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  • Stratification and Public Utility Services in Colombia:Subsidies to Households or Distortion of Housing Prices?
  • Carlos Medina and Leonardo Morales

There is ample consensus about the desirability of subsidizing the consumption of public utility services because of the positive externalities that result when they are supplied and the high public costs generated by their absence. On that basis, most Latin American countries subsidize the supply of services and constantly try to improve their targeting systems while minimizing social losses associated with the subsidy schemes.

States in the region that allocate subsidies for residential public utility services (servicios públicos domiciliarios, or SPD) have always found the targeting and coverage of subsidies a source of controversy, debate, and criticism.1 Among the ways used in the region to reach households with SPD subsidies are cross subsidy schemes, subsidies to supplying utilities, cash transfers, and so forth. Because of the variety of alternatives and the socioeconomic and cultural diversity of the countries of the region, no regional consensus exists on how subsidies should be targeted.

To the problem of lack of technical consensus can be added the difficulty of reforming the targeting systems derived from the complex political economy of subsidy policies in the region. That difficulty has become even greater [End Page 41] because some governments in the area have sought to consolidate their power base by subsidizing services to the poor.

A great deal of Colombian policy to improve social equity through public spending has focused on guaranteeing access to public utility services by the needy population. In fact, the targeting strategy used to provide SPD subsidies has become one of the criteria in the poverty and welfare measurement methodologies used to target most social public spending in the country.2

The country has several studies that have quantified SPD public expenditure amounts and determined the way that they are distributed among households of different income levels. However, there are no studies that quantify how much of the expenditure actually goes in the form of a subsidy into the pockets of the households living in subsidized housing units rather than being transferred or distorting factors such as relative housing prices. This paper presents a quantification of the incidence of SPD subsidies and contributions on housing prices, which it uses to estimate the net subsidy that the government transfers to households and actually stays in households' pockets.

We test the hypothesis that subsidies or contributions play a role in determining housing prices, so that we can identify some of the limitations of the current system of targeting subsidies for public utility services. To quantify the incidence of SPD subsidies on house prices, we estimate hedonic price equations, applying a regression discontinuity approach as our identification strategy. The empirical work is done with information from Bogotá. However, the institutional framework that governs the SPD subsidy targeting policy is the same countrywide, so we expect our findings to apply across Colombia's main cities.

We find that the estimated increment in house value due to subsidies is similar in magnitude to the present value of the flow of subsidies, discounted at reasonable market rates. We find comparable effects when we assess the effect of subsidies on leasing prices.

That finding leads us to conclude that in Colombia the goal of subsidy financing for the poor population through government spending on public utility services is not being achieved. The final effect of most of the government spending in this regard is the distortion of housing prices in different socioeconomic strata. While the public sector in Colombia distributes approximately 0.7 percent of GNP in so-called subsidies for public utility services each year, [End Page 42] the final effect of the distribution is to introduce a new feature, the subsidy, to houses in certain areas, which is then reflected in higher prices for those houses and the consequential distortion of relative housing prices.

We begin by presenting background information on Colombia, describing the country's targeting principles and the way that it has consolidated its targeting strategy. We then summarize the findings of related studies, describe our methodology and data, and give the results of empirical exercises. Finally, we present the conclusions.

Background

The...

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