Pricing, Subsidies, and the Poor. Demand for improved Water Services in Central America

Pricing, Subsidies, and the Poor. Demand for improved Water Services in Central America

Ian Walker, Fidel Ordofiez, Pedro Serrano y Jonathan Halpern


The World Bank


_A_P2S4 6 8
Pricing, Subsidies, Evidence from Central
America’s publicly owned and and the Poor managed water supply
companies indicates that the
Demand for Idproved Water urban poor are ill served by DemafonrdI mpWraotveer d currents ubsidyp oliciesT. he
Services in Central America best way to improve water
services for the urban poor,
Ian Walker this study concludes, is for
Fidel Ordofiez tariffst o reflects ystemc osts
Pedro Serrano and for consumption to be
Jonathan Halpern metered. This permits each
household to determine how
much it wants to spend on
water while ensuring
sustainability of services across
the network. The attitudes of
poor communities toward
metering are generally
The World Bank
Latin America and the Caribbean Region
FinanceP, rivateS ector,a nd InfrastructurSee ctorU nit
November 2000
Summary findings
Reformulating tariff and subsidy policies is central to o There is little income-related differentiation in
improving water and sanitation services in developing consumption and therefore in effective piped water
countries. The traditional model of state enterprise tariffs. Volume-based tariffs would generate crossservice
provision, coupled with residential tariffs set well subsidies from the rich to the poor if the rich consumed
below the cost of service, has generally delivered more water. But the data indicate that consumption of
unsatisfactory results. Low internal generation of funds piped water varies little with income, so most of the
has impeded expansion of networks into poor water subsidy is captured by the nonpoor.
communities and has resulted in very poor services there. 0 Poor households that are not presently connected
Most of the subsidy has benefited higher-income groups. would clearly benefit from access to piped water supply.
Reformers have proposed private provision to improve This would require increasing tariffs to cost-reflective
efficiency, cost-reflective tariffs to permit the systems to levels. But where the urban poor already enjoy access,
meet demand, and better-targeted subsidies. such tariff increases would have a disproportionate
But is there empirical evidence that existing subsidies impact on this income group. This impact should be
are ineffective and that the poor could pay the full cost mitigated through better-targeted, temporary subsidies.
of water services? Analyzing household survey and water o The poor are often willing to pay much more than
company data from cities of Central America and the present tariff for access to piped water but not
Venezuela, Walker, Ordofiez, Serrano, and Halpern necessarily the full cost of the monthly consumption
confirm that: assumed by planners (30 cubic meters). If tariffs were set
* Households without piped connections pay a lot for to cover long-run financial costs, many poor households
small amounts of water from “coping sources.” . would consume much less. Improving the design of tariff
– Most public water companies undercharge hugely, structures and extending metering to such households
providing an implicit, generalized subsidy and would permit them to regulate their expenditures on
accelerating their systems’ decapitalization. water by controlling their consumption.
This paper-a product of the Finance, Private Sector, and Infrastructure Sector Unit, Latin America and the Caribbean
Region-is part of a larger effort in the region to evaluate and disseminate lessons of experience in designing policies to
improve the quality and sustainability of infrastructure services and to enhance the access of the poor to these basic services.
Copies of this paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact
Silvia Delgado, room I5-196, telephone 202-473-7840, fax 202-676-1821, email address Policy
Research Working Papers are also posted on the Web at The authors may
be contacted at or November 2000. (23 pages)
The Policy ResearchW orkingP aperS eriesd isseminatesth e findingso f work in progressto encourageth e exchangeo f deas about
developmenti ssuesA. n objectiveo f the seriesi s tog et the findingso ut quickly,e veni f the presentationasr e lesst hanf ully polished.T he
papersc arryt he names of the authorsa nd shouldb e citeda ccordinglyT. he findings,i nterpretationzasn, d conclusionse xpressedin this
paper are entirelyt hose of the authors.T hey do not necessarilrye presentth e view of the WorldB ank, its ExecutiveD irectorso, r the
countriest hey represent.
Produced by the Policy Research Dissemination Center
Pricing, Subsidies and the Poor
Demand for Improved Water Services in Central America
Ian Walker, Fidel Ordofiez, Pedro Serrano
and Jonathan Halpern

Demand for Improved Water Services in Central America
Ian Walker, Fidel Ordohez, Pedro Serrano,’ and Jonathan Halpern2
The reformulationo f tariffs and subsidyp olicies is centralt o the reform of water and sanitations ervicesi n
developingc ountriesT. he traditionaml odelo f servicep rovisionh as coupledp ublico wnershipw ith tariffst hata re
set well belowt he cost of the service,j ustifyingt his in terms of the importanceo f water servicesf or the health
status of the poor. However, results have often been unsatisfactoryS. ervice quality and coverager emain
inadequate in many countries, and subsidies directed at public water companies have often benefited the
middlec lassesr athert han the poor,w ho remainu nconnectedto the public network.R eformersh ave proposed
to break out of this “low level equilibrium”th rough a combinationo f private sector provision( to improve
efficiency)f,u ll-costt ariffs (to permitt he expansiono f the service in line with demand),a nd bettert argetingo f
subsidies( to ensuret hat reformd oes not have a negativei mpacto n the poor). Howevert,h ere is a scarcityo f
empiricael videncer egardingth e currentd istributiono f subsidiesa ndt he demandf or water services,s o thatt he
propositionth at subsidiesa re poorlyd istributed and that the urbanp oor are willing to pay for efficientp iped
water servicesa re often offeredu p as itemso f faith. This papers eekst o contributet o the discussiono f sector
reform through an empirical analysis of water tariffs, subsidies and water demand in Central American and
Venezuelanc ities,b asedo n households urveyd atag eneratedd uring1 995-98.
The analysisc onfirmst hat householdsw ithouta piped connectionp ay large sumsf or small amountso f water
from “copings ources”F. ew countriesh ave explicit subsidyp oliciesf or piped water, but a comparisonb etween
existing tariffs and the estimated efficient cost of providing water shows that most public water companies
underchargeh ugely, leading to a generalizedim plicit subsidy and to acceleratingd e-capitalizationo f their
systems.T he study also showst hat there is little income-related ifferentiationin effective pipedw ater tariffs.
Eacho f the citiess tudiedh ad volume-basetda riffs,w hichw ould generatec rosss ubsidiesf rom the rich to the
poori f the rich weret o consumem orew ater. In fact, the consumptiono f piped water varies little with income.
As a result,t he richest6 0% of householdsc apturem ost of the implicits ubsidy.T he obviousw ay to favort he
poor is to increasec overage,r ather than to subsidizep iped water. Neverthelessi,n cities where piped water
coverage is high, many relatively poor households at present do receive a significant subsidy. Since poorer
householdss pend a higher proportiono f their incomeo n water services,r aisingt ariffs to cost-reflectivele vels
would affect these groupsd isproportionatelyIn. this situation,t he introductiono f targeteds ubsidiesc ould be
usedt o avoida negativeim pacto n the pooro f globalt ariff adjustments.
The secondp art of the papera nalyzest he demandf or water, drawingo n both contingentv aluatione stimates
generatedb y “willingnessto pay” surveysa nd revealedp referenced ata.C ontingenvt aluationr esponsesc onfirm
that the poora re normallyw illingt o pay much moret hat the presentt ariff for piped water. Howevert,h ey also
suggest that the poorest urban households are not always willing to pay for the full cost of the standard
monthlyc onsumptiono f 30m3 often assumedb y planners.R evealedp referencee stimatesc onfirmt hat if tariffs
were set to cover long run financiai costs, average demand in many cities would be below 30m3 a month. This
reinforcesth e case basingt he tariff on the system costs and using meteringt o allow householdsto determine
how much water they consumea nd pay for. In Panama,m eteringl oweredc onsumptionb y over 20% in four
months. Across the region, survey and focus group findings show that attitudes to metering in poor
communitiesa re generallyp ositive.I t is regardeda s the fairest way to chargef or water and metersa re also
regardeda s a proxyf or tenurer ights in informals ettlementsT. hereforem, eterings houldb e considereda s part
of serviceu pgradingp rogramsa nds houldb e promoteda s a meanso f fosteringf air distributiono f costs.
1 ESAC onsultoresT,e gucigalpaH, onduras.
2 LCSFPW, orldB ank.
I Introduction
Ready accesst o clean and safe water is taken for granted in industrializedc ountries.B ut in poor countries,
large proportionso f both urban and rural householdsd o not have accesst o safe water. In CentralA merica,
“potable” water coverage ranges from under 40 % to 70% in rural regions and the average national coverage
in urbana reas lies in the range8 0% to 90%,a lthoughs ome individuacl itiesh ave coverageo f up to 100%.F or
those with access, the water is frequently not potable in the strict sense of the word and the quality of service
(frequency,p ressurea nd qualityo f the waters upplied)i s often poor( Walkera nd Velasquez,1 999).
The coverage and quality of the service is generally correlated with income and wealth and the poorer the
country, the closer the correlation. Where there are not enough public resources to provide piped water for
everyonet,h e bettero ff have usuallye xercisedp oliticali nfluencet o ensuret hat theirc ommunitiesa re included
in the formal piped water network and receive a service superior to that available in lower income communities.
The poor adopt coping strategiesT o compensatef or the absenceo r inadequacyo f the piped water supply,
which include the purchase of water from trucks and hauling water from standpipes or domestic faucets in
neighboringc ommunities.S uch strategiesa re normallye xtremelye xpensivei n terms of moneya nd time. In
contrast, piped water normally is priced well below the marginal cost of provision.
The productiona nd distributiono f potablew ater has the characteristicso f a natural monopoly,d ue to the
costlinesso f movingr aw water betweenr iverb asinsa nd of duplicatinglo cal distributionn etworksA. t the same
time, universal access to adequate water and sanitation services has long been recognized as a cornerstone
of public health and an essentialc omponento f individuawl ell being. The traditionalr esponseo f governments
to these twin concernsh as been publico wnershipm, anagemenat nd financingo f water companiesa nd setfing
tariffs at levelsd eemeda ffordablet o all householdsb, oth for distributionaal nd public health motives.A s these
tariffs were on average below the level required to recover costs, implicit and explicit operational and
investmenst ubsidiesw ere establishedt o bolstert he precariousf inancialp ositiono f the water companies.A t
the same time, there was a progressivea ccretiono f complexa nd contradictoryc ross-subsidiesw, hich aimed
to redistributein comeb etweens ocialg roups.
