_Designing Pro-poor Water and Sewer Concessions_ _Kristin Komives_ priority would be to make in-fill connections, and to expand service only in densely-populated areas where per connection expansion costs are lower. The concession contract seeks to counteract the inclination to make in-fill connections by mandating that in-fill account for no more than half of all new connections. Nonetheless, Aguas del Illimani is likely to save the more sparsely populated areas of El Alto for the end of its expansion plan.

_Unified water and sewer tariff_ Aguas del Illimani charges a unified tariff for water and sewer, as did SAMAPA. All households pay for sewer service even if they are not connected to the sewer network. In other words, a household with a water connection but no sewer connection will have the same monthly bill as a household with a sewer connection and the same level of water consumption. This situation is likely to discourage Aguas del Illimani from expanding sewer service, as expansion of the sewer network implies new investment but generates no additional revenue. This problem may be resolved in 2001: Aguas del Illimani's contract calls for the company to propose separate water and sewer tariffs at the first five-year tariff revision.

In the near term, however, the unified tariff could have interesting implications for expanding water service to poor neighborhoods. Households with both water and sewer service are presumably the most costly for Aguas del Illimani to serve. Some of Aguas del Illimani's costs do not vary with the number of services each household receives (for example, monthly billing). Other costs, such as maintenance, however, should be higher for households with both water and sewer service. Since water-only and water-and-sewer customers pay the same tariff, water-only customers may be paying more than the true cost of the service they receive. If water-only customers are paying more than what it costs Aguas del Illimani to serve them, then Aguas del Illimani would have a financial incentive to increase the number of water-only connections. This incentive would be consistent with the expansion schedule in the concession contract: quickly reach universal coverage of in-house water connections in poor neighborhoods and then only gradually expand sewer service in these areas. It is extremely difficult, however, to analyze whether water-only customers are indeed paying more than the cost of water service because there are other cross-subsidies in the tariff structure.

_Cross-subsidies_ The Aguas de Illimani contract contains two prominent cross-subsidies. First, industrial, commercial, and government users subsidize service for domestic connections: all households, except the tiny number using more than 150 cubic meters of water per month, pay less than the average per unit tariff; all industrial, commercial, and government customers pay more.<sup>61</sup> Second, the tariff differentiates between low-volume and high-volume users. For domestic connections, the increasing block tariff includes a lifeline unit tariff that falls well below estimated marginal cost for the first 30 cubic meters of water per month.<sup>62</sup> As table 5 shows, most households in El Alto use much less than 30 cubic meters of water per month. The sale of water to these low-consumption households is thus a loss-making proposition, particular since households do not pay a monthly fee to cover fixed costs like meter reading and billing. Given this tariff structure, we can expect that Aguas del Illimani' s preference would be to first

> 61 This tariff structure need not be a cross-subsidy if the per unit cost of serving industrial and commercial users is indeed higher than the cost of serving domestic customers. The information to make this determination, however, is not available.

62 The tariff study done to create the Aguas del Illimani tariff estimated long-run marginal cost to be $1.18, the tariff in the highest usage block.

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