Wrap-up session Theme 5 Topic 5.2 – Pricing Strategies 5 th World Water Forum, 20 March 2009 – Istanbul, Turkey Monica Scatasta Environment Directorate, OECD, Paris, France

OECD 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 Ts: Tariffs, Taxes and Transfers But the trade-offs between financial sustainability and other policy objectives complicate their design and implementation

OECD 3 Trade-offs affecting WSS pricing

OECD – Process Matters : overcoming conflicts, building a dialogue Objectives Understand the differing points of view : citizens, consumers, workers, providers, regulators and donors See if common ground could be identified, particularly on the issues of sustainable cost recovery and affordability Outcome - A surprise: the different interests seemed to converge : financial sustainability as a pre-requisite for sustainable services – tariffs have a role in sustainable cost recovery but that this should be ensured from a FLEXIBLE mix of the 3 Ts (tariffs, taxes, transfers) affordability can be a problem for the poor, but most people CAN pay look beyond tariffs : to effectiveness in providing access to the poor, efficiency in service provision, service quality, capacity of regulator to assess costs… building a dialogue requires credible information, communication, democratic participation – but it can be costly and needs to be structured properly make decisions locally based on transparency, democracy and accountability

OECD – Affordable, sustainable services: Role of tariffs and other instruments Objectives Present a conceptual framework for looking at pricing of water services Presents ways to achieve both financial sustainability and affordability Outcome : Policy-makers need to understand trade-offs between policy objectives: political responsibility in making hard decisions Financial sustainability as a pre-requisite for sustainable services – tariffs have a role in sustainable cost recovery but that this should be ensured from a FLEXIBLE mix of the 3 Ts (tariffs, taxes, transfers) Affordable for whom?? Most people CAN pay. Focus on poor and assess locally Solutions CAN be found: they need to be based on understanding of local reality, tailored, targeted and flexible to change over time Tariffs are composed of 3 policy levers : level, structure and process Look beyond tariffs : to effectiveness in providing access to the poor, efficiency in service provision, service quality, capacity of regulator to assess costs…

OECD – Special challenges of pricing for sanitation services Sanitation remains a public responsibility Need balance financial sustainability, access to adequate and affordable sanitation facilities, and environmental objectives Challenge: user are generally less inclined to pay (as part of the benefits are at community/basin level) while investments requirements are often larger that in drinking water Need for behavioural change, need to increase demand by users: role of subsidies to support this Cannot rely on user charges only mix the 3 Ts according to the stage of the sanitation chain, including transfers from other parts of the water value chain (e.g. water bill) – but affordability may pose limits

OECD 7 Key messages Making hard policy choices: Understand the conflicts between objectives Affordability is key, but most people can afford services! identify vulnerable groups and define affordability at local level From full to sustainable cost recovery flexible combination of the 3 Ts in different contexts, but avoid the hell of excessive dependence on taxation as funds dont reach the sector A 4 th T = Timing : postponing capıtal maıntenance But TIME does matter all solutions are dynamic, involve a process: evolution of service levels, progress in tariff levels… Think beyond tariff: link with the value of resource, quality/value of services, efficiency and effectiveness of providers Policy coherence: Tariffs are one of a set of incentives faced by water users - need to coordinate with policies in other sectors

OECD 8 Key messages Use all 3 tariff policy levers: Level, Structure Process 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: make decisions locally based on transparency, democracy, accountability

OECD 9 Key messages Affordable for whom? Assess it locally The poor suffer the most from lack of access or low-quality services Need local assessment of affordability 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

OECD 10 Key messages Process matters: Get it right! Rules and responsibilities for choosing a tariff structure, setting tariff levels and updating them Effective regulation requires the elimination of asymmetries: of information, of capacity, of power A policy dialogue is necessary, but a failed dialogue may have dire consequences. Who participates, on what questions, and how?