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Pricing, subsidies, and the poor : demand for improved water services in Central America

Author

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  • Walker, Ian
  • Ordonez, Fidel
  • Serrano, Pedro
  • Halpern, Jonathan

Abstract

Reformulating tariff and subsidy policies is central to improving water and sanitation services in developing countries. The traditional model of state enterprise service provision, coupled with residential tariffs set well below the cost of service, has generally delivered unsatisfactory results. Low internal generation of funds has impeded expansion of networks into poor communities and has resulted in very poor services there. Most of the subsidy has benefited higher-income groups. Reformers have proposed private provision to improve efficiency, cost-reflective tariffs to permit the systems to meet demand, and better-targeted subsidies. But is there empirical evidence that existing subsidies are ineffective and that the poor could pay the full cost of water services? Analyzing household survey and water company data from cities of Central America and Venezuela, the authors confirm that: 1) Households without piped connections pay a lot for small amounts of water from"coping sources."2) Most public water companies undercharge hugely, providing an implicit, generalized subsidy and accelerating their systems'decapitalization. 3) There is little income-related differentiation in consumption and therefore in effective piped water tariffs. Volume-based tariffs would generate cross-subsidies from the rich to the poor if the rich consumed more water. But the data indicate that consumption of piped water varies little with income, so most of the water subsidy is captured by the nonpoor. 4) Poor households that are not presently connected would clearly benefit from access to piped water supply. This would require increasing tariffs to cost-reflective levels. But where the urban poor already enjoy access, such tariffincreases would have a disproportionate impact on this income group. This impact should be mitigated through better-targeted, temporary subsidies. 5) The poor are often willing to pay much more than the present tariff for access to piped water but not necessarily the full cost of the monthly consumption assumed by planners (30 cubic meters). If tariffs were set to cover long-run financial costs, many poor households would consume much less. Improving the design of tariff structures and extending metering to such households would permit them to regulate their expenditures on water by controlling their consumption.

Suggested Citation

  • Walker, Ian & Ordonez, Fidel & Serrano, Pedro & Halpern, Jonathan, 2000. "Pricing, subsidies, and the poor : demand for improved water services in Central America," Policy Research Working Paper Series 2468, The World Bank.
  • Handle: RePEc:wbk:wbrwps:2468
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    Citations

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    Cited by:

    1. Deichman, Uwe & Lall, Somik V. & Suri, Ajay & Rajoria, Pragya, 2003. "Information-based instruments for improved urban management," Policy Research Working Paper Series 3002, The World Bank.
    2. Irina Klytchnikova & Michael Lokshin, 2009. "Measuring Welfare Gains from Better Quality Infrastructure," Journal of Infrastructure Development, India Development Foundation, vol. 1(2), pages 87-109, December.
    3. Estache, Antonio & Gomez-Lobo, Andres & Leipziger, Danny, 2001. "Utilities Privatization and the Poor: Lessons and Evidence from Latin America," World Development, Elsevier, vol. 29(7), pages 1179-1198, July.
    4. -, 2011. "Sistema de cuentas ambientales y económicas del agua. Borrador final," Libros y Documentos Institucionales, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 3148 edited by Cepal.
    5. Whittington, Dale & Nauges, Céline & Fuente, David & Wu, Xun, 2015. "A diagnostic tool for estimating the incidence of subsidies delivered by water utilities in low- and medium-income countries, with illustrative simulations," Utilities Policy, Elsevier, vol. 34(C), pages 70-81.
    6. Deichmann, Uwe & Lall, Somik V., 2003. "Are you satisfied? citizen feedback and delivery of urban services," Policy Research Working Paper Series 3070, The World Bank.

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