When the pooresth ouseholdsd o not havea ccesst o pipedw ater, the argumentf or subsidizingth e tariff loses
much of its force, since the resulting subsidy distribution is likely to be regressive. When the available
resources are “captured” by better-off consumers or by system employees, low water prices may have
perversed istributionacl onsequencesT. hey presenta financialo bstaclet o the expansiono f servicesi nto the
low-incomec ommunitiesa nd condemnt he poort o payingm uch more for an inferior,n on-pipeds ervice,e ven
though they may be able and willing to pay the full cost of a piped service.
Traditionalt ariff arrangementsa re also associatedw ith limited household-leveml eteringo f consumption.F or
those without meters, the water charge is simply a fixed fee, not linked to the volume of consumption. This
promotesi nefficientc onsumerb ehaviora, s those with a superiors upplyc onsumew ater up to the point where
marginal utility is zero. In rationed systems (including most urban systems in Latin America) this prevents
increasedc onsumptionb y other householdsw, hichs till have positivem arginalu tiiity.
These weaknesses result in two basic types of problems. The first is inefficient resource allocation. When
marginal water tariffs are lower than the marginal cost of provision, there is little incentive for the water
company to expand the service and fewer resources are allocated to potable water provision than would be
optimal. Moreover, incomplete networks and unreliable services result in the adoption of costly “coping
mechanisms”s, uch as water distributionb y tankert rucksa nd by humanh aulage,a nd householdi nvestmenitn
cisterns.T he secondb asic problem is that of distributionailn equity,a s subsidiesa re regressivelyd istributed
whent he poor do not havea ccesst o subsidizedp ipedw ater service.
In recent years in Central America, the multilateral development banks have commissioned water demand
surveysa nd willingnesst o pay studies,i n order to documentt he underlyingf easibilityo f a policys hift towards
tariffsw hich reflect systemc osts, coupledw ith the introductiono f targeteda nd transparentd emand subsidies
in place of the global supply subsidies implicit in generalized under pricing. Such studies have been
undertakenb y the consultingc ompanyE SAC onsultoresi,n nationaal nd regionalc apitalsi n six countriesi n the
* Honduras (1995). Marginal barrios of Tegucigalpa and the intermediate cities of San Pedro Sula, Santa
Rosa de Copan, Choluteca and Comayagua (World Bank and IADB).
* Nicaragua (1996). Marginal barrios of Managua (World Bank).
3This is trues o longa st heu sersw ould,in f act,b ep reparetdo paya tariffe quatl o marginaclo st.
* El Salvador( 1996).T he wholeo f the intermediatec itieso f SantaA na,S an Miguela nd Sonsonate( IADB).
* Venezuela( 1996).T he whole of Caracas,B arquisimetoa nd Merida( WorldB anka nd IADB).
* Venezuela (1997). Marginal barTios of Caracas (1997) (World Bank).
* Guatemala( 1997).M arginalb arrioso f GuatemalaC ity (WorldB ank).
* Panama (1998). The whole of Panama City and Col6n (World Bank).
Detailso f the surveyu niversesa re presentedi n Annex 1.4 The presentp aper brings togethert he resultso f
these studiesi n a comparativefr amework,w hich seekst o amplifyo ur understandingo f the microeconomics
and the politicale conomyo f water supply in low-incomec ommunitiesin the LatinA merica.T he paper also
highlightsth e policyi mplicationso f its findings.I t is dividedi ntof our principasl ections:
* The distributional impact of tariffs for piped water services
Section2 analyzess ubsidye lementso f potablew ater tariffs. It estimatesth e subsidyh ouseholdsr eceivedb y
incomeq uintilei n sixc ities,t o assesst he degreet o whichp oorerh ouseholdsb enefit.T he patterno f accesst o
sewerage services is also analyzed. This section closes with a discussion of implications for the political
economy of sector reform.
* Analysis of water demand using revealed preference data and contingent valuation survey data
Section 3 comparesf indings on water demand generatedb y two different methodologiesI.t first presents
revealedp referenced ata for waterc onsumptiona nd expenditure(i nt ime and money)f or householdsw ithouta
pipeds upply,w hichu se” copings ources”a nd for thosew ith a pipeds upplya nd meteredc onsumptio5n. These
data are used to generate household water demand curves for each of the cities studied. The revealed
preferencer esultsa re then comparedw ith contingentv aluationd atao n demandf or improvedw ater services,
based on responsesto surveyq uestionsT. hesef indingso n demanda re then relatedt o each system’sc osts
and existingta riffs.
– Attitudes towards metering
Water metering is desirable in order to establish a positive marginal consumption price. It is economically
rationalt o establishm eteringw hereverth e economico pportunityc osto f water releasedb y meteringi s greater
Furthedr etailos nt hed atas etsu sedf or thiss tudya rea vailablfero mt hea uthors.
5 The analsisi n thiss ectionlo oksa t householdthsa ta ree ffectivemly eteredw, hosec onsumptiowni lle xpandto thep oint
wherem arginault ilityis equatl o them arginatal riff.M anyh ouseholdwsi tha pipeds upplyd o not havee ffectivelmy etered
consumptioTnh. eyw illt hereforceo nsumwe ateru pt o thep ointw herem arginault ilityis zero.T hisi s givenb y thei ntercept
betweetnh ed emandc urvea ndt hex axis.
than the cost of metering. This is likely to be the case in rationed systems . But politicians are often reluctant to
install meters, fearing the resistance of low-income communities. In some cases there have indeed been
conflicts around metering. This section presents evidence on attitudes towards water metering taken from the
household surveys and focus group exercises, which show a high potential for acceptance when metering is
associated with service improvement.
* Conclusions and policy recommendations
The final section summarizes the main findings and their implications for sectoral policy.
6 Formallyi,t is rationalt o introducem eteringw hereverth e economicb eneft derivedb y the householdsw ho will get more
waterw hen other usersr educet heirc onsumptiond ue to meteringis sufficient o offset the costso f installinga nd reading
the metersp lust he losso f economicb eneft of the usersw hosec onsumptionw ill be reducedb y metering
2 Thed istributionaiml pacto f tariffsf or pipedw aters ervices
It is well known that households without access to a piped water connection spend a high proportion of their
income on relatively small volumes of water provided by inefficient un-piped services. The benefit to these
households from getting a household connection would be very high indeed. A recent case study of Honduras
underlines this finding (Walker et al, 1999).
However, it is often also assumed that within the scope of networked services, the poor consumers lose out to
the better off, because they receive services of inferior quality and/or because the tariff arrangements are
regressive, due to high fixed charges that penalize households with lower consumption levels, which tend to be
the poorer households. This hypothesis implicitly
underlies the assumption that there will be political Water tariffs in the systems studied
support from the poor for policy changes which In the systems studied in the present paper, the structure
combine tariff increases with service quality of the domestic water tariff at the time of the survey had
improvements. The present section analyses survey the following characteristics:
data on the consumption of and payment for piped . There was a fixed minimum volume, which is charged
water services by households that have a domestic for regardlesso f whether it is consumed.T his is 15
connection, to see to what extent the poor lose out to m3 in most places; in Panama it is 30 m3 for
the rich within the scope of the existing piped water residential consumers and lower amounts for lowsystems.
income areas.
Charges levied for the services are compared to the . The marginal per-meter charge for consumption
estimated cost of providing an efficient piped water abovet he minimumi s a progressivefu nction of the
service7. It is shown that tariffs are generally below troatnagl veosl;iu nm Neicc oanrasguumateh de.rI new Eel rSea 9l;v iand Poart hnearmea w,5 e raen 3d
the efficient financial cost, so the systems as a whole in Venezuela 4. The degree of progressiveness
are subsidized. Transfers between richer and poorer relatedt o volumev aries considerablyfr om place to
households are shown to be small, indicating a slight place.
cross subsidy. . There are regional variations, which aim to capture
This is due to two factors. First, per-household differences in costs and I or in social conditions.
consumption is similar across income groups. This, in These normally specify a higher tariff for the
turn, suggests both that there is little income elasticity metropolftans ysteIn ElSealvador there were two
in the demand for piped water in the cities studied; (metropolitan and other); in Nicaragua there were
and that the amount of rationing faced by users at geographical distinctions within the capital city
different levels of the income distribution is similar. according to the distance from an historically
important source and the regions paid less than the
The second factor is the structure of tariffs in the cities capital; in Panama there were four regional or spatial
studied (see text box). In each case, the main source variantsin the tariff.
of differentiation in payments was a stepped tariff, . There was normally a special tariff for “social” cases.
where the charge per cubic meter rises as Sometimes this only applies to standpipes (El
consumption rises. In this type of system, the Salvador); in other cases it applies generally to
“progressivity ” of the tariff structure depends in the informasl ettlement(sM anaguaP, anamaV, enezuela).
main on the degree to which the rich consume more . In all these systems, the coverage of micro metering
than the poor. However, water consumption is is relativelylo w; in some of them, it is simply none
generally stable across income groups, so this existent. In such conditions, the water company’s
mechanism does not result in differential charges for discretionary estimates of each users water
richer households in the cities studied. However, in consumption are crucial to tariff setting. This
some cities there are also “social” tariffs, which do discretion is often used with the intention of trimming
lead to differences between the payment of the the bill to what the company thinks each part of the
lowest quintile and other households. market will bear. As a result, the company’s more or
less arbitrary estimates of consumption and their
There are, however, two clearly regressive distributive decisionso n zoning( wheret his is a factori n the tariff)
impacts of pricing piped water and sanitation services tum out to be the key determinantso f what people
in the cities studied. First, where coverage is not pay for water.
universal, households without a connection are
denied any subsidy and must resort to use more
7 For Meridaa nd Panamat,h e costd ata includet he cost of wastewatecr ollectiona nd treatment.
8 At present,i n the systemsa nalyzedc, osts are abovee fficientl evels.T he presents tudy usesa s a benchmarke stimated
efficientc ostsb asedo n forward-lookingp rojectionS. ee Section2 .1.1.f or details.
costly sources. These households are much more likely to be poor than those with a piped water connection.
Second, differential access to sewerage services results in a regressive transfer from poorer to richer
households, because the poor are less likely to have a sewerage connection, but the water tariff is usually the
same for those with or without a sewerage connection. However, in the absence of cross country data on
sewerage costs, it was not possible to quantify this effect.
