# **5. Discussion**

It is important to note a few limitations to our use of the Chilean model firm data. An assumption embedded in our methodology is that Chile’s geographical conditions are shared by all utilities. In our model, we assign a unit asset base (unit capital cost) value based on data from 15 Chilean firms, while in reality capital costs are strongly influenced by the geographical conditions of the area it serves. For example, different countries have access to different water sources that facilitate (or complicate) extraction, leading to lower (or higher) expenditures on assets. In addition, access to technology plays a role: newer and better machinery can greatly reduce a utility’s operational expenditures. Also, Chile is among the world’s most open economies, with low to nonexistent import taxes, while commercial barriers in other countries drive up the cost of imported assets, resulting in higher capital expenditures. Quality standards also vary between countries: low-income countries usually have lower standards than highincome countries, necessitating more investment to improve service quality.

The most directly comparable estimate of subsidies was conducted by Kochhar et al. (2015). Instead of the model firm approach taken here, the authors use a reference full cost-recovery price of $1 per cubic meter, which is taken from work done by the Global Water Intelligence in 2004 (GWI 2004) and is assumed to be the same for drinking water and wastewater. They then adjust this price for each country to account for three factors: (i) general price inflation that occurred between 2004 and 2012; (ii) lower labor costs in low- and middle-income countries; and (iii) varying levels of water scarcity. Revenue is approximated using data on utility drinking water and wastewater tariffs for a sample of over 80 countries in 2012 from the GWI. The authors estimate that water and sanitation subsidies provided through public utilities were about $456 billion, or 0.6 percent of global gross domestic product (GDP), in 2012. Across regions, subsidies range from between 0.3 percent and 1.8 percent of GDP. Note that these estimates include China and India, the former with an estimate of around $130 billion, or about 1.5 percent of its GDP in 2012. Without China and India, this estimate becomes 0.5 percent of global GDP, or, adjusted for general price inflation from 2012 to 2017, $347 billion. Both of these numbers fall within our estimation range.

While our estimates of subsidies for OPEX are relatively straightforward—they predominantly represent explicit expenditures required to sustain service provision at current levels of efficiency and quality—our estimates of subsidies for CAPEX, or that required for the major repair and/or replacement of existing infrastructure, require additional nuance.<sup>26</sup> Because of a lack of data on most countries’ direct expenditure on networked water and sewered sanitation, our model instead estimates the CAPEX required for the replacement of existing infrastructure. However, there have been several recent attempts to extrapolate direct expenditure from countries with more comprehensive and transparent expenditure data to regional, and even global, levels of expenditure.

Prior estimations of global and regional direct CAPEX on WSS services in low- and middle-income countries, making use of data available from a limited number of countries, are between 0.4 and 0.5 percent of GDP. Fay et al. (2017) have found that the WSS sector has traditionally received a small share of Latin America and the Caribbean’s investments in infrastructure, hovering between a quarter and a third of a percent of GDP in the period 2000–12. Data from Foster and Briceño-Garmendia (2010) suggest that Africa spends around 0.5 percent of GDP, while Andres, Biller, and Dappe (2013) estimate that South Asia spent an average of 0.41 percent of its GDP in the period 2000–11. A more recent, and global, estimation of subsidies in the WSS sector can be inferred from Fay et al. (2019), who estimate infrastructure investments in low- and middle-income countries. Their report does not directly

> 26 It is again important to acknowledge that our estimation does not include CAPEX for infrastructure expansion. Since infrastructure expansion tends to be fully subsidized, the actual global magnitude of networked WSS subsidies is much greater than our estimation.

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