COVID-19 and Lifeline rates as social protection strategy

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Coronavirus (COVID-19) disease is a new global pandemic threatening the world. The pandemic has caused many deaths, disrupted the economy and unleashed lockdown measures in many countries around the globe. To slow down the infection rate, many governments have intensified their campaign on social distancing, hand hygiene, restrictive movements and ‘home officing’.  Besides, governments have deployed measures to ease the burden on businesses, to shield their citizens from financial hardship. In Ghana, such measures had included tax reliefs and introduction of lifeline consumption rates. The president of Ghana, Nana Akuffo-Addo, in his latest State of the Nation’s Address on COVID-19 on the evening of 9th April 2020, stated:

“We have decided on further measures of mitigation for all Ghanaians for the next three months, i.e. April, May and June. The government will fully absorb electricity bills for the poorest of the poor, i.e. for all lifeline consumers, that is free electricity for persons who consume zero (0) to fifty (50) kilowatt-hours a month for this period”.

We will, in this report, present a snapshot of what lifeline consumption means, and outline its strengths and weaknesses as part of our SWOT analysis. Lifeline rates and subsidies are part of social pricing and rural development economics. Sophie Trémolet and Diane Binder in June 2009, provided some answers on this subject in the body of knowledge on infrastructure regulation. Now let’s start with some basic background definitions.

Subsidies are indispensable economic strategies for promoting universal access for all and in most instances, making things easier and affordable for the poor. In essence, it ensures equitable distribution of resources among both the rich and the poor. In water economics, for example, one of the basic principles that governs the use of water is the definition of water as a social good. Thus, access to water is every human’s right and that every human should have access to clean and safe water. The Dublin Principles of 1992 give a clear mandate in principle number four that, “Water has an economic value in all its competing uses and should be recognised as an economic good”. It is, therefore, paramount to protect water from abuse, overexploitation, and to maintain the sustainability of water use for the next generations. It means that water use and its access should be regulated using charging and pricing. Charges related to water cover things such as the maintenance costs of provision, recovery cost and signal consumers’ willingness to pay for additional investment in water services. Failure to account for the economic value of water has led to wasteful and environmentally damaging uses of water resources in the past (See Global Water Partnership document on Dublin-Rio Principles).

Against this background, the introduction of lifeline rates is often recommended to ensure affordability for customers and poor neighbourhoods who in most instances, are already connected to the national grid. Lifeline rates are targeted subsidies based on the consumption level of households, which is enough to cover basic needs (for example, first block, 25 litres/capita/day). In lifeline rates, only the first block, covering the basic needs, is subsidised. Anything above would be charged at a commercial rate, i.e. based on the marginal cost of service provision. This mechanism appears more accurate than increasing block tariffs since, in this case, only the lower block is subsidised (Trémolet and Binder, 2009). The rest of the discussions are based on suggestions by Trémolet and Binder (2009) in making lifeline rates sustainable.

Strengths of lifeline rates in providing affordable access to essential services:

1. Lifeline rates are fair and necessary to provide necessary and critical services to the poor. It is an instrument of social protection policy and a way to increase the purchasing power of the poor in society.

2. Lifeline rates are one of many policy instruments that the government can use to mitigate the burden of increased tariffs on the poor.

3. Restricting the price subsidy to the initial block of consumption offers a less costly alternative to across-the-board price subsidies while preserving their politically attractive universal protection feature.

4. Lifeline rates are easy to implement at minimal administrative costs and provide highly predictable support to the poor.

5. Lifeline rates provide an incentive for large consumers to economise on use and thereby fit a sector efficiency objective.

Weaknesses of lifeline rates:

1. Quantity-based consumption subsidies do a poor job of targeting benefits to the poor, and risk of exclusion is frequent: poor consumers are not necessarily small consumers.

2. Lifeline rates may be regressive if poor (and more numerous) families consume more than the lower block. Likewise, if several low-income families are renting a property together or if homeowners resell the service to their neighbours who are not connected.

3. Implementation of lifeline rates suggests that households are connected to the national grid. However, some low-income families often do not have access to the service and hence would not benefit from the subsidy.

4. Lifeline rate can create significant price distortions in the behaviour of water utilities, and their consumers as the price paid would not reflect the marginal cost of the service.

5. Lifeline rates and increasing block tariff systems raise the question of financial sustainability. Cross-subsidies for lifeline rates in Latin America and Asia did not work because of the lower residential consumption less than the last block consumption targeted to cover operational costs.

6. Lifeline tariff would not be transferred to the poor when intermediaries sell the services on a retail basis (small portions).

Ways to improve tariff design when metering is in place:

  1. Link subsidies to service levels so as to use “self-selection” as a targeting mechanism;
  2. Implement connection rather than consumption subsidies, as they are a better way of targeting subsidies especially when coverage rates are low;
  3. Consider pre-paid meters (possibly at subsidised tariffs) which allow individuals, users, households and families to control their own total expense on the service.

Literature sources

Global Water Partnership document on Dublin-Rio Principles

Trémolet and Binder (2009). Available at: http://regulationbodyofknowledge.org/faq/social-pricing-and-rural-issues/what-are-the-strength-and-limitations-of-lifeline-rates/. Accessed on the 10th April 2020.

AK Mensah and Edmund Yeboah

Source: CEBSAR-AFRICA

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