Affordable, sustainable water and sanitation services: An OECD perspective on pricing 5 th World Water Forum, 18 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 T’s: 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 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

OECD 5 Some results of the OECD 2008 survey Source: GWI 2008 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

OECD 6 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 Some results of the OECD 2008 survey Selected OECD countries – Unit price of WSS services to households, incl. taxes (USD/m3 at PPP rates)

OECD 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

OECD 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

OECD 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

OECD 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?

OECD 11 Thank You Visit our website: Contact: Environment Directorate