Effective subsidies in developing countries

Abstract

During the last decades, significant subsidies have been allocated to government-owned water and sewerage enterprises in developing countries. However, water and sewerage coverage is still far from desirable and the poor are particularly affected by the shortage of these services. The truth is that a considerable part of these subsidies have been used up to build huge infrastructure works that would make some construction firms happy, while often decreasing the service costs for the richer. The costs associated of delivering water and sanitation services to the poor are significantly higher, as they often live in slums or irregular urban developments without urban infrastructure. It is possible, and desirable, to improve government's effectiveness through the use of appropriate economic incentives. The Brazilian River Basin Pollution Abatement Program, based on the "output-based aid" concept, is a good example of how this can be achieved. The Program is a success story that shows that the quality of expenditures on sanitation can be considerably improved if governments of developing countries refrain from contracting sanitation infrastructure works and start paying for results, not for promises.