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Shanta Devarajan's picture

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Submitted by Jon Strand on
Shanta, thanks for your nice blog on Wednesday last week