Managing markets: Using subsidies to regulate in favour of the poor

The World Bank and donor agencies have promoted the privatisation of basic services as a strategy to increase investment and secure improved and extended services. However, in the case of water, investments are still deficient and many of the poor do not have piped supplies in easy reach. Others live close to a pipe but cannot afford to connect to the network or to pay the bills when they are connected.

The privatisation of vital services raises a number of problems around meeting the needs of both market efficiency and poverty reduction. Whilst state regulators attempt to ensure that private companies pipe water to poor as well as rich areas, meet agreed quality standards, and keep prices at an acceptable level, in practice state authorities are vulnerable to commercial pressures. Price rises have often been considerable. Regulation needs to be strengthened but something more is also required.

Subsidies

Subsidies enable governments to compensate private companies to pipe water to unprofitable areas, and to charge the consumer below-market rates. Subsidies have a useful role to play in assisting families to connect to piped systems and to purchase adequate supplies.

But important questions remain around how subsidies should and can work:

• Who should qualify? Research on individual means-tested subsidies in Chile suggests that many of those who qualify are not being reached; area-based targeting is more effective. In some countries, individual household access is unlikely and water will continue to be delivered through public standpipes.
• How much should the poor pay? Durban (like other South African municipalities) provides a minimum quantity of free water to the poor. But should some charge be made? In Chile even the poorest consumers pay 15% of the cost to ensure that they do not waste water.
• How should subsidies be paid? Economic efficiency would suggest that water subsidies should be paid by direct central government transfers, but such payments might be vulnerable to political pressure.

To recover the costs of subsidies governments should work with city and regional based water companies to set up cross-subsidy systems in which richer consumers pay more for water and poor consumers less. Such systems would ensure that water services were commercially viable, and provide finance to extend piped systems and reduce unit costs to the poor.

 

Source(s):
Insights 49: Regulating for Development

id21 Research Highlight: 5 December 2003

Further Information:
Diana Mitlin
Senior Research Associate
IIED
3 Endsleigh Street
London
UK

Contact the contributor: Diana.mitlin@iied.org

International Institute for Environment and Development

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