costs over a significant range, so marginal cost pricing does not recover costs. These services are also, to very different degrees, excludable<sup>6</sup> , so it is not always possible to charge for use, even if it would be efficient to do so. For public goods such as green spaces, it is difficult to recover costs directly. On the other end of the spectrum are private goods that are largely excludable<sup>7</sup> . These services often comprise a substantial share of the urban cost base, and user charges are a means of recovering costs.

# **Water Supply and Sanitation (WSS) and Electricity**

Water and electricity are very often provided by separate utility companies that, unlike government departments necessarily maintain accounts of their costs of production, so there is ample data to consider how they recover costs in user charges, and international practices are particularly well documented. This section starts with a discussion of utility cost recovery and subsidy policy for urban electricity and water services<sup>8</sup> . Practice in this area worldwide has a number of important similarities.

# **_Both WSS and electricity are widely subsidized—and WSS is particularly heavily subsidized._**

First among these is the widespread prevalence of subsidies. Utilities in poor and rich countries alike subsidize water and sanitation services. Higher income countries do so less than low income countries, as might be expected, but subsidy use is common and sometimes significant even in all parts of the world. Table 3.1 illustrates this for an international sample of WSS utilities. Nearly 10% of high income country water utilities charge tariffs that are not high enough to recover most of operations and maintenance (O&M). Fully half of their utilities do not have tariffs high enough to recover any capital costs. Even in upper middle income countries, a substantial share (39%) of utilities do not fully recover O&M, and the same share recover no capital costs. In low income countries, only a little over ten percent of utilities even cover most of their O&M costs. Regional patterns suggest that factors other than income alone are at work. For example, although the Middle East and North Africa region is a mix of upper and lower middle income countries, the percentage of utilities that do not recover basic O&M is much higher than the average for both lower and upper middle income groups. Similarly South Asia and Europe and Central Asia perform below their respective income groups on this same measure. Indeed the Latin America and Caribbean region is the outlier amongst the regions, resembling quite closely high income and OECD country cost recovery performance, while other regions achieve a great deal less.

> 6 Excludability refers to goods to which access may be denied if users do not pay. Network services like water and electricity where access to the network can be stopped are good examples.

> 7 Water services in cities of many poor countries suffer from high enough rates of unaccounted for water, often in the 30-40% range, that  substantial pilfering is probably taking place and effective excludability is questionable.

> 8 This section relies heavily on a recent book (Komives et alia: 2005) synthesizing a number of case studies of utilities in developing countries. It is a comprehensive treatment of subsidy practice and impacts, and is strongly recommended as a reference for those interested in utility pricing practice and subsidy impact analysis.

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