**<u>Table 7: Reference level for cost of subsistence consumption (US$/m)</u>**

|**Water**|Current<br>LAC tariff<br>US$0.40/m<sup>3</sup>|Cost recovery<br>tariff<br>US$0.80/m<sup>3</sup>|**Electricity**|Current<br>LAC tariff<br>US$0.09/kWh|Cost recovery<br>tariff<br>US$0.09/kWh|
|---|---|---|---|---|---|
|Lower bound<br>8m<sup>3</sup>/m|<br>3.20|6.40|Lower bound<br>40kWh/m|3.60|3.60|
|Upper bound<br>16m<sup>3</sup>/m|6.40|12.80|Upper<br>bound<br>120kWh/m|10.80|10.80|

In order to understand how much of a burden such charges might represent, data are collected on the distribution of income in 32 countries (19 from Latin America, 8 from Africa, and 4 from East Asia, plus India). Interest focuses on the distribution of household income, rather than the distribution of personal income as is more typically studied, because household income is the relevant budgetary constraint for utility services. Due to constraints in data availability household income data are used for India and Latin America, while household expenditure data are used for Africa and East Asia. In general, expenditure is thought to be a more reliable indicator of household welfare than income. Given that expenditure is known to be more equitably distributed than income, statistics based on income may tend to over-state the affordability problem faced by low income households relative to statistics based on expenditure.

The data are used to calculate average household income (expenditure) at each level of the income (expenditure) distribution, which can then be compared against the cost recovery benchmark for utility prices in order to determine the extent to which these are affordable. The analysis focuses entirely on the urban income distribution, since utility services are mainly prevalent in urban areas. The methodology used to calculate average household income (expenditure) in comparable dollar terms across countries is described in greater detail in Appendix 2.

The analysis is repeated both in US dollar and international dollar terms reflecting purchasing power parity. The former is more appropriate to the extent that water and utility services are regarded as traded goods, while the latter is more appropriate to the extent that they are regarded as non-tradable goods. In reality, the cost structure of electricity and water services comprises both tradable and non-tradable components. In practice, the exact balance between the two is likely to depend on the size and income level of the country. Large middle-income countries may have the capacity to produce many of the manufactured inputs for water and electricity services, whereas smaller lower-income countries will often need to import them. In addition, other things being equal, water services (due to their greater reliance on public works and lesser reliance on sophisticated mechanical equipment) would tend to have a lower share of imported items in the overall cost structure. In summary, it would appear that water services in large middle-income countries are close to being entirely locally produced. On the other hand, electricity services in smaller lower-income countries are close to being entirely imported. Other cases lie somewhere in between.

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