The next part of this session's material deals with how to best assist poor households. There are four videos about the design of subsidies in the water and sanitation sector. Because tariffs are so low, water and sanitation services are subsidized almost everywhere. So, it is important to think carefully about how to make sure these subsidies benefit poor households. This first introductory video presents three important concepts for assessing different subsidy schemes. The first concern's two types of targeting errors that one can make when delivering subsidies. Errors of inclusion and errors of exclusion. The second concerns the source of funds to pay for subsidies. Whether these funds come form outside or inside the water utility. And the third concept addresses how these subsidies are used to assist poor households. Whether they're used to reduce the price of water or are delivered to poor households directly to reduce their water bills. It is an understandable, commendable desire to want to use the delivery of government services, such as piped water supply to help poor, disadvantaged households. The most common approach to doing this in the water and sanitation sector is to use increasing block tariffs. But as we saw in the last video, IBTs have numerous problems. Importantly, in most cases the subsidies are not well targeted to poor households. Another popular approach is to subsidize all water sold, even to make it free. This may sound like a good idea, but in fact subsidizing the price of water creates six main problems. First, low subsidized water prices lead households to use too much water. They encourage people to waste water. In extreme cases, when water is free, people often will not bother to fix a leaking faucet or toilet. Prices that reflect cost are needed to promote water conservation and good water use behavior. Second, subsidized prices lead to inefficient production of water services by utilities. If waters is two cheap, there is lesson for water utilities to minimize their cost. Even if utilities improves operational efficiency will not be able to reconveyance cost of the price of water it sell is too low. So, it's often and easier for the utility spends time energy instead looking for subsidies then producing water efficiently. Third, is subsidies are delivered to the wrong people, the subsidies scheme maybe perceive as unfair. Fourth, if the subsidies scheme does not reach poor households it may exacerbate in common equality, not reduce it. Fifth, in many low income countries, the very poor, not connected to the pipe water distribution system anyway. So, they cannot receive subsidized water delivered to households with pipe connections. So, the first step in helping unconnected poor households is to get them connected. But subsidizing water prices is likely to discourage utilities from extending services to poor unconnected households. This is because every additional connection increases the utilities financial lawsuits. So, unless the utilities assured of additional subsidies, it has no incentive to extend the pipe distribution system to connect poor households they're not currently connected to the network. Six, the subsidies embedded in subsidized water prices have opportunity cost. Subsidies must be paid by someone. A dollar spent on water subsidies is usually a dollar that is not spent on education, hospitals or roads. Low income countries have lots of important budget priorities. Professionals working in these other sectors are also seeking subsidies. Water sanitation is just one of many deserving sectors. Moreover, the magnitude of the subsidies to the water sectors is large. So, these opportunities cause are also large. In this new IMF report from 2015, the authors estimate that in 2012, $456,000,000,000 were spent subsidising water utilities. That is about $65 per capita per year for every one on the planet. This emanate to about 0.6 % of global GDP. In the developing countries of Asia, the percentage of GDP spend on subsidies to water utility is nearly three times higher or 1.6% of the original GDP. In seven countries this subsidies to water utility emanate to more than 5% of GDP. These included such diverse countries as Azerbaijan, Honduras, Mongolia, and Zimbabwe. So, in summary, subsidizing water prices is not a good way to assist poor households. We need better ways to help poor households, and we need to be able to evaluate the performance of different subsidies schemes. To better enable you to do this, next I want to talk about errors of inclusion and exclusion. This is a way to think more systematically about the types of mistakes we can make when targeting subsidies to poor households. The columns of this table are the poor households and non-poor households in a population. The rows indicate whether a household receives a subsidy or not. You can think about the cell entries in two ways. First, you can think of the number or percentage of households in the population that fall into each of the four cells. The number of households in the four cells would sum to the total number of households in the population, or the percentage of households in the four cells would sum to 100%. Second, you can think about the total dollars of subsidies or the percentage of subsidies to the population. In this case, the dollar amount of the subsidies in the four cells would sum to the total dollars of subsidies delivered to the population, or the percentages of the subsidies in the four cells would sum to a 100%. The four cells in the table showed two good outcomes and two mistakes. In the north west cells, the first good outcome. Poor households receive the subsidy as intended. In the north east cell, non-poor households also receive the subsidy. This is a mistake. We call this mistake an error of inclusion, because non-poor households are included in the subsidy program. Areas of inclusion are likely to be political popular because the subsidy reaches more people even if they're not especially deserving. Areas of inclusion may also be needed to mobilize political support for a subsidy scheme. In the United States States when our Social Security System in the 1930s, it was not targeted at just poor households. The government officials who designed the system believed that the majority of the population should be eligible to participate in order to generate the broad political support needed to pass the legislation. In the southwest cell in the table is another mistake. Here are poor households who did not receive the subsidy as intended. The subsidy scheme inadvertently missed them. We call these mistakes errors of exclusion because poor households are excluded from the subsidy program. In the southeast cell is another good outcome. These are non-poor households that did not receive the subsidy. If you think of the cell entries in this table as numbers of households in a well-designed subsidy scheme, all of the poor households would be in the northwest cell and all of the non-poor households would be in the southeast cell. Another words, there will be zero non-poor households with the subsidy, no errors of inclusion and zero poor households without the subsidy, no errors of exclusion. If you think about the sale entries in this table as the total dollar amount of subsidies in a well designed subsidy scheme, all of the subsidies would be in the northwest cell and zero dollar amounts in the other three cells. The next slide illustrates the second and third concepts, the source of funding for a subsidy scheme and how these funds are used. Basically, subsidies can either come from sources external or internal to the water utility. And they can be used either to reduce the price of water or provided directly to households as income support. Which can be used to reduce a poor household's water bill. The columns in this table show the source of funds for subsidy scheme. Whether they could come from outside or inside the utility. The rows show two approaches to delivering subsidies to poor households either in the form of subsidized water prices or directly as income support. An example of funds for a subsidy scheme from inside the utility would be to charge some customers more than the average cost of water services in order to price services to other customers below cost. An example of funds for a subsidy scheme from outside the utility would be a direct infusion of cash from central government to the water utility to cover a gap between revenues and costs. The cells in the table show four cases. In Case A the funds for the subsidy come from outside the water utility from higher level government. These funds are used to enable the utility to provide households with water services at subsidized prices. Case A is overwhelmingly the most popular approach in the water sector but as we discussed it has those six main problems. In case B the funds for the subsidy are generated internally by the water utility and used to provide subsidized water services to some households. Many people think the water hotel is charge in industrial users and high income households more than their average costs and then use the revenues to cross subsidize low income residential users. In fact, this practice is much less common than imagine. There are two reasons for this. First, industrial users typically have other options. Often they will disconnect if the water utility tries to charge much more than the average cost. The most common alternative is ground water, where abstractions are typically are regulated. Second, the prices utility charge, industrial users maybe higher than those charged residential users but, they are typically still low and below the full cost of supply. In Case C, the fund for the subsidy come from outside sources and they are used not to subsidize water prices but rather, to directly assist poor household to pay their water bills. There are a few examples of this type of subsidy scheme in the water sector. In the next video, we will look at the most famous example from Chile. Finally in Case D, the funds for the subsidy come from the utility, and are provided to households to reduce their water bill. There are examples of Case D in water utilities in industrialized countries. Here utilities may ask households to pay voluntarily an additional amount on top of their normal water bill. This enables the utility to provide financial assistance to poor, needy households, so they can pay lower water bills. In the next video, I will describe two subsidy schemes that have been used to target subsidies to poor households in Latin America. One from Chile and one from Columbia.