2. 1 Data
In order to analyze the distributional impact of water tariffs it is necessary to have data for the amount of
subsidy (positive or negative) received by each household and for the income of the household. The following
paragraphs describe the methodology used to arrive Table 2
at these estimates. This part of the paper is restricted Long run averagef inancialc ost for pipedw ater/l
to the cities where the survey universe covered the Estimateda veragec ost of water,
whole city population (not just marginal barrios) and US$ I cubic meter
where the registers allowed an estimate to be made Operation& Total
of the volume of piped water consumed at a Maintenance
household level. Managua 0.27 0.47
2.1.1 Cost and subsidy estimates Merida, Ven 9 0.09 0.13
For eash system, a benchmark tariff was estimated Sonsonate, ES 0.11 0.18
on the basis of cost projections including operation Santa Ana ES 0.10 0.17
and maintenance and capital costs (financial charges
plus depreciation). This tariff is set to generate a real San Miguel, ES 0.12 0.21
rate of return of 12%. Table 2 summarizes the Panama & Colon 0.59 0.71
resulting estimates. This allows us to establish Note: 1/ Thesed ata in generarle flecot nlyt he cosot f pipedw ater
whether a given household is receiving a subsidy. productioann dd istributioann d do not includeth at of wastewater
Those who pay less than the benchmark tariff are coilectioann dd isposael,x cepitn the caseo f Meridaa nd Panama,
defined as subsidized, while those who pay more are wheren os eparatdea taw erea vailabfloer w atear lone.
being over-charged. Using this framework, the paper
explores the way that differential pricing redistributes
resources between consumers. Table 3
2.1.2 Household income estimates Who gets piped water services?
The household surveys generated data for monthly % ofh ouseholdinse achq uintilwe itha domesticco nnection
household income based on the incomes of all 1 2 3 4 5 All
household members from all sources.1° These data Managua 93 97 98 97 98 97
permit ranking households by per capita income and
grouping them by quintiles from poorest (1) to richest Merida, Ven 100 100 100 100 100 100
(5). This analysis could only be done where the SonsonateE, S 71 80 84 93 94 84
survey universe covered the whole city population and
not just marginal barrios, as in the latter case no data Santa Ana ES 84 92 98 99 100 95
are available for the upper range of household San Miguel, ES 54 65 67 79 86 70
incomes. Table 3 shows the percentage of Panama and Colon 98 95 99 100 100 98
households in each income quintile with a domestic
connection for potable water.
For Managua, Merida and Panama & Colon, coverage is very high (close to 100%) for all income groups. This
means that low-income households are likely to receive an important share of any subsidy, unless they are
9 For Meridan o data are availablefo r capitalc osts.T hef ull cost is estimatedfr om the availabled ata for O&M cost applying
the averager atiob etweenf ull and O&M cost reportedf or the other cases.A morer ecents tudy reporteda somewhath igher
figuref or totalf inancialc ostf or the Meridas ystem,o f $0.22 per cubicm eter( OXERA,1 999).H owevert,h is relatest o a later
period.T he abovee stimatefo r waterc osts haveb een used in ordert o maintainm ethodologicaclo nsistencyb, ecauset his
number relates to the period when the survey data were gathered (1996). Note: even if the total average financial cost were
higher than is here indicated,t he pattem of cost distributionb etweeni ncomeq uintiles( which is the main focus of the
present study) would not be affected
10 Where the informant knew the job of a household member but not their income, income was imputed from the average
valuer eportedb y other casesi n the samed atabasew ith the samet ype of job.
subject to disproportionate rationing or discriminatory pricing. In contrast, in the three Salvadoran cities of
Sonsonate, Santa Ana and San Miguel coverage is lower, and is strongly correlated with income.
2.1.3 Water consumption and expenditure estimates
The surveys measured expenditure on piped water for all Table 4a
cases and registered the volume consumed where meters Average household piped water consumption
were installed (table 4a). For households without meters, for metered households
consumption was imputed using regression analysis of the
households with meters to identify the main independent witha metereddo nesUcmocn nection
variables (apart from price) linked to consumption. The
determinants of water consumption varied from city to city. 1 2 3 4 5
They included: the frequency of the piped water service, per Managua 25 57 29 31 28
capita household income, number of people in the household, Med
geographical location, the size of the dwelling or plot, and a,Ven 49 35 37 43 40
storage capacity for water. The resulting coefficients were SonsonateE, S 35 26 34 27 28
used to estimate piped water consumption for un-metered SantaAnaES 25 31 33 30 31
households. The analysis is restricted to the cities with
sufficient observations of metered consumption to permit this San Miguel, ES 30 34 27 29 26
imputation: Managua, Panama, Merida and the three cities in Panama and Colon 30 29 31 30 37
El Salvador.__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ NoteT: herew eres ufficienotb servatioinns e achc asefo r
Based on this procedure, table 4b shows estimated thea veragteo b es tatisticalslyig nificant.
consumption in all houses with a network connection, by
household income quintile.” There is little evidence of discriminatory rationing in low-income areas. Average
consumption is higher in the wealthier quintiles in only two cases (Panama and Santa Ana); in all the other
cases, consumption is similar across income groups. This is consistent with the fact that Merida and Managua
have relatively good coverage and service frequency across the whole network, while both Sonsonate and San
Miguel are small cities where rationing is undertaken in a relatively uniform fashion.
Table 5 shows piped water expenditure for households with a domestic connection, and table 6 shows the
implicit price per cubic meter, derived from tables 4 and 5. There is a significant cross subsidy from richer to
poorer households only in Managua, where the richest quintile pays 53% more per cubic meter than the
Table 4b Table 5
Estimated average household piped water Averagee xpenditureo n pipedw ater
consumptionfo ra ll households US$p erm onths pento n pipedw aterb y householdins
M3 per monthc onsumebdy householdins eachq uintile eachq uintilwe itha domestcico nnection
witha domesticco nnectioin,c ludinigm putecdo nsumption 1 2 3 4 5
for unmeterecdo nnections
1 2 3 4 5 Managua 3.5 4.0 3.9 5.0 5.8
MeridaV, en 2.9 1.7 2.1 2.0 3.5
Managua 23 34 25 26 26 SonsonateE, S 5.6 4.7 7.4 5.3 6.2
Merida, Ven 43 38 38 40 39 Santa Ana ES 5.0 7.5 6.9 6.0 6.7
Sonsonate, ES 30 26 30 27 27 San Ana ES 5.7 7.5.3 6.3 7.0
Santa Ana ES 25 29 30 31 34 San Miguel, ES 5.7 7.4 5.3 6.3 7.0
San Miguel, ES 30 31 27 30 27 Panama and Col6n 8.4 10.7 11.2 10.7 12.6
PanamAa nd Colon 28 28 30 31 36 NoteF: orh ouseholwdsit houwt atemr etercso nsumption
Note:F orh ouseholwdsit houwt atemr etersc onsumptioisn is imputedS.e ete xtf ore xplanation.
imputedS.e ete xtf ore xplanation.
poorest (table 6). This reflects the failure of INAA (the operating company at the time of the survey) to collect
more than symbolic fees in marginal barrios, which received a good service. In the other cities there is much
less evidence of cross subsidy: in Merida the richest pay only 28% more per cubic meter than the poorest; in
Sonsonate, 28% more; in San Miguel, 37%, in Panama, 13%, and in Santa Ana there is no difference at all.
11 It might be arguedt hat the procedurea doptedf or imputingc onsumptionfo r un-meteredh ouseholdsis likelyt o resulti n
an underestimateb,e causeth e meteredc aseso n which the imputationis basedf ace positivem arginapl rices.I n contrast,
the un-meteredh ouseholdfsa ce a zero marginapl ricea nd are thereforel ikely- cetensp anbus- to consumem ore than a
similarm eteredh ouseholdT. his effecti s iikelyt o be greateswt hen the supplyi s less rationed.I n futurew orkw e proposet o
refinet hese estimatesb y developinga methodologyto take accounto f these price and rationinge ffectsw hen imputing
consumptionfo r un-meteredh ouseholds.
2.2 The incidence of subsidies
In this section,t he data derivedi n Section2 .1 are used to analyzet he distributiono f subsidies.” Subsidy”i s
defined as the shortfall between the amount charged and the benchmark tariff, which reflects the estimated
efficientc ost of waters ervice,w hileh ouseholdsp ayingm oret hant he benchmarkt ariffa re deemedt o be “over
charged”. In order to assess distributive impact, the total Table 6
subsidy received or over-charge paid by each quintile is
estimated. In cities with high coverage, subsidies are Averageu nit priceo f pipedw aterb y quintile
distributedr elativelye venlya cross incomeq uintiles,w ith the US$/m
result that the preponderanceo f benefts accruet o the non 1 2 3 4 5
poor. Only in the two Salvadoran cities with relatively low
coverage (Sonsonate and San Miguel) does a different Managua 0.15 0.12 0.16 0.19 0.23
pattern emerge. Since in these cases, the water users as a MeridaV, en 0.07 0.05 0.06 0.05 0.09
whole are being over charged to generate transfers to the
national water company, ANDA, and the poorer households S 0.18 0.18 0.25 0.19 0.23
who are excluded from water coverage avoid paying this; the Santa Ana ES 0.20 0.26 0.23 0.19 0.20
resulting distributive impact within the water system is SanM iguelE, S 0.19 0.24 0.19 0.21 0.26
progressive. The following sections detail the steps of the
analysis. Panam&aC olon 0.31 0.38 0.37 0.35 0.35
2.2.1 Subsidiesa t the quintile level Note:D erivefdro mta bles4 and5 .
Table 7 compares the price paid in each quintile (taken from Table 7
table 6) witht he benchmarkta riff presentedin table 2, to show
the amount of implicit subsidy each quintile receives. In Averageu nits ubsidyo f pipedw aterr eceived
Managua and Panama all users are quite heavily subsidized by the quintile
and the level of subsidyi s fairly uniform across quintiles.I n US$p er M3 of subsidyr eceivebdy the householdsin
Meridat here is less subsidy but once again it is fairly even eachq uintilwe itha domesticco nnection
across quintiles. In Sonsonate the average price of water is 1 2 3 4 5
very close to its real cost. Low-income users (the first two
quintiles)a re neithers ubsidizedn or over charged,b ut higher Managua 0.32 0.35 0.31 0.28 0.24
incomeu sers pay a small surcharge.I n San Miguelt here is a MeridaV, en 0.06 0.09 0.08 0.08 0.04
small subsidy to the very poorest and a small surcharge on
the richest. In Santa Ana everyonei s overcharged,a nd at SonsonateE,S -0.0050 .00- 0.07- 0.01-0 .05
about the same rate. Santa Ana ES -0.03 -0.09 -0.06 -0.02 -0.03
The total amount of over chargingo r subsidyr eceivedi s a SanM iguelE, S 0.02 -0.03 0.02 0.00 -0.05
function of the unit price of water per cubic meter, compared
with its cost, and of the volume of water consumed in the Panamaand 0
quintile.T his, in turn,d ependso n the averagec onsumptionfo r NoteD: erivefdro m tables2 and6 .
householdsw ith a domesticc onnectiona, nd on the proportion
of householdsw ith pipedw ater.
