# **1. Introduction**

Universal access to water and sanitation is a stated international development goal (UN 2015).<sup>2</sup> Well-designed subsidies—along with investment, technological innovation, and better governance and planning—stand out as a key instrument to reach this objective. In the context of high levels of poverty, where markets alone do not result in the desired levels of service provision and consumption, targeted subsidies can help address affordability and equity issues without necessarily jeopardizing the objectives of cost recovery or economic efficiency (WWAP 2019). Additionally, water and sanitation subsidies are advocated because greater access to and consumption of water and sanitation services are associated with rising productivity and living standards, and positive externalities related to public health.

The design and performance of subsidies hinges on the structure and technology of piped water production and delivery. But it is difficult to design subsidies. The water and sanitation sector involves large up-front (fixed) costs, long-lived assets, and network characteristics that make it difficult to estimate marginal costs, and thus to recover costs through efficient pricing. Instead, services often receive a blanket subsidization that may not increase either accessibility or affordability, and is likely to undermine the financial sustainability of the system. It is recommended that tariffs at least cover the operating expenditures incurred by suppliers, but even this minimal objective is rarely achieved. In this paper, we consider the extent to which subsidies meet equity objectives and affect providers’ ability to recover service costs. In the process, we provide new evidence of the distributional performance—and, specifically, the propoor targeting—of subsidies for piped water consumption in 10 developing countries, and document the gap between estimates of actual tariffs and cost-recovery tariffs.

We consider 10 low- and middle-income countries around the world: Ethiopia, Mali, Niger, Nigeria, Uganda, El Salvador, Jamaica, Panama, Bangladesh, and Vietnam. This sample is relatively heterogeneous in terms of gross domestic product per capita, connection rates, tariff structures, and cost-recovery tariffs. Our analysis is founded upon data from household surveys that capture water expenditure, utility providers’ administrative reports, and a novel estimation of country-specific costs of service.<sup>3</sup> Our results suggest that, in all the countries analyzed, the mean unit prices charged are, on average, lower than the overall cost of producing and distributing piped water (that is, lower than would be needed to cover both capital and operating expenditures), resulting in substantial subsidies. Having said this, in some countries the average prices charged are higher than the tariffs that would be needed to cover operating expenditure. In addition, subsidies are regressive, with the amount of resources allocated to water consumption subsidies increasing over the expenditure distribution, and richer households in the top five deciles usually capturing the lion’s share. The results also suggest that, in most countries, subsidies are regressive due to a combination of factors that are not related to their design: (i) poor households are located in areas not covered by piped water networks, (ii) poor households are in areas that are covered,

> 2 The United Nations’ Sustainable Development Goals (SDGs), adopted in 2015, include the aims to “achieve universal and equitable access to safe and affordable drinking water” and to “achieve access to adequate and equitable sanitation and hygiene for all” by 2030.

> 3 These estimates are calculated using an improved methodology and new data presented in Andres et al. (2019).

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