Note: Data from India and Latin America are based on household income, while data on Africa and East Asia are based on household expenditure, as a result the two groups are not directly comparable.

A final way to look at this issue is to estimate the impact of increasing service tariffs towards cost recovery levels on the incidence of poverty. By raising the cost of meeting an essential service, such tariff increases would effectively reduce the real income of the population, thereby bringing more people under the poverty line, or deepening the poverty of those already under the poverty line.

A number of scenarios are considered for increasing utility bills. The first scenario raises the monthly bill from US$3 to US$6 per month, the second scenario raises the monthly bill from US$6 to US$12 per month, while the third scenario raises the monthly bill from US$1 to US$12 per month. The first two scenarios correspond to the kind of tariff increases that might be required in Latin America (recall Table 7). The third scenario is more relevant to some low-income countries that would need to raise utility bills by an order of magnitude in order to reach cost recovery levels (recall Tables 3 and 6).

In each of these cases, the data on household income (expenditure) distribution is used to calculate the percentage increase in three poverty measures: the headcount ratio (HC), which measures the percentage of the population under the poverty line; the poverty gap (PG), which measures the average percentage deviation of the income (expenditure) of those under the poverty line from the level represented by the poverty line; and the FGT index, which measures the average squared percentage deviation of the income (expenditure) of those under the poverty line from the level represented by the poverty line. In all cases, an ordinal poverty line is used, and is determined at the income (or expenditure) level of the 40<sup>th</sup> percentile of the income (expenditure) distribution in each region prior to the tariff changes. The poverty impact is calculated as though all households had access to the service. This is manifestly not the case. However, such a calculation is nonetheless valuable in determining whether services would remain affordable to newly connecting households at cost recovery prices. Further methodological details are provided in Appendix 2.

The results show that doubling utility bills from US$3 to US$6 or US$6 to US$12 does not have a major impact on poverty indices across Latin America, Asia or Africa (Table 8). The exceptions are countries such as Bolivia and Guatemala, where such policies could add 2 percentage points to the headcount poverty rate. However, with increases from US$1 to US$12 per month, the poverty impact is quite large across all regions, but particularly in Asia and Africa. The headcount ratio increases by 2 to 3 percentage points in Latin America, 3 to 5 percentage points in Asia, and four to seven percentage points in Africa. The poverty gap and FGT indices also increase substantially, particularly in Africa. These findings suggest that there is still significant scope for progress towards cost recovery in middle-income countries where tariffs are already reasonably high, without major impact on poverty. However, in low-income countries starting from very low baseline tariffs, the social consequences of any transition towards cost recovery would appear to be very large.

In summary, based on a 5% affordability threshold, cost recovery tariffs would represent affordability problems only for the poorest 20% of households in Latin America.

21