Table 8 shows the average amount of subsidy Table 8
received by each household with a water Averagem onthlys ubsidyp er householdb, y quintileU, S$
connection. In Managua the global average month
monthlys ubsidyi s $8.08p er householda ndt he
amount received varies little by income level. In 1 2 3 4 5 Total
Panama the average is $10.88 per month and Managua 7.28 12.04 7.75 7.20 6.14 8.08
varies little across income groups. In Merida
there is a lower subsidy of $2.72, again Merida 2.72 3.21 2.85 3.19 1.64 2.72
uniformly distributed. In the three Salvadoran Sonsonate -0.14 -0.01 -1.99 -0.35 -1.32 -0.76
cities studied there is considerable SantaA na -0.75 -2.56 -1.80 -0.74 -0.94 -1.36
overcharging, ranging from US$0.24 per
household/month in San Miguel to US$1.36 a S. Miguel 0.49 -0.83 0.50 -0.06 -1.29 -0.24
month in Santa Ana. In San Miguel and Panama & 11.13 9.25 10.24 11.03 12.75 10.88
Sonsonate the over charging for the lowest Col.
income groups is much lower than that for the
higheri ncomeg roups. SourceD: erivefdro rnta bles1 through7 .
Table 9 Table 9 shows total monthly subsidy by
quintile, taking account of the proportion of
Total monthlys ubsidyr eceivedb y all householdsin each householdsc onnected to the system. The
quintile, US$ month systems in Managua and Panama are both
1 2 3 4 5 Total heavilys ubsidizedt,o the tune (respectivelyo) f
$1.3 million and $2.4 million per month. In
Managua 231,263 399,205 259,705 238,797 205,555 1,334,524 each case, this subsidy is distributed fairly
Merida 18,869 22,266 19,716 22,122 11,331 94,305 evenly across income groups, with rich and
Sonsonate -250 -13 -4,212 -814 -3,138 -8,427 poor benefiting alike. In Merida the total
subsidy is much lower ($94,000 per month),
SantaA na -3,784 -14,156 -10,587 -4,394 -5,656 -38,577 reflectingt he smaller size of the city and the
S. Miguel 1,120 -2,271 1,405 -202 -4,686 -4,635 lower subsidy per cubic meter. In El Salvador,
the water company ANDA is shown to be
Panama& 493124 397,505 458,617 498,710 576,552 2,424,509 transferringa significanta mount of resources
Col. from Santa Ana ($38,500 per month) and
SourceD: erivefdro mt ables1 through8 . smaller amounts from the, other two cities,
presumablyto coverc osts in San Salvador.
Table1 0 The estimatesp resentedin tables8 and 9 are
based on a benchmark tariff that reflects the
Averagem onthlys ubsidyp erh ouseholdb,y quintileb, ased full cost that an efficient company ought to
onlyo n Operatioann dM aintenancceo stsU, Ssm onth incurr , as reported in table 2. However,t he
1 2 3 4 5 Total waterc ompaniesc’ ash expendituresa re lower
Mvanagua 2.70 5.22 2.80 2.03 1.04 2.76 than this, because in general they make
Manaa 2inadequate provision for asset depreciation
Merida 0.96 1.65 1.27 1.54 0.01 1.09 and do not normally pay for capital finance,
Sonsonate -2.25 -1.83 -4.08 -2.27 -3.22 -2.73 which is granted by the Government.
Santa Ana -2.49 -4.59 -3.88 -2.89 -3.30 -3.43 Tables 10 and 11 repeat the same
c alculations as tables 8 and 9, but this time
S. Miguel -2.17 -3.66 -1.97 -2.75 -3.76 -2.86 onl th prto n aneac ot r
* ~~~~t~h~e ~O~p~e~ra~t~io~n~ aonndl yM aintenance costs are
Panama & 7.83 5.88 6.62 7.35 8.46 7.23 taken in account. The results show a much
Col. Iower monthly subsidy per household in
Source:D erivefdro mta bles1 throug7h. Mangaua, Merida and Panama, at $2.76,
$1.09 and and $7.23 respectively, compared
with the full cost estimates of $8.08, $2.72 and $10.88.
Table 11 showst he monthlyt otal subsidyf or each system,b ased only on operationa nd maintenancec osts.
Once again the subsidies in Managua, Merida and Panama are smaller than those reported in table 9. In both
Managua and Panama, transfers from the central government finance part of the subsidy. The rest is
Table 11 accounted for by deferred maintenance: the
company spends less than it should on
Total monthlys ubsidy receivedb y all householdsi n each programmedm aintenance,w hich is likely to
quintileb, asedo nlyo nO peratioann dM aintenancceo sts,u s$ shorten the life of equipment.I n El Salvador,
when only O&M costs are taken into account,
1 2 3 4 5 Total the small cities of Santa Ana, San Miguel and
Managua 85,841 172,932 93,904 67,227 34,729 454,634 Sonsonate are shown to be veritable milchcows.
They generate surpluses ranging from
Merida 6,623 11,460 8,795 10,682 93 37,653 $30,000 to $98,000 per month for the water
Sonsonate -4,031 -3,681 -8,627 -5,307 -7,630 -29,276 company ANDA, to help offset deficits
SantaA na -12,579 -25,375 -22,867 -17,216 -19,827 -97,865 elsewhere.
S. Miguel -4,944 -10,014 -5,559 -9,163 -13,625 -43,305
Panama& 346,849 252,614 296,341 332,624 382,785 1,611,214
SourceD: erivefdro mta blesI throug8h.
Ta1b2le tToh ec easltcimulaattee s dtheeri veddis atrbibouvetio cna no bfe utosteadl
Percentage of total subsidy received by each quintile, and subsidy.12 Table 12 summarizes the
progressivitiyn dexf or each system/,l 1 findings reported in tables 8-11. In
1 2 3 4 5 Index of Managua, Merida and Panama subsidies
progressiveness are distributed more or less uniformly
/2 across quintiles and the system is neither
progressive (in the sense that it favors the
Managua 17% 30% 19% 18% 15% 0.06 poor more than the rich), nor is it
Merda 20% 24% 21% 23% 12% 0.06 regressive. In each case, the index
Sonsonate/I 3% 0% 50% 10% 37% 0.31 number for the degree of progressivity is
Sonsonat3 %closteo zero. In Santa Ana, the burden of
Santa Ana /1 10% 37% 27% 11% 15% -0.06 over-charging is uniformly spread so this
S. Miguel /1 -24% 49% -30% 4% 101% 0.82 system is also neutral in distributive terms.
The neutrality in the incidence of
Panama & Colon 20% 16% 19% 21% 24% -0.04 subsidies across income groups shown
Notes1: / Fort het hreec itiesin El Salvadothr et ables hows% of totali mplicit by these results contrasts with the stated
over-chargipnagi db yt heq uintileIn. theseth reec asesa, negativfieg ureim plies goal of tariff/subsidyp olicieso f protecting
a subsidy.I nt heo therc asest,h et ables howsth e% of totasl ubsidyr eceivebdy the poor. However, in both Sonsonate
theq uintile2./ Thep rogressiveniensdse xis d efineodv ear rangoef -1 to +1,w ith d S MI th better ff a much
a zerov aluere flectinnge utrality-1, rflectingm aximumre gressivene(sasllt he an an igue, e e o p y
subsidyg oest o the richesqt uintilea)n d+ 1m aximumpr ogressiven(easlslt h e more than an equal share of the excess
subsidyg oesto thep ooresqtu intile). charges levied, and are therefore
progressive in a distributive sense. This
arises because water coverage is low in the poorer quintiles and the rich pay a little more per meter than the
2.2.2 Sewerage coverage and charges
It is clear from the foregoing analysis that where piped water supply coverage is high, subsidies appear to be
relatively evenly distributed across income groups. However, an important element of regressivity arises from
divergent sewerage connection rates across income groups. In all these cities, apart from Managua, the water
tariff is the same for those with or without sewerage services, because sewerage coverage is supposed to be
mandatory, and the charges are levied for a composite
Table 13 service. However, in practice, many poor households do
Percentageo f householdsin each quintilew ith not have sewerage connections (table 13).
a seweragec onnection At present, many of these systems are being prepared for
1 2 3 4 5 privatization, with major investments slated for the
collection and treatment of wastewater, in order to improve
Managua 38 49 53 66 78 environmental conditions. This will mean significant tariff
Merida 96 97 100 100 98 increases. In this context, priority should be given to
5S0o nso7n0a te 71 83 88 increasing the sewerage connection rates of low-income
Sonsonate 50 70 71 83 88 households, which normally generate bigger
Santa Ana 57 76 80 84 92 environmental and health gains than the installation of
S. Miguel 43 59 59 75 82 wastewater treatment systems1.4 To ensure equity, only
households that are physically able to connect to the
Panama_ & Colo_n 42 41 67 69 80 sewerage system should be charged for this service 5. This
will also give the operator a clear incentive to extend
12T hise xerciseh asb eend oneo nlyf or the full costt ariffa nd not for the Operationa nd Maintenanctea riff.
13W hen the cumulativec urvec rossest he 45-degreeli ne,t his introducesa degreeo f ambiguityin to the findings.F or the
calculationo f the progressivenesisn dex in table 12, this paper simplyn ets out the areasa bovea nd below the line to
producea globalf igure.
