Abstract
Heterogeneity of public utility services is common in developing countries. In a “high-level” equilibrium, the quality of utility services is high, consumer willingness to pay for services is high, the utility is well funded and staff well paid in order to induce high quality of performance. In a “low-level” equilibrium the opposite is the case. Which alternative occurs depends on both the quality of utility management, and public perceptions about service quality. If a utility administration has the potential to offer high-quality service, and the public is aware of this, high-quality equilibrium also requires the public's service payments to be high enough to fund the needed pay incentives for the utility staff. When the public lacks knowledge about the utility administration's quality, the public's initial beliefs about the utility administration's quality will also influence their willingness to pay sufficiently for a high-quality equilibrium to be realized. This paper shows that, with low confidence, only a low-level equilibrium may exist; while with higher initial confidence, a high-level equilibrium becomes possible. “Intermediate” (in between the low- and high-level) outcomes can also occur, in early periods, with “high-level” outcomes later on.
Highlights
This paper presents a theoretical framework for analyzing some key issues related to urban public utility services in developing and emerging economies, with specific reference to Latin America, South Asia, and Africa
A main case in point is the market for electricity to households and farmers in India. This market is plagued by a chronic “low-level equilibrium” where willingness to pay for electricity supply is low, service quality is poor with frequent power outages and voltage distortions, and there are large system losses
When the price paid by the public is increased, additional revenue is allocated to two different ends: a fraction α is spent on excess payments to utility staff; while the rest is spent to service the utility’s fixed capital costs
Summary
This paper presents a theoretical framework for analyzing some key issues related to urban public utility services in developing and emerging economies, with specific reference to Latin America, South Asia, and Africa. Estache et al (2000) find that providing piped water and electricity access, in addition to increasing the level of welfare directly, may significantly raise real household income in many Latin American countries e.g. by freeing time for market work or education among household participants.2 This implies the potential for enormous overall welfare gains from improvements in these areas, in both the short and long run. A main case in point is the market for electricity to households and farmers in India This market is plagued by a chronic “low-level equilibrium” where willingness to pay for electricity supply is low (often zero at the margin for farmers, and typically determined at the state level through a political process), service quality is poor with frequent power outages and voltage distortions (leading to damaged equipment), and there are large system losses.. To connect my model to theirs, note that a system with gradually higher user payments in my model can in principle be interpreted as one with gradually greater local autonomy and less central control in theirs (considering a system where the balance of utility revenues are obtained from central funds)
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