Affordable, sustainable water and sanitation services: An OECD perspective on pricing

1. Affordable, sustainable water and sanitation services: An OECD perspective on pricing Monica Scatasta Environment Directorate, OECD, Paris, France 5th World Water Forum, 18 March 2009 – Istanbul, Turkey

2. Pricing WSS services – The challenges • There is disagreement on : • Link between value, cost and price of WSS services (why pay) • Which costs should be covered through the tariff (how much to pay) • How these should be allocated (who should pay) • Vicious circle : underfunded providers inadequate investment, operation and maintenance collapsing infrastructure worse services lower willingness to pay • Tariffs play a key role in achieving sustainable cost-recovery, as part of the 3 T’s: Tariffs, Taxes and Transfers • But the trade-offs between financial sustainability and other policy objectives complicate their design and implementation

3. Trade-offs affecting WSS pricing

4. Financial sustainability vs. affordability Affordable for whom? • The poor suffer the most from lack of access or low-quality services • Need local assessment of “affordability”: the case of Portugal • “Macro-affordability”: How much should we pay? Tariff level • “Micro-affordability”: Who should pay for what? Tariff structure • Non –tariff instruments are also available. But: • Complexity of designing them in coordination with tariffs, and • Costs and capacity required to manage /enforce them

5. Some results of the OECD 2008 survey • Continued real price increases for household services • Continued increase in use of volumetric tariffs (uniform or IBTs) • But increased share of fixed charges in some countries • Increasing separation of wastewater charges, increasingly based on costs • Evidence that consumers respond to price signals, but their reactions are small (more significant if changes in tariff structure) • Adjustments of tariff structures to improve targeting of vulnerable groups Source: GWI 2008

6. Some results of the OECD 2008 survey Selected OECD countries – Unit price of WSS services to households, incl. taxes (USD/m3 at PPP rates) • Continued real price increases for household services • Continued increase in use of volumetric tariffs (uniform or IBTs) • But increased share of fixed charges in some countries • Increasing separation of wastewater charges, increasingly based on costs • Evidence that consumers respond to price signals, but their reactions are small (more significant if changes in tariff structure) • Adjustments of tariff structures to improve targeting of vulnerable groups Source: OECD, 2009

7. Look beyond money: Too much focus on tariffs? • Management of service provision matters: • Improving service quality • Ensuring that this is done at reasonable costs • Increasing collection rates • Governance matters: • Process matters : Rules and responsibilities for choosing a tariff structure, setting tariff levels and updating them • Overcoming the challenges of regulatory capacity: Who checks on • A policy dialogue is necessary, but a failed dialogue may have dire consequences. Who participates, on what questions, and how? • Policy coherence: Tariffs are one of a set of incentives faced by water users need to coordinate with policies in other sectors

8. The special challenges of pricing sanitation • User are generally less inclined to pay, particularly for wastewater treatment , when compared to drinking water • Investments requirements are often larger that in drinking water • Part of the benefits of sanitation are at the community, regional or national level • This provides a rationale for alternative cost-sharing mechanisms (beyond the polluter-pays principle) • This may include the use of subsidies, to balance financial sustainability, access to adequate and affordable sanitation facilities, and environmental objectives • But if involved in preparation, people are willing to pay even for capital costs: Mumbai slum sanitation project

9. Key messages from the work • Understand the conflicts between objectives and address them using three “tariff policy levers” • Average tariff level • If it is too low for everyone it may hurt the poor • Assess affordability locally and look beyond tariffs (service quality) • Tariff structure • Can achieve both financial sustainability and access/affordability • Support should be well targeted, subsidies transparent • Tariff setting and adjustment process matters • Effective regulation requires the elimination of asymmetries: of information, of capacity, of power • Pricing instruments cannot be developed and assessed in isolation

10. Issues for discussion • How can we measure affordability? Should affordability be measured locally? • How do different tariff structures and non-tariff measures perform in achieving different objectives? • How can their capacity to target lower income groups be improved? • What have been the major difficulties in implementing pricing reforms?

11. Thank You Environment Directorate Visit our website: www.oecd.org/water Contact: Monica.Scatasta@oecd.org