14 Howeveri,t shouldb e notedt hat the environmentaaln d heathg ainst o be had from installings eweragew hereg ood
latrinesa lreadye xista re normallys mall( ESAC onsuiores,1 999).I t is alwaysa dvisableto makea carefuls tudyo f the costbenefdre
lationshipto be expectedfr om imposings trictere nvironmentanlo rmsr elatedt o wastewatemr anagemenot n water
system operators.
15N otet hat the proper criterionf or levyingt he chargei s accesst o the service,n ot connection to the service.I f charges
wereo nlyl eviedo n householdsc onnectedto the sewerm ains,t herew ouldb e a financiadl isincentiveto connect.
coverage,a s doings o will generatea dditionatla riff revenue.
2.2.3 Implicationfso r the politicael conomyo f tariff reform
The underp ricingo f water bringsd amagingl ong run consequencesin the form of underi nvestmenat nd poor
serviceq uality.T he patterno f subsidyd istributionin dicateda bove is also inefficientf rom the point of view of
socialp olicy,s incea large proportiono f the total subsidyg oes to householdsw hod o not needi t. Howevert,h e
situationm ay be difficult to change.U nless financialp erformanceis so weak as to require large current
transfers,t he Government’sfi scal motivef or reform may be limited .On the otherh and, in many cases, if all
subsidiesw ere to be removed,p oor householdsw ith pipedc onnectionsw ould be negativelya ffected,f acing
increasedt ariffsa nd reducedr eal incomes1.6
None of this removest he casef or reformt o increasee fficiencya nd recoverc osts throught he introductiono f
regulatedp rivateo perators.H owever,it does suggestt hat, where coveragei s alreadyc lose to 100%,t he
politicale conomyo f reform is different.I n citiesw ith low coverage,t he poor will gain unambiguouslyfr om
improvedc overagea, nd have little to lose from tariff adjustmentsa, s they are presentlye xcluded.H owever,
where the poor alreadyh ave accessa nd receivea proportiono f the existings ubsidy,t hey standt o lose from
tariff reform if it is not carefully designed. Opponents of reform might form alliances with low-income
communitiesw, ho have a reasonablefe ar that they will be negativelya ffectedb y the tariff changesi mpliciti n
sectorr eform and privatep articipationT. he privatizationp rogrami n Panamah it this sort of politicaol bstaclei n
late 1998, and was put on hold as a result.
It may then be necessaryfo r the politicalv iabilityo f reform to designs ubsidym echanismst argetedt o the
pooresth ouseholdsa nde nergeticallyto publicizet his policy.M anyc ommentatorsb elievet hatt he inclusiono f
a subsidyg uaranteefo r the pooresth ouseholdsw as crucialt o the successo f sectorm odernizationin Chile in
the 1990s. Another strategy to promote reform was developed in a World Bank project in Managua in 1996.
Poor communities in informal settlements generally enjoyed relatively good service and were paying well
below cost for water service. However,f ocus group consultationsr evealedd issatisfactionw ith the lack of
formalizationa nd with the failure to replacei mprovisedlo cal distributionn etworksw ith properlye ngineered
systems,i ncludingm eters( considereda symbolo f tenures ecurity)T. he communityw as willingt o pay morei n
return for the correction of these problems. The water company therefore developed a program to link
formalizationa nd reengineeringw ith tariff increasesi n the citys asentamientosA. similar program coupling
formalizationa nd physicalu pgradingw ith the initiationo f chargingf or water servicesh as beend evelopedf or
the World Bankp roject,P ROMUEBAC aracas.
Another finding is that centralized systems may be dogged by cross subsidies between cities. It is common
for the metropolitans ystemt o absorbr esourcesfr om the smallerc ities,w hose politicali nfluencei s less.T his
seems to be the case in El Salvador,w here all three non-metropolitansy stems were over-chargedA. s it
happens,t his over-chargingi s done in a relativelyp rogressivew ay (i.e. it falls mainly on the wealthier
households). Nevertheless, in such situations, secondary cities are likely to be strong supporters of
decentralizations, incet hey could operates ustainablyw ith a lowert ariff. It is strikingt hat the momentumf or
decentralizationh as gatheredf orce in El Salvadoro vert he lasty ear( Walkera ndV elz6squez,1 999).
16 Thisw ouldb ee venm orec learltyh ec asei n someo therc itiesin ther egionw, hichw eren oti ncludeidn thiss tudyfo r data
reasonsa,n dw hichh avet ariffs ystemtsh atf avort he loweri ncomeh ouseholdTsh. isi s thec asei n Caracasw, heret he
waterc ompanyH, IDROCAPITAsuLp, pliews atert ot he marginabla rriows ithouct hargingT. hisi s financedb y a mixtureo f
centragl overnmensut bsidya ndc rosss ubsidfyr omt her ichera reaso f thec ity.T heq ualityo ft he servicein manym arginal
areasis veryp oorp, artlyd uet o deliberatrea tioninbgy t hec ompanyin, responsteo t hef actt hati t derivelsit tieo r no income
froms ucha reasN. everthelesesn,o ughw ateris supplietdo maintaitnh ev iabilitoyf theses ettlements.
3 The demand for improved services
Tariff adjustmentsto achievec ost recoverya re centralt o water sector reform in CentralA merica.A s seen in
the previous section, many systems run at a loss. They finance the shortfall between tariff revenue and costs
througho peratinga nd capitals ubsidiesfr om the governmenat nd througha cceleratedd epreciationo f capital.
The result is a gradual deterioration of service quality as the system becomes trapped in a “low level
equilibriumc” haracterizedb y lowt ariffs,p oor servicea nd limitso n access,e speciallyo f poorh ouseholds.T his
viciousc ircle has provend ifficultt o break, partly due to politiciansn’ ervousnessa bout the political impacto f
tariff hikes. Section 2 showed that in many systems, the poor receive part of the existing subsidy and argued
that this adds to the politicalc omplexityo f tariff reform. It suggestedt hat the politicals ustainabilityo f reform
might be improvedb y focusings ubsidieso n assuringa ccesso f the poor. However,it is difficultt o dimension
tariff and subsidyp roposalsw ithout more precisei nformationa bout what people are willing to pay for water
This section presents evidence on the demand for improved water services. It first discusses two alternative
wayso f measuringw illingnessto pay: ‘revealed preference”e stimatesa nd contingentv aluations urveysa nd
then presents the findings of the Central American studies. For several of the cities, it is possible to compare
the resultso f direct revealedp referencea nd contingenvt aluatione stimatesT. hesea re alsoc omparedw ith the
benchmark tariff needed to cover average long run financial costs and with the tariff that prevailed at the time
of the survey.
Definitionapl roblemsd ogt he discussiono f willingnessto pay. For economistsw, illingnessto pay is a technical
term referringt o the area undert he marketd emandc urve,i ncludingb oth the amountp aid to suppliers( market
price times volume) and the triangle of ‘consumers surplus” which lies above this. The latter is not paid by the
consumers, but reflects the fact that they would have been willing to pay more than the market price for the
intra-marginapl art of the total volumet hey are purchasings, incet heir marginalu tilityi s a decliningf unctiono f
the volume of consumption. When a cost-benefits tudyr eports” averagew illingnesst o pay” for water, it is
referring to the amount an average consumer would freely pay for an average cubic meter of the water they
consume, and NOT to what they would pay for the last (or marginal) cubic meter that they consume. This
average will always be greater than the marginal price, due to the existence of consumer surplus. However,
the term willingnessto pay has also come to be widely used in a looser way in discussionsa bout tariff setting
for public services. Here, it usually refers to the price that the market (or some part of the market) will bear.
This means the marginal price at which users would consume some specified volume of water. This is clearly
different from the concept of willingness to pay as used in welfare economics. To avoid confusion, in this
paper,t he term willingnessto pay is used exclusivelyto refert o “averagew illingnessto pay”.1 8
3.1 Empirical problems in the measurement of water demand
Demand curves should where possible be derived from revealed preference data. These can be taken from
water companiesc’ ommerciald atabases( which hold data on meteredc onsumptiona) nd from specialized
households urveys( whichs howw hatp eoplep ay for water from “coping”s ourcesa s well as householdin come
and consumptiond ata).T hesed ata have been used to derive demandc urves.19In moree laborates tudies,
I8 Bothc onceptso f willingnestos paya red istincftr omt hen otiono f abilityt o pay, whichr efersto the financialc apacityo f
theh ouseholidn relationto thec osto fa benchmarqku antitoyf waterc onsideretod be necessafroyr hygienaen dc ooking.
TheW orldH ealthO rganizatio(Wn HOh) asi ssueda widelyu sedg uidelinseu ggestintgh ath ouseholdssh ouldn otb ea sked
to surrendemr oret han3 .5%o f theirm onthliyn cometo payf or basicw atera nd1 .5%fo r sanitatiosne rvicesIt. mightb ea
goalo f policyto ensureth att hep oorc anb uya basica mounot f waterw ithoust acrificinmg oret hana certainp roporboonf
theiri ncomeT. hep olicym akerm ightf,o r examplew, antt o setu pt het ariffi n sucha wayt hata n averagheo useholidn the
bottom quintile pays no more than 5% of their income for a basic supply of water and its sanitary disposal. If this is
incompabblew ith the economicallye fficient ariff,a varietyo f possiblem echanismsfo r subsidyo r cross subsidym ight be
adoptedt o bridget he gap. However,m anya nalystsb elievet hat there is no good economicr easont o limit expenditureo n
water to a givenp ercentageo f income.O n this view,t he amounts pento n water shouldd ependo n the cost of water in a
given place and on the preferenceso f the dwellers.I n many cities with a stressedw ater supply,t he efficientc ost of
supplyinga basics ervicer uns well above5 % of incomea nd the householdsa re clearlyw illingt o pay such an amount,
becauseth ey do so. It is not clearw hatt he casew ouldb ef or subsidizingth is consumptionth roughl owert arffs, especiallyif
thisw ere to leadt o an increasein the volumed emandedI.f publicr esourcesa ret o be madea vailableto increaseh ousehold
incomesin thesep laces,i t may be preferableto provide generailn comes upport.
19T herea re variouse mpiricapl roblemsw ith thiss ort of analysis:
the demand curves are used jointly together with supply functions to estimate long run system equilibrium of
supplya nd demand2.0 To generatea meaningfu”l revealedp reference”d emandc urvef or water,t he minimum
information needed is the following:
* Survey data on prices and consumption for households without a piped connection, who use “coping
sources”. Where there are various sources with different prices, there might be multiple observations.
