Incidence of Subsidies in Residential Public Services in Mexico: The Case of the Water Sector

Borja-Vega Borja-Vega,Garcia Morales Garcia Morales,Gonzalez Gonzalez

doi:10.3390/w11102078

Abstract

Access to safe water has tremendous direct and indirect impacts on poverty-related outcomes. In Mexico, economies of scale in water provision justify bulk provision of water, such that it is collectively rational to invest heavily in capital for infrastructure development. This is compounded by the fact that water utilities are highly capital-intensive. We analyze two distinct types of subsidies prevalent in the residential water sector. We exploit a household socio-economic module with detailed water services information from the 2014 National Income and Expenditure Survey in Mexico. We combined this data with a unique dataset from water operators in Mexico (PIGOO). We estimate economic (considering operating costs) and direct (considering household’s water payments) subsidies targeted to residential water tariff subsidies. Large heterogeneity in the direct subsidy incidence is found, which partly explains the distortions and wide differences in tariffs and total amount paid for water among different segments of the income distribution. The Omega Indicators (Ω), defined as the proportion of the subsidies received by the poor divided by the proportion of households in the total population in poverty, is less than one, implying that wealthy populations benefit more from water subsidies (economic and direct) than the poor.

Highlights

Access to safe drinking water has been recognized internationally as a basic human need
Subsidies targeted to residential water tariff subsidies
In Mexico, subsidies for residential water services are aimed at increasing coverage and achieving universal access for the poorest [1]

Summary

Introduction

Access to safe drinking water has been recognized internationally as a basic human need. The arguments in favor of water subsidies are countered by two main concerns: such subsidies are frequently seen as causing resource-use inefficiencies, as well as financial weakness in service providers, all of which hamper efforts to improve and expand services [2,3,4]. Those adverse consequences have repeatedly been used to argue against charging consumers less than the cost of service. In light of the Sustainable Development Goals (SDGs), the debate has gained renewed importance as governments strive to ensure access to minimal levels of such services for all citizens, while seeking to recover a larger share of the costs of service provider operations to produce the resources required to sustain service and improve quality

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