price for a service tends to expand access. Based on the limited evidence available access to water or power may cover several extra tens of percent of the population, if effective pricing schemes are implemented. This may require allowing free unregulated entry as discussed in the first section.

Some poor people may pay high unit costs for service, but they buy very little. For such small quantities it may not be economic to build out an infrastructure system. Finally, willingness-to-pay studies show that in many countries there are very poor people who still cannot afford modern service and continue to live with low quality provision, for example, walking many hours to fetch water of questionable quality.

Where possible, price discrimination is a way to charge rich people more and poor people less as in the quote from Adam Smith at the beginning of this section. Price discrimination is an efficient form of cross-subsidy. One way to discriminate prices is to offer populations with low willingness to pay a special and appropriate price-quality mix. For example, poor people may not be able to pay regularly, but when they have money. Water vending systems from buckets are a way of accommodating this. They may get simpler pipeline systems. They may get a flexible service offering and more appropriate quality standards – better than what they have, but less demanding than found in some of the most modern water or power systems. For example, it may be worth having access to water even if it is not fully treated. For many uses, such as flushing toilets treated water is not needed. Boiling may be the preferred way to make sure drinking water is safe .They may get more flexible payment terms. As discussed before, allowing entry of “unconventional” service suppliers can be helpful ranging from forprofit vendors to community-based organizations.

Governments may also provide subsidies to deal with affordability concerns. Yet, many subsidies do not effectively enhance access. For example, subsidies in an existing utility may simply help those already connected. The subsidies may then just benefit the better-off as evidenced in a number of studies (World Bank 1994, Komives et al. 2005). A key issue is thus focusing subsidies on expanding access. This may, for example, be done by providing subsidies for new connections. A second core issue is targeting subsidies to poor people. This requires either means-testing as in the Chilean water subsidy system or targeting certain areas where poor people tend to live or so-called life-line rates that provide a minimum level of service at low rates. In the latter case, there remains, of course, the issue that such subsidies benefit all customers regardless of income level.

The level of subsidies required depends obviously on the cost of service. Required subsidies may be calculated in the same way as regulators calculate required tariffs or they may be established via auctions such as water connection subsidies in Cambodia.

User fees tend to be paid when service is actually delivered. Similarly, subsidies can be made dependent on service delivery by infrastructure providers. However, many times subsidies are embedded in financing terms upfront. This is obviously preferred by providers and it suits those who can sweeten financing terms with subsidy, because they get more business. However, incentives to deliver efficiently suffer.

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