* The averagep rice-volumep ointf or householdsw itha piped servicet hat is both un-rationeda nd metered.
This providest wo or morep ointsf or a demandc urvef or the averageh ousehold2.1 The curvec an then be fitted
so long as the general functional form can be inferred. Usually, a semi-log function is used.
An alternativea pproachi s to applyc ontingentv aluationm ethodologiesw, hichw ere originallyd evelopedf or the
valuationo f environmenta”lp ublic”g oods.T he demand curve is inferredf rom the resultso f surveyq uestions
aboutw hat householdsw ould be preparedt o payf or a specifieds ervice.T his sort of work begant o be done in
the late 1980s, mainly to establish demand for rural water systems in Africa and Asia.
The standard approach in contingentv aluationi s to use “referendum”s urvey questions.T he intervieweeis
asked how he would vote on a specified change in the service, having first been told what change in cost this
would imply. People who would vote in favor are considered to have a willingness to pay for the improved
service,a t least as great as the cost stipulatedi n the questionnaireN. ormally,o nly one cost is put to each
respondent,b ut alternativec osts are postulatedt o other respondentss, o the impact of different prices (or
tariffs)o n the proportiono f positiver esponsesc an be analyzed.
This approachh as its own set of difficulties.T he trainingo f the surveyw orkersi s a delicatem atter,d ue to the
need to avoidt he intervieweirn fluencingt he response.C V data may be “contaminatedb” y strategicb idding.I f
the interviewee believes the response may have an impact on the tariff, they may deliberately under-bid in
order to procure a lower tariff. If, on the other hand, they think their response may affect the decision to
implementa projectt hat will benefitt hem, they may deliberatelyo ver-bid,i n ordert o ensuret hat the projecti s
approved.P roperlya pplied,t he “referendum”m ethods houldr educet hist ype of risk,b ut it cannote liminatei t.
The use of contingentv aluationt echniquesto determinet he demandf or pipedw ater is especiallyd ifficult.T he
technique was originally developed for valuing categorical changes (eg the value of the existence of a forest,
comparedw ith its disappearance)I.t lends itself less well to valuingc ontinuousv ariables,s uch as the volume
of water consumed in a piped service. It is difficult to address volume in a survey questionnaire. It is
meaningless to ask the question: “If the price per meter were $0.30, what volume would you purchase
monthly?” as users often have little notion of volume.
* Wherea newp ipedw aters ystemis to be constructede,x ante,o nlyt he demandfo r non-pipedw aterc an be
observe(dth roughs urveyw ork).H owevecr,o nsumptioonf non-pipewd ateru suallfya llsi ntoa rangeth ati s distant
fromt hatr elevantot pipedw ater.D emanfdo r a pipeds upplym ustb ei nferrefdr omo thers ystems.
* Meteringis neededto generateo bservationosn householwd aterc onsumptioEn.s timatedco nsumptio(nw hich
oftena ppearsin the waterc ompany’dsa tabasea s the legalb asisf or the tariffc alculationis) meaninglesfos r
economiacn alysis.
• Wherec onsumptioisn r ationedw, ec annoot bservep ointso nt hed emandc urvefr omi ndividualbse’ havioar,s they
willb ec onsuminlge ssth ant heyw ouldw isht o consumea tt hee xistinpgr ice.
* Whereta riffsa rel eviedw ithourte ferencteo thev olumec onsumedth, eyc onstitutae lumps ums ervicec hargea nd
them arginaplr iceis zero.
* In most ariffs ystemtsh erei s onlyo nem arginaplr icep ert ypeo f consumesro t herea rei nsufficienotb servationtos
derivet he elasticitoyf demande mpiricallTy.h e analysht ast o guessth e elasticitayn d use senstiviya nalysitso
showt hath isr esultsa rer obustA. n alternativwea yo f generatinsgu fficienptr ice-demanodb servationiss t o trace
changesin the realt arifft hrought ime duet o eitherin flationo r nominatla riffc hangesa, nd see howv olume
respondsH. owevethr isb egsm anyq uestionasb outt hee ffecto f moneyil lusiona ndo f changeisn otheru nknown
independenvta riables( thet imet rend),s o the empiricavl alidityo f the resultsw ill alwaysb e questionable.
20 The programS IMOPg eneratesth is sort of estimation.
21 It mightb e objectedt hat pipedw atera nd un-pipedw atera re two differentp roducts,s o that it is not legitimateto derivea
singlem arketd emandc urvef rom observationso n “coping”s ourcesa nd pipedw aterc onsumption.H owevert,h e two can
be regardeda s essentiallys imilarp roductsi f the followingc onditionsh old: 1) neithers ourcei s strictlyp otable;2 ) the piped
sourcei s not continuous( sot hat the useo f eiher servicer equiresa storages ystemi n the household)3; ) the copings ource
deliversw atert o the householda nd the full cost of this (includingh ouseholdla bor)i s accountedfo r. Thef irst two conditions
hold for the systemsc overedb y the presents tudy,a nd the estimateso f the pricef or waterf rom copings ourcesi ncludet he
full cost of deliveringth e watert o the house,i ncludingth e imputedc ost of householdla bor.
Rather, the usual type of question is the following: “If the price were
$10 per month for an average consumption of 30 cubic meters a Watedr emandc urve,P anama
month, variable in accordance with the real metered consumption p
of each household, would you vote in favor of the system…0. –
improvement I have described?” As a result, the survey can only be 8Q -@
used to estimate one point on the demand curve, reflecting the 6.0 , y.4263Ln(x)vl4 918
averagea mountt hat respondentws ould be preparedt o pay for the 4.0 15
stipulated volume. If the questionnaire were to postulate a variety of 2.0 i
quantitiesw ith differentr espondentsi,t would in theoryb e possible 00.
to observe more than one point on the demand curve. But this is 0 10 20 30 40
rarely done, due to the difficulty of concretizing the notion of volume Quant, m3amouwholdlmont
for the respondent. Table 14
Demand for water of households with and
3.2 Water demand data generated by the without a piped service
Central American water studies Without piped With piped
The surveys on which the present article is based service service
generated demand data of both the aforementioned types: M3 / US$ / M3 / US$
revealed preference estimates and contingent valuation month m3 month m3
estimates. This section summarizes the findings and
comments on their significance. San Pedro Sub, 3.55 2.46 39.50 0.24
3.2.1 Revealed preference estimates Intermediatcei ties, 2.73 1.18 33.50 0.09
All the surveys gathered data on household water Hon /2
consumption and expenditure. These are used to estimate Managua 6.30 0.71 33.70 0.19
the average price per meter and the average volume
consumed per month for a) households without a piped SonsonateE, S 530 1.65 29.40 0.18
service, who use coping sources such a wells and water Santa Ana ES 8.80 1.48 30.40 0.18
trucks; and b) households with metered piped services22. San Miguel, ES 11.40 0.41 28.60 0.18
Table 14 shows the average price paid and quantity Panama & Colon 3.55 9.51 31.40 0.21
consumed for households with and without a piped service
in each city. Those without a piped service pay between Unweighted 5.95 2.49 32.36 0.18
$0.41 (in San Miguel) and $9.51 (in Panama) per cubic average
meter of water consumed, including both the cash spent
and the imputed value of the time used for hauling the water. Consumption varies inversely with this price,
ranging from 2.73 meters per month in Comayagua, up to 11.4 meters in San Miguel. On average, these
households consume 5.95 meters at a price of $2.49 a meter, spending $14.8 per month.
The households with piped water face more uniform tariffs, ranging from $0.09 per meter in Comayagua to
$0.24 in San Pedro Sula. Their consumption ranges from 28.6 meters in San Miguel up to 39.5 meters in San
Pedro Sula. On average they consume 32.4 meters a month at a price of $0.18 per meter, spending in total
$5.82. It is obvious that there would be large economic gains for the households without piped water if they
were to be given a piped service on these terms.
These two points were used to derive a simple household demand curve, by fitting a semi-log function.24 This
was used together with the benchmark tariff reported in Section 2 to determine the equilibrium price and
quantity. 25 An example is shown here for Panama.
22 Theoreticallyo ne should use the measuremenot f unrationedc onsumptionH. owevera n analysiso f consumptiono f
meteredc lientsw ith differents ervicef requencieisn all casesr evealeda n insignificandt ifferenceb etweenth e overalal verage
consumeda nd the averagec onsumedb yt hosew ith an unrationeds ervice.T his suggeststh at householdsd evelops torage
capacityto meett heirc onsumptiong oal,r egardlesso f the frequencyo f the service.
23 The opportunityc ost of the time used carryingw ater was valueda t 40% of the averageh ourlyi ncomef ound in the
income data in the survey.
24 Strictly speaking this procedure is only valid so long as it is assumed that the households with and without domestic
connectionsa re otherwises imilar.I n fact, thosew ithoutp ipedw atera re generallyp oorer.H owevert,h is is unlikelyt o cause
These curves were used to estimate willingness to pay (WTP), based on the area under the curve (table 15)26.
The WTP for 30 cubic meters varies from $12.5 a month in San Miguel up to $140 per month in Panama.
WTP per meter ranges from $0.42 in San Miguel to $4.67 in Panama. The estimate for Panama reflects the
high value imputed to the household labor time used to carry water, which in turn reflects labor market
conditions in Panama City. 27
Table 15
Revealedp referencee stimateso f Willingness to Pay,U S$
WTP per WTP per
month meter/l
San Pedro Sula, Hon Marg. barrios 42.5 1.42
Intermediatcei ties,H on Cityw ide 17.2 0.57
Managua City wide 16.1 0.54
SonsonateE, S Citywide 30.7 1.02
Santa Ana ES City wide 37.3 1.24
San Miguel, ES Citywide 12.5 0.42
Panama and Colon Citywide 140.1 4.67
1/ The per meter estimatesre flecte stimateda verageh ousehold
consumptioinn e achc ity,d erivedfr oma pplyintgh e estimatefudl l cost
tarifft o theh ousehodlde mancdu rve.
