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Submitted by Theresa Osborne on

I agree that the key issue is creating stronger incentives for government responsiveness and accountability. In some contexts, it is hard to see how CCTs alone would do this. Although in your education example competition from private schools could induce some improvement in the public schools, too (depending on funding formulae for public schools, information flows, and shifting norms (?))But what if there is an effective state monopoly? Suppose for example that poor people are underserved by electricity. The government effectively refuses to raise electricity tariffs to cost recovery levels (which would also allow for future investment and expansion), because of fear of a political backlash. However, the inability of the sector to self-finance through customer charges alone impedes both accountability for improved service and expanded access. The private sector is unable to compete or expand access given existing regulatory frameworks, and may under-provide service in any case, given the inability of governments to commit to non-confiscation (where positive returns occur only years in the future and assets are immobile). This situation precludes expansion of lower cost energy to the poor, but as long as the urban middle and upper classes do not see their bills go up, and the government can blame the "independent" electricity utility for poor service quality (hamstrung as it is by government regulation), the government stays in office. The benefits of reform are indirect and will come only in the future. The poor are not an important political constituency, and transferring cash to them will not change this, with or without the electricity sector reforms. We already know who is earning the rents -- current electricity consumers, in direct proportion to their consumption. A donor seeking to help remedy the situation may opt to simply supply expensive electricity (at a high opportunity cost) through off- grid technologies. But this will have a limited sustained effect on growth and may defer needed reform. Suppose instead that the donor tries to tackle the central issue, including tariff, institutional, and regulatory reform. The government pushes back, saying that the poor cannot afford higher tariffs. Never mind that the poor lack electricity and already pay much more for energy than these tariffs (using kerosene, battery storage, etc.) Although the incidence of implicit subsidies can be pointed out to the government and its constituencies, this would not, at least immediately, alter their political calculus, because the support of the urban population is politically necessary -- as is, in some cases, the ability to appoint friends and relatives to high paying positions within the utility. The typical donor approach would be to (periodically) provide large capital construction loans in exchange for a pretense of conditionality that tariffs will be raised in the future. This has been shown time and again to be a self-defeating strategy -- political payoffs come too far in the future and political pain too soon. But would the option of cash transfers alter the political calculus? Perhaps. A transfer of cash to the poor, nominally to pay for connections and possibly electricity use itself -- and other items if they wished, could be made on a pari passu basis with progress towards reform if all sign up to a more effective commitment device. This may even include temporary transfers for the non-poor, which would decline with objective measures of improved quality or service. But as part of a larger package, with cash transfers to improve political viability, and these transfers managed by an independent payment agent entrusted with disbursing only when agreed steps have been taken, it has a chance of working. Alternatively, one can let the situation deteriorate until such time as businesses apply pressure for a fix -- but this assumes a certain political economy dynamic that may not exist either -- certainly if donors are ready to subsidize the status quo.