Designing direct subsidies for water
            and sanitation services - Panama : a case study
As an alternative to traditional subsidy
            schemes in utility sectors, direct subsidy programs have
            several advantages: they are transparent, they are explicit,
            and they minimize distortions of the behavior of both the
            utility, and the customers. At the same time, defining
            practical eligibility criteria for direct subsidy schemes is
            difficult, and identifying eligible households may entail
            substantial administrative costs. The authors, using a case
            study from Panama, discuss some of the issues associated
            with the design of direct subsidy systems for water
            services. The conclude that: 1) There is a need to assess -
            rather than assume - the need for a subsidy. A key test of
            affordability, and thus of the need for a subsidy, is to
            compare the cost of the service, with some measure of
            household willingness to pay. 2) The initial assessment must
            consider the affordability of connection costs as well as
            the affordability of the service itself. Connection costs
            may be prohibitive for poor households with no credit,
            suggesting a need to focus subsidies on providing access,
            rather than ongoing water consumption. 3) A key issue in
            designing a direct subsidy scheme is its targeting
            properties. Poverty is a complex phenomenon, and difficult
            to measure. Eligibility must therefore be based on easily
            measurable proxy variables, and good proxies are hard to
            find. In choosing eligibility criteria for a subsidy, it is
            essential to verify what proportion of the target group
            fails to meet the criteria (errors of exclusion) and what
            proportion of non-target groups is inadvertently eligible
            for the benefits (errors of inclusion). 4) administrative
            costs are roughly the same no matter what the level of
            individual subsidies, so a scheme that pays beneficiaries
            very little, will tend not to be cost-effective. It is
            important to determine what proportion of total program
            costs will be absorbed by administrative expenses. 5)
            Subsidies should not cover the full cost of the service, and
            should be contingent on beneficiaries paying their share of
            the bill. Subsidies for consumption above a minimum
            subsistence level, should be avoided. Subsidies should be
            provided long enough before eligibility is reassessed to
            avoid "poverty trap" problems. 6) The utility or
            concessionaire can be helpful in identifying eligible
            candidates, because of its superior information on the
            payment histories of customers. It will also have an
            incentive to do so, since it has an interest in improving
            poor payment records. Thought should therefore be given at
            the design stage to the role of the service provider in the
            implementation of the subsidy scheme. 7) The administrative
            agency's responsibilities, the sources of funding, and
            the general principles guiding the subsidy system should
            have a clear legal basis, backed by regulations governing
            administrative procedures. 8) To reduce administrative
            costs, and avoid duplication of effort, it would be
            desirable for a single set of institutional arrangements to
            be used to determine eligibility for all welfare, and
            subsidy programs in a given jurisdiction, whether
            sub-national, or national.