As we've seen in previous videos, it is not easy to use a pipe water in sanitation network to deliver subsidies to poor households. Providing everyone with subsidies water services is not only requires very large financial subsidy these with accompanying opportunity costs, but it also leads to wasteful water use. This is especially true in hot, dry locations. Increasing block tarrifs have a strong, intuitive appeal, but as we have seen, they do not target subsidies effectively to poor households. The errors of inclusion that result from IBTs are typically very large. The joy in approach of means testing households and delivering financial assistance only to poor households sounds very promising. But it's initial implementation resulted in sizeable errors of inclusion and exclusion. The Columbian approach of geographic targeting was even worse. So, what can be done? In this last video on the design of subsidies, I will describe the steps that I think should adopted in the water supply sector to help poor households. The first step is for the water utility to ensure that it has the capability to run its system efficiently. The water utility must first get its own house in order. This requires that meters be installed on all private connections. Broken meters must be fixed, meters must be read accurately and water bills delivered to customers and unaccounted for water needs to be brought under control. This package of reforms may not seem pro-poor, but it is a poorly run water utility cannot assist poor households effectively. The second step is to establish a tariff that strikes a reasonable balance between the main objectives of cost recovery, economic efficiency, in fairness single part fixed charge non volumetric tariffs should be eliminated. IBTs also should be phased out for both private and shared metered connections. And as quickly as possible, I would eliminate any discrepancy between industrial and residential water tariffs. Industries should pay the full marginal cost of the services they receive, but it's not efficient or fair to charge them more than this. Moreover it is usually counterproductive because it may drive industrial water users off the pipe network and force them to self supply by drilling their own wells. I will set the volumetric rate equal the marginal cost. The marginal costs are rising and are above average costs, this will provide the utility with excess revenues that can be used to give rebates to poor households. If marginal costs are decreasing and are below average costs, the utility will need to add a positive fixed charge to ensure cost recovery. Poorer households could be exempted from this positive fixed charge. And I would utilize seasonal water pricing if there's a large difference in water use between seasons. This will reduce the need for costly capacity expansion to meet peak demand and help keep prices down. I hope these actions do not sound too formulaic. Their timing and sequencing will have to be tailored to local political realities and the local water resources situation, but I think these actions are a good place for tariff reform to start. The third step is to do what you can to protect the poor during this reform process. I think there are three main ways to do this. It may be possible to create a system of free public taps that will serve as a safety net for poor households. Most households, even poor ones, want a private metered connection. For many water utilities, especially in middle income countries, the demand for water form free public taps is unlikely to reduce the demand for private connections or be a large financial burden to the utility. In fact, free public taps were provided in many European cities until relatively recently. This was to ensure that poor households had access to water supplies even if public taps were not the most convenient source. If subsidies are available I would use them to reduce the cost to poor households of getting connected to the pipe system. Not to subsidize the volumetric price of water. After poor households are connected, if subsidies are still available, I would use means testing to provide financial assistance directly to poor households, similar to the Chilean subsidy scheme. The Chilean subsidy scheme is well known to water sector professionals. It has many admirers, but often, people say it will not work in their country because they don't have an administrative capacity to run a means-tested program. I understand that means-testing can be challenging and may increase corruption. Officials responsible for a household's income classification may request a bribe to make a favorable determination. But I think that the IT revolution and big data techniques are making means testing much easier to implement and more feasible. For example, cell phones are now widespread in almost all developing countries. Cell phone usage is a relatively reliable indicator of household wealth. It may be possible to use cell phone records combined with other computerized databases to more efficiently and objectively identify poor households who need financial assistance to pay their water bills. And finally, I would preserve options for the poor. There are three main ways to do this. First, even if a poor household cannot afford a private connection now, we should not assume that this will always be the case. I would keep the option to poor households to have a private connection in the future. We should not lock poor households into a low level water supply equilibrium by refusing to extend services to poor neighborhoods. Second, water vending and on-selling of water by small scale providers and households with connections should be legal. Water vendors and household resellers provide unconnected households with important options. Especially when water utilities fail to provide high quality services. Poor households should not be denied these often essential services of private providers. Third, I would think hard before granting private operators exclusivity, especially for long periods. Exclusivity restricts the options that poor households need to cope with poor services and may protect private operators from competition and technological innovation. Private operators will always ask for exclusivity, but if they're really efficient in delivering high quality services they probably don't need it. To wrap up our discussion of the design of subsidies it can be easy to sympathize with the views of global leaders such as Pope Francis. He has expressed the need for more subsidies to provide improved water and sanitation services to the poor. Pope Francis said our world has a grave social debt towards the poor who lack access to drinking water, because they are denied the right to a life consistent with their inalienable dignity. This debt can be paid partly by an increasing funding to provide clean water and sanitary services among the poor. But unfortunately, Pope Francis didn't offer any advice on precisely what water and sanitation services to provide poor households or how much if anything to charge them. As we have the seen the intuitively solution of subsidizing the price of water to everyone has many problems. If you think about it in physical terms, it really isn't surprising that subsidizing the price of water is a difficult, costly way to assist poor households. One cubic meter of water weighs one ton or a thousand kilograms. When subsidised water use charges are used to assist poor households, it is necessary to move massive weights to deliver a relatively small financial benefit. Green House gas emissions from energy use are an important global concern. Large amounts of energy is needed to move water around during the provision of water services. The use of a heavy resource like water to transfer income from one person to another imposes unnecessary environmental cost on society. For typical tariff designs that are used currently on many low income countries, about 500 tons of water need to be moved to a household to deliver an annual Monetary benefit of $250 US. If these numbers seem implausible to you, try to work them out for yourself. Perhaps the strongest advocates of more sensible pricing policies are emerging from developing countries themselves. These are the people that have experience the failures of well intentioned subsidy schemes to deliver the high quality water and sanitation services that are needed to underpin a dynamic urban economy. My friend, Dr. Anjum Altaf, is the provost of Habib University in Karachi, Pakistan, and an urban and water economist. He has described the use of donor aid for direct poverty alleviation and income support as a fool's errand. He argues that the use of donor aid to subsidize the delivery of services such as water supply is misguided and explains why he feels this way. For those of you working in the water and sanitation sector and those of you aspire to do so. This debate over the appropriate use of aid and subsidies is a subject worthy of serious thoughtful reflection I'd encourage you to keep an open mind and to look hard at the empirical evidence. Don't let ancient instincts about fairness determine your preferred policy alternatives. The relationships between water tariffs, customer water use cost of service and the distribution of subsidies to different income groups can be best characterized by set of dynamic non-linear equations. Intuition is an unreliable guide to understanding the behavior systems of dynamic non layer equations. In our next session we'll examine another equally controversial subject, the role of the private sector in the delivery of water and sanitation services. Thank you for watching this video.