3.2.2 Contingent valuation estimates
In each of the cities, the surveys asked contingent valuation questions to establish WTP for an improved
service with monthly consumption of 30 cubic meters. In all cases, the institutional scenario postulated
metered service with delivery at least once per day. Where households already enjoyed an “ideal” scenario
(formalized service with a 24 hour supply every day) they were asked about their willingness to pay a higher
tariff to avoid deterioration in this service. This was done in Caracas, Merida and Panama.
Only one price was put to each subject. The various prices under investigation were distributed randomly
between different subjects. The analysis is based on the percentage of “yes” and “no” answers to each price.
In most cases, the question was put in the referendum format In a few cases for households without a piped
service, it was formulated in terms of the decision to connect to a new service. The resulting estimates are
presented in Table 16. They were derived from logistical regressions, using standard methodology. In each
case the estimates were made using a linear function (for estimates of both the average and the median value)
and a logarithmic function (for the median only) . The estimates can be used to infer average household WTP
for 30 cubic meters of water per month. This is a single point on the household demand curve for water,
analogous to the point for “with piped water” in table 14, but with volume fixed in each case at 30 meters per
29 month. Since existing service conditions might affect responses, the results are shown separately for
households who already had a piped service and those who had none. In general, those without a formal piped
connection are prepared to pay more than households who have one.
a major distortiond, ue to the low income-elasticiotyf waterd emand. Thev alidityo f the procedurea lsod ependso n the two
commodities’pipedw ater”a nd Sun-pipewd ater”beinge ssentialltyh e same.( seef ootnote2 1).
25F or the presents tudy,n o iterationw as undertakenb etweent he demanda nd supplyf unctions.I mplicitlyi,t is assumed
thatt he long run cost curvei s flat.S ection3 .2.5d iscussesth e implicationos f this assumptionn ot holding.
26S eef ootnote1 8 for a discussiono f the definitiono f willingnessto pay.
27T he proportiono f familiesw ithoutp ipedw ateri n Panamais veryl ow and the numbero f observationfso r such households
in the dataseti s alsoc orrespondingllyo w. Thisf igures houldt hereforeb et reatedw ith circumspection.
28T he regressiono utputsa nd estimationp rocedureas re availablefr om the authors.
29T he contingenvt aluationr esultsd o not permiti nferencesa boutt he shapeo f the demandc urvef or lesserv olumes.A s
mentionedin section3 .1,t his wouldo nlyb e possibleif the surveysh ad solicitedr esponsesfo r a rangeo f volumes.A bsent
that, one cannota scertainw illingnessto pay in its full sensef rom contingenvt aluationw, hileo ne can from the revealed
preferenced ata (Table1 5).T he contingentv aluationd ata in table 16 reflecto nly the areao f the rectanglefo rmedb y the
price-volumep airf or 30 metersp er month,a nd do not capturet he triangleo f consumers urplusw, hich liesa bovei .
Table 16
Contingenvt aluationo f the amounth ouseholdsw ouldp ayf or 30 cubicm eters
$USp erm onthf or a formalizedco nnectionw ithm eter,d ailys ervice,c onsumptono f 30m 3/ month
Lineaer stimat(ea veragaen dm edian) Logarithmeisct imat(em edian)
Scenario: a) Improvedo r b) Newf ormal a) Improvedo r b) Newf ormal
maintainesedr vice connection/i maintainesde rvice connection/i
TegucigalpaH, on Marg.B arros 4.7 5.0 4.4 5.3
San Pedro Sula, Hon Marg. Barrios n/a 4.1 n/a 3.8
Intermedc. ities,H on Citywide 3.1 n/a 3.1 n/a
Guatemala Marg. Banios 12.0 21.8 11.1 30.7
Managua City wide 5.3 6.3 4.7 5.7
CaracasV, en:P etare Marg.B arrios n/a 14.0 n/a 11.3
CaracasV, en: LaV ega Marg.b arrios n/a 13.1 n/a 10.6
CaracasV, en: Cotiza Marg.b arrios nla 6.3 n/a 5.6
SonsonateE, S Citywide 10.0 10.8 9.7 10.6
Santa Ana ES City wide 9.6 17.4 9.2 20.0
San Miguel, ES Citywide 13.7 10.8 14.7 10.6
Panama and Colon Citywide 16.0 31.2 15.2 43.2
1/ In all butt woc asest,h esea re householdws thout a domesticc onnectiona t thet ime of the survey.T he exceptionsa reM anaguaa nd
PanamaI.n Managuath esea reh ouseholdsc onnectedill egallyt o thes ystem,w hichw ere askedt heirW TP for a formalizeda nd improved
service.I n Panamath eya re householdws itha poors ervicew, hich payn othinga s theya rec lassifieda s “socialc ases”,w ho werea sked
aboutt heirW TP for an improvesde rvice.
3.2.3 The impact of income on the Table 17
responses to contingent The impact of income on demand for water
valuation questions or of3 0
The surveysa lso permitt he analysis Averagew illingnessto pay fora serviceo f 30m3 per month,l inear estimate,U S$.
of the impact of income on payment Quintile
intention. The survey responses City and scenario 1 2 3 4 5 Cases
indicate that the poor are willing to New connection
pay similar amounts to the non-poor Tegucigalpa 3.9 4.5 6.2 10.5 5.0 471
for water (Table 17). San Pedro Sula 4.1 5.5 3.4 3.8 3.5 117
Guatemala 19.5 22.3 22.4 25.9 27.9 701
The average willingness to pay of SonsonateE, S 9.4 13.5 13.7 6.9 8.2 221
the poorest quintile for a metered, Santa Ana, ES n.a. 19.1 13.8 13.5 16.0 140
piped service of 30 m3 per month is San Miguel, ES 8.6 n.a. 9.1 10.5 10.7 193
estimated at US$8.9 per month, Average 7.7 11.2 10.2 10.7 10.9
compared with between $10.2 and Improveds ervice
$10.9 for the second, third and Tegucigalpa 3.9 4.9 5.4 3.7 5.3 304
fourth quintiles. Guatemala 9.2 12.0 10.2 12.9 14.1 820
Managua 4.4 4.8 5.4 6.6 10.1 942
However, there is a more SonsonateE, S 8.8 7.2 7.8 12.0 29.5 108
divergence between the WTP of the Santa Ana, ES 8.1 9.4 9.2 9.9 10.2 236
poor and non-poor for households San Miguel, ES 10.2 12.7 10.4 n.a. 28.6 248
without a piped connection. In this Average 7.4 8.5 8.1 9.0 16.3
case (whecna stthhee (wsseehrvnvi icceeooffffreerde d iss aa PMaanianmtaai& n Cesodel 6rnv ice 16.4 14.5 15.7 15.0 19.9 1191
new connection) the average WTP GlobalAverage 8.9 10.9 10.2 10.9 14.5
for the poorest quintile is $7.7 per n.a. = not avaiable
month compared with between
$10.2 and $11.2 for the second, third and fourth quintiles.
3.2.4 Revealed preference and contingent valuation estimates compared to benchmark and current
Table 18 compares the demand estimates yielded by the revealed preference and contingent valuation for the
cities where both estimates are available. The estimates of the price at which demand would be 30 cubic
meters a month are broadly commensurate (columns 3 and 4). Only in two cases do the two estimates differ
by more than 100%; in 3 cases they differ by less than 50% and in two cases, by between 50% and 100%. The
contingent valuation methodology does not appear systematically to distort the estimate upwards or
downwards compared with the revealed preference estimate. In three cases, the revealed preference estimate
is the higher of the two; in four cases the contingent valuation estimate is higher. Nevertheless, the divergences
are in general too great to concludet hat contingentv aluationi s an acceptables ubstitutefo r good revealed
preferenced ata.
Table 1 8
Comparisono f the presentta riff and the full-costt ariff with thec ontingentv aluationp rice andt he revealed
preferencep rice atw hichd emandw ouldb e 30m
3 . (US$ per m3)
Present Bench-markC ontingevnat luatioens timate Revealepdr eference
tariff fullc ostt ariff of pricea tw hicha verage estimatoef pricea tw hich
consumptiowno uldb e3 0 averagceo nsumptiowno uld
mr/I be 30 m3
TegucigalpHa,o n 0.11 0.22 0.15 n/a
SanP edroS ulaH, on 0.13 0.26 0.13 0.49
Intermediactieti esH, on/ 2 0.07 0.35 0.10 0.14
Managua 0.25 0.47 0.16 0.23
SonsonateE,S 0.18 0.18 0.32 0.16
SantaAnaES 0.18 0.17 0.31 0.19
SanM iguelE, S 0.18 0.21 0.49 0.17
Panama ndC ol6n 0.25 0.71 0.51 0.40
Table 18 also compares the demand data with the existing tariff and with the benchmark tariff estimated to
reflect long run cost.W ith the exceptiono f the threeS alvadoranc ities,t he averaget ariff is at presentl ess than
half of the benchmarkt ariff, indicatingth e need for a sharpt ariff risea crosst he boardi f these systemsa re to
reach financial sustainability.
3.2.5 Estimation of demand response to raising tariffs
Table 19 estimatesth e averagec onsumptionth at Table1 9
would result if water meters were installed and Average consumption when the price is set at the
the price was set at the benchmarkt ariff. This benchmarkta riff,r eflectinglo ng run cost
would vary from 13.7 cubic meters per month in Pricep er Cubicm eterps erm onth,
Managuau p to 38.7 meters in San Pedro Sula. meter, fromr evealepdr eference
We can concludet hat in most cases, although US$ demandcu rve
people are willing to pay more for water, they SanP edroS ulaH, on 0.26 38.7
would not consume3 0 cubicm eters per month at Intermediactieti esH, on 0.35 25.4
the full cost tariff. Only in San Pedro Sula and Managua 0.47 13.7
SantaA na would averagec onsumptionb e above SonsonateE,S 0.18 29.4
f3o0u cr ucabsice ms,e itt werosu altd t bhee sbigennicfihcmanatrlkylto awrieffr,. aW nidth iinn SPSaaannnM taaAmig nau6ane E dlE,SC S o l6n 000…721171 232075…193
those averages, the demand for the poorer
householdsw ould tend to be lowert han the rest.T hesef indingss houlds ervea s a warningt o plannersn ot to
assume consumptiono f 200 litersp er personp er day as the minimums ervices tandard,w hichi s the volume
consistenwt ith 30 cubicm etersp er monthf or householdsw ith 5 members.
