Reducing Leakage: Subsidies and Tariff Reform in Water and Sanitation Services in Metropolitan Lima, Peru

Abstract

Water utility companies around the globe are seeking to improve their financial sustainability and expand services in growing urban areas, while guaranteeing low-income families access to water. In Lima and Callao, the biggest metropolitan area in Peru, an important tariff reform for their water and sanitation services was implemented in 2017. The new policy differentiated tariffs between customers residing in poor and non-poor blocks, and revised the subsistence level (lifeline block) used in its tariff structure from 25 to 20[Formula: see text]m3. This study uses utility historical billing records of the population to evaluate three outcomes: (i) the effect on the subsidy amount received by poor and non-poor households at different consumption levels, (ii) the subsidy distributive incidence, and (iii) the effects on the utility’s financial situation. Results show that after the reform, the subsidy for the poor was 45% higher than that of non-poor households at 14[Formula: see text]m3, the mean consumption of subsidy-eligible households. Subsidy targeting changed from being regressive to progressive, with the poor receiving 22% more than they would have under a random subsidy scheme. In turn, by reducing subsidies to non-poor households, the utility’s monthly income from customer payments has increased by 7%.