Pricing, Subsidies, and the Poor: Demand for Improved Water Services in Central America

Abstract

Evidence from Central America's publicly owned and managed water supply companies indicates that the urban poor are ill served by current subsidy policies. The best way to improve water services for the urban poor, this study concludes, is for tariffs to reflect system costs and for consumption to be metered. This permits each household to determine how much it wants to spend on water while ensuring sustainability of services across the network. The attitudes of poor communities toward metering are generally positive. 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, Walker, Ordonez, Serrano, and Halpern confirm that: • Households without piped connections pay a lot for small amounts of water from coping sources. • Most public water companies undercharge hugely, providing an implicit, generalized subsidy and accelerating their systems' decapitalization. • 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. • 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 tariff increases would have a disproportionate impact on this income group. This impact should be mitigated through better-targeted, temporary subsidies. • 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. This paper - a product of the Finance, Private Sector, and Infrastructure Sector Unit, Latin America and the Caribbean Region - is part of a larger effort in the region to evaluate and disseminate lessons of experience in designing policies to improve the quality and sustainability of infrastructure services and to enhance the access of the poor to these basic services.