of day for
tradeoffs imposed by the need to jointly address equity, power and telecormnunications, and by season for natefficiency,
and financial goalsh Ingeneral, if financial au- ural gas (to reflect seasonal demand for heating) and
tonomy is a requirement, the public price has to be re- water (to reflect seasonal supply, especially in dry
vised to cover the cost of providing the service plus a -seasons)-
markup, often resulting in multipart tariffs and possible Tariffs can also be differentiated in other ways. For
cross-subsidies Two common options to minimize the nstance, when servce costs differ by region, prices
distortions (to effidency and equity) of achieving finan- should reflect these differences. In Nairobi, Kenya, the
cial autonomy are increasing-block tariffs and time-of- 1975 cost of providing water at higher elevations was 32
use rate structures.
percent higher than the cost in lower parts of the acty
Under an increasing-block tariff, consumption of ser- Prices should vary vith such differences
48