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Five lessons in infrastructure pricing from East Asia and Pacific

Melania Lotti's picture
Photo: © Dini Sari Djalal/World Bank

In the infrastructure domain, “price” is a prism with many façades.
 
An infrastructure economist sees price in graphic terms: the coordinates of a point where demand and supply curves intersect.
 
For governments, price relates to budget lines, as part of public spending to develop infrastructure networks.
 
Utility managers view price as a decision: the amount to charge for each unit of service in order to recover the costs of production and (possibly) earn a profit.
 
But for most people, price comes with simple question: how much is the tariff I have to pay for the service, and can I afford it?

For the World Bank and other development institutions, infrastructure pricing is critical because the affordability of basic services can determine the achievability of development goals. Affordability is important to governments, who are often expected to finance infrastructure development. Due to the region’s high growth rates, infrastructure needs in East Asia and the Pacific are amongst the highest in the world, with estimates ranging at US$1.5 trillion per year.
 
Prices of infrastructure services matter for infrastructure expansion in the region. How much does a cubic meter of water costs in Fiji or one kilowatt of electricity in Vietnam? The Status of Infrastructure Services in East Asia Pacific, a recent report by the World Bank Group’s Infrastructure, PPPs, and Guarantees group, draws out significant lessons for developing countries in this region and beyond.
 
1. Low tariffs do not equal affordable services

The first lesson may seem counter-intuitive, but service tariffs that are relatively low in absolute terms may not be so low if adjusted to purchasing power parity (PPP). After adjusting for PPP, even  electricity tariffs that appear relatively lower compared to other countries in the region, such as US$0.15/kWh in Cambodia, become higher than absolute tariffs in high-income countries such as Singapore. Similarly, PPP-adjusted water tariffs in Jakarta are the second highest in the region, at a level close to Singapore.
 
Conversely, affordable services do not always mean low tariffs. Singapore has the region’s highest water tariffs, but water services are largely affordable for most Singaporeans.
 
From a government perspective, low tariffs can be costly. Brunei and Malaysia have two of the region’s lowest electricity tariffs. But significant government subsidies enable low tariffs in Brunei. In Myanmar, lack of utilities cost-recovery have contributed to poor service delivery. 

2. Differences in production costs are inevitable, but technology and efficiency can significantly bring down costs
 
Costs are context-specific and depend on a number of country-specific factors including cost of capital and technical conditions. For example in water supply, costs depend on local geographic and physical conditions, availability of water resources, and levels of operational efficiency. Electricity costs largely depend on a country’s specific electricity mix, as well as its natural endowments. For instance, energy imports explain why energy costs tend to be higher in the Pacific Islands.
 
Yet new technologies and operational efficiency can significantly trim costs. For example, the Solomon Islands – where electricity costs are as high as US$0.78/kWh –are working at reducing electricity costs by diversifying from a system where electricity is generated with imported diesel, towards indigenous and renewable energy sources such as hydropower and solar. Private participation may also increase competition and improve efficiency.

3. Cost recovery remains a significant challenge to expanding services and improving existing networks
 
In East Asia and the Pacific, service tariffs vis-à-vis operational costs do not always result in cost recovery. In Jakarta (Indonesia), Ho Chi Minh City (Vietnam), and Quezon city (Philippines) , average unitary revenues from retail electricity tariffs (collected by the RISE database) do not seem to match the marginal costs of generating the same amount of electricity (based on the country-specific Levelized Costs of Energy as calculated by Bloomberg and Lazard, weighted according to the electricity-mixes of respective countries) , let alone the costs of distribution and transmission.

Photo: ©World Bank

Government subsidies typically fill the gap. In Indonesia, highly subsidized electricity tariffs come with high fiscal transfers to the national power utility Perusahaan Listrik Negara. Subsidies in 2015 amounted to 0.6 percent of GDP – a high figure, despite efforts in 2013 to target subsidies only to low income consumers and to increase tariffs for higher-consumption blocks.
 
Subsidies are also common for the water sector. In 2013, revenue generated by water and sewerage charges in Fiji amounted to only 44 percent of operating costs, making Fiji’s Water Authority heavily reliant on government transfers.
 
The lack of cost recovery may slow down infrastructure development, especially when governments face budget constraints. 

4. Waste water collection, treatment and disposal are often not priced
 
Unlike electricity and water services, wastewater services are often not priced. In Yangon, Vientiane and Dili, tariffs for wastewater collection services are not charged at all.
 
Other countries, including Brunei, Indonesia, Philippines and Thailand, subsume wastewater tariffs under the water bill. This approach should imply that water tariffs are high enough to cover operations and maintenance costs for both water and waste water services. This is not the case.
 
The lack of pricing mechanisms – or its underpricing – helps perpetuate poor services. Many of the region’s cities are not connected to a centralized sewer, and sewage is not collected by the utilities, let alone treated. In ASEAN, only Singapore treats 100 percent of its wastewater. Malaysia, Vietnam, Thailand and the Philippines treat between 40 percent to 60 percent of collected wastewater. Wastewater treatment is even less elsewhere in ASEAN. 

5. Understanding infrastructure service pricing requires improved data collection
 
Data gaps regarding infrastructure service pricing are significant. Virtually all data available, for both water and electricity sectors, are of urban areas. Pricing information in rural areas is largely unknown. The transport sector lacks an updated and publicly available cross-country database on tariffs and costs. Updates are not always transparent and publicly accessible. Even IBNET, the most comprehensive water utilities database, fails to provide accurate data, since utilities report them on a voluntary basis. For instance, available data in Indonesia dates back as far as to 2004.
 
Tackling these shortcomings requires improving price transparency, by encouraging utilities to publish information on costs and tariffs.  The World Bank could join other multilateral organizations in creating a comprehensive pricing dashboard that can be regularly updated.
 
Improved data would enable better cross-country comparisons and a better assessment of cost recovery levels – and, ultimately, a better understanding of the region’s actual needs for infrastructure development and financing.

The Status of Infrastructure Services in East Asia Pacific report was prepared by the IPG team based at the Singapore Hub for Infrastructure and Urban Development.

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