# **Box 1: Colombian experience with raising residential water tariffs**

In 1994, Colombia passed the Public Services Law requiring reference utility tariffs to rise to full cost recovery levels. The law also limited the extent of cross-subsidies between customers, so that poor households should always pay at least 50% of the full cost of the service, while better off households should pay no more than 20% over and above the full cost of service in order to finance cross-subsidies to poor households. A two year deadline was established for the completion of this tariff rebalancing.

However, the magnitude of the tariff increases required to meet these legal goals was extremely large, and moreover regressively distributed. An increase of 50% was required to bring the reference tariff in line with full cost recovery. Furthermore, due to the fact that cross-subsidies were historically much larger than those prescribed by law, the tariffs of the poorest households would have had to rise by 400% in real terms. Given the social and political difficulties entailed, the legal deadline was twice extended, first by five years (from 1996 to 2001 by Law 286/96) and then by a further four years (from 2001 to 2005 by Law 632/01). In the meantime, the requirement for poor households to pay at least 50% of the full cost of service provision was reduced to 30% of full cost. Ten years after the reform law, reference tariffs have now reached cost recovery levels. However, higher income consumers continue to pay surcharges of 30-60% on their bills in order to compensate for the large subsidies still applied to lower income groups.

Owing to the broad definition of low income groups used in the Colombian tariff system, about 80% of residential customers qualify as eligible to benefit from cross-subsidies. Thus, notwithstanding the progress made towards the tariff objectives established in the 1994 Public Services Law, the water sector continues to make substantial fiscal demands. The Colombian government transferred an average of US$240 million per year to municipally operated water utilities over the period 1998/01, which accounted for 80% of the resources available for investment in the sector.

Source: Adapted from _Colombia Recent Economic Developments in Infrastructure_ , World Bank 2004 Given these tendencies, to what extent do current water tariffs succeed in covering the full costs of service provision? The direct evidence is limited. A recent survey of water tariffs conducted by regulatory agencies in Latin America concluded that residential tariffs in 10 large cities on average fall short of full cost recovery by around 30%, while industrial tariffs may exceed cost recovery levels by around 20% (ADERASA, forthcoming). In the case of Asia, a recent review of water tariffs in 18 large cities reports that only half of them are high enough to cover full operating and maintenance costs (ADB, 2004).

Thus, in order to provide a broader evaluation of cost recovery, the analysis will refer to indicative ranges within which tariffs would need to fall in order to have a high probability of recovering either operation and maintenance costs or full capital costs. The ranges are taken from GWI 2004 and summarized in Table 1 below. They are broadly consistent with estimates of a global reference price for water made by Kingdom, Van Ginneken and Brocklehurst (forthcoming). These authors set a reference value of US$0.30 per cubic meter for operation and maintenance costs, and a reference value of US$0.90 per cubic meter for full capital costs (including operation and maintenance costs).

5