In manyC entralA mericanw aters tudies,t hisn umberi s useda s a standardp lanningp arameteri,n conjunction
with populationp rojectionsi,n ordert o determines ystemi nvestmenrte quirementsT. he resultsp resentedh ere
together with the fact that 30 m3 is at least three times more than is needed for basic hygiene purposes in most
situationssu ggestt hat services tandardss houldb e moref lexible.
The bestw ay of achievingfl exibilityis to remitt o the consumert he decisiona bouth owm uchw atert hey wantt o
consumea nd howm uch theyw ant to spend rathert han beingr equiredt o pay for amountsth at they would not
otherwisec hooset o consume.
4 The impacto f water meters and The effecto f meteringo nw ater
attitudes towards their consumptionin PanamCn ity
Section3 concludedt hat individuaml eteringm ay be £
used to manage demand and thereby avoid over- E
dimensioning investment schemes and inflating ,, 50 \
costs. It is also attractive because it allows a
households to determine how much water they are | 45 _\-
prepared to pay for. In contrast, if they are E 40 –
automatically billed for a fixed estimated 0
consumption volume and pay a marginal tariff of 3
zero, this will tend to stimulate demand.. 30 –
How much difference can metering make in 1 2 3 4
practice?I n Panama,a n estimatew as made of the Monthss incem eterings tarted
impact of metering by tracing measured
consumptiono ver the first four monthso f metering. Table2 0
It was assumed that the consumption in the first
month reflected un-metered consumption and that
after four months behavior had adjusted to the Average metered monthly consumption of newly metered
realityo f payinga positive marginalp rice for water. householdisn Panamab etweenM ay 1997a ndA pril 1998
The exercise revealed that metering reduced Monthss incem eteringb egan
consumptiono f normalr esidentiacl lientsb y 22%. In %
contrast, low-income clients and small town users, 1 2 3 4 change
whose consumptionw as alreadyl ower on average ResidentiaPla, nama
than the residential group, registered increases, city 55.1 37.6 39.5 42.8 -22%
which probably reflect the fact that prior to the
installation of meters they experienced rationing Special(lowincome) 270 29.3 30.3 28.7 6%
(table2 0 and graph). Interio(rs maltlo wn) 36.1 39.8 38.2 40.4 12%
However, there remains much nervousness in SourceC: ommercdiaal tabasoef IDAAN
policymaking circles about the public’s reaction to
water meters,a nd apocryphasl toriesa boundo f violentr esistanceto their installation.E achs urvey addressed
attitudest o water metering( table2 1).
The surveyse ncountereda n overwhelminglyp ositiver eactiont o meteringa s the fairest way to distributet he
costs of the water service. However, in cities with poor service quality, skepticism was expressed about the
accuracy of the meters. The studies also found that informal communities on land with disputed title often
welcomed metering coupled with the formalization of the water service, as a proxy for tenure. Table 22
summarizes the proportion of informal users who favored obtaining a formalized metered connection; in no
Table 21
Attitudes towards water meters
Which of the folowing is the fairest way to decide the charge for water?
BarquisimetoM, erida, PanamaC ity Guatemala
% with each opinion Managua Caracas Ven. Ven. and Colon City
Meteredv olumeo f consumption 55 66 59 67 54 76
Numbeor f peoplein household 14 4 4 9 n/a n/a
Zone of the city n/a 5 7 7 n/a n/a
Abilitytopay 25 14 21 14 39 11
All should pay the same 7 6 7 3 7 11
No opinion 0 5 2 0 0 2
city was this below 74%.
One conclusiont hat can be drawnf rom these findingsi s that Table2 2
the installation of metering should be considered as a Proporton of illegal users of water services
componento f programst o upgrade service quality rather whow ould likea fonnalizedc onnection
than being pursuedi n isolation,a s has often been the case
in publicly managed water systems. Metering should be %
promoted on the basis of fairness and as a means of Managua 88
improving operating efficiency and lowering costs. Care Caracas 74
should be taken to allow a couple of months of ‘shadow Barquisimeto 81
billing”t o give users time to adjust consumptionb ehavior. MeridaV, en n/a
The provisiono f technicala ssistancet o help to identifya nd Panama 92
correct intra-domiciliaryle aks can also help to ameliorate GuatemaClai ty 94
potential consumer apprehension.
5 Conclusions
This paperh as reviewede videnceg eneratedb y households urveysa crossC entralA mericao n water use and
demand.I t used the resultingd ata to analyzet he distributiono f subsidiesa nd to compared emande stimates
generatedb y revealedp referencea nd contingenvt aluationm ethodologies.
5.1 Summary of principal findings
* Survey data confirm that across the region, households without a piped water connection spend
significanta mountso f time and moneyt o get relativelys mall amountsf or water with which they can
satisfyo nly their most basich ygienen eeds.I nvestmentsto expandt he coverageo f potablew ater to
suchc ommunitiesa re likelyt o havea very highe conomicr ate of return.
* The poora re generallyi ll servedb y the currents ystemo f global subsidiesa nd incompletec overage
common to many publicly managed water systems. However, where low-income communities do
have householdc onnectionst,h ey are normallyt he beneficiarieso f a significanta mount of the total
* The disparityo f seweragec onnectionr ates amongi ncomeg roupsw hent he watert ariff automatically
includesc hargesf or sewerages ervicesi s a considerables ourceo f regressivity.
* Contingent valuation survey responses show that the poorest urban households are willing to pay
much more per cubic meter for a piped service than is charged at present by the water company.
Howevert,h ey also suggestt hat poor householdsh avel owerW TP for a serviceo f 30 m3 I montht han
other households.
* Revealed preference estimates confirm that in many cities, if tariffs are set to recover cost,
householdsm’ onthlyd emand (especiallyt hat of poorer households)w ould fall below the standard
planningv olumeo f 30 cubicm etersa monthp er householdw, hichi s widelyu sed in the region.
* Water meteringi s not as unpopulara s is often thought.F acedw ith the choiceo f alternativew ayso f
distributingth e costo f the serviceb etweenu sers,m ostc hosem eterso ver otherp ossibleo ptions.
5.2 Implications for tariff and subsidy policy
* Poor householdsw ithouta piped water connectionc urrentlyp ay much more for water from coping
sources than those with access and contingentv aluationd ata suggestt.h at most householdsa re
willing to pay substantiallym ore than the currentt ariff for an improvedp iped water service.P olicy
makerss hould thereforea ssess,r ather than assume,t he need for subsidies.T he poor are better
servedb y gaininga ccesst o pipedw ater rathert hanb y the continuationo f globals ubsidies.
* Tariffss houldb e graduallyr aisedt o levelst hat reflectc osts in order to permit sustainede xpansiono f
coveragea nd improvementsin serviceq uality.
* Tariffs tructuress houldb e as simplea s possiblew, ith a standardf lat rate per cubic meterc onsumed,
reflectingt he total financialc ost of the system’so peration.O ne-off connectionc hargesm ay impede
access,s o thesec ostss houldb e recoveredlt hroughm onthlyc harges.A ny subsidys houldb e targeted
to the poor and shouldf ocus on increasinga ccess.R ising block tariffs are an ineffectivem eanso f
targetings ubsidiesb, ecauset he incomee lasticityo f householdw ater demandi s low.
* Low-incomeh ouseholdss houldb e givent he freedomt o decidet heir level of water consumptiona nd
expenditurer,a ther than being requiredt o pay for amountst hat they would not otherwisec hooset o
consume.T his would militatef or expandingm eteringa nd reducingm inimumc onsumptionb locks in
the tariff structure. Metering should be promoted on the basis of “fairness” and as a means of
enhancingo peratinge fficiency( identifyingle aks and discouragingw astage).B ut meterss houldn ot be
installed in isolation: they are useless unless the service quality is improved and appropriate tariff
structuresa re put in place.
• Tariffs should not be charged for sewerage unless there is a sewer line adjacent to the dwelling;
programs should be developed to help poor households finance the connection to the sewer; and
investmenpt rogramss houldi ncludep lanst o increases eweragec onnectionin low-incomea reas.
Raisingt ariffs to cost-reflectivele velsw ill have a disproportionateim pacto n the real incomeo f the
poor, for whom water comprisesa larger share of their consumptionb askett han for the non-poor.
This, in turn, may serve as a pretext for mobilizing political opposition to tariff reform. Therefore, in
cities where the poor already have access to piped water service, policy makers should consider the
inclusiono f temporaryta rgeteds ubsidiesfo r the pooresth ouseholdsto ameliorateth e negativeim pact
of tariff adjustments.
6 References
ESA Consultores (1995) Encuesta de usuarios de agua en Honduras: Hallazgos principales. Banco
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BarquisimetoV, enezuela.
(1996 d) Estudiod e Disposici6na pagar por serviciosd e agua y alcantarilladoe n
Merida, Venezuela.
(1996 e) Hallazgos de Encuesta de Hogares para la ciudad de Santa Ana, El
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OXERA (1999). Estudio de Tarifas para la empresa de agua de M6rida. Report to the World
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Annex 1: Survey data used in this study
Table A.1.1 provides an overview of the survey data used in the present paper. The surveys used similar
methodologiesi,n cludingr igorouss amplingp roceduresb asedo n the best availablec artographya, nd were
subjectedt o strictq ualityc ontrol.T hey generatedla rgelyc omparabled ata for householdin comea nd wealth,
the coveragea nd qualityo f water and sanitations ervices,e xpenditureso n and consumptiono f water from
differents ourcesa nd willingnessto pay for improveds ervicesT. he executeds amples izesr angef rom 227 to
2,163 households.
Table A.1.1
Survey data used In this study
Surveyd ata Exchangrea te
Universe Date Samplsei ze Universseiz e Locacl urrency
(executed) (households) unislUS$
TegucigalpHa,o n Marginabla nTos Mar-95 1273 30121 9.13
SanP edroS ulaH, on Marginabla rrios Mar-95 236 2528 9.13
ComayaguHa,o n Cityw ide Mar-95 227 6399 9.13
Guatemala Marginabla rrios Oct-97 2163 42104 6.1
Managua City wide Nov-95 1639 170894 8.43
MeridaV, en Cityw ide May-96 980 34637 290
SonsonateE,S Citywide Jun-96 444 12596 8.77
SantaA naE S Cityw ide Jun-96 502 30036 8.77
SanM iguelE, S Citywide Jun-96 347 21075 8.77
Panama ndC olon Citywide Sep-98 1613 226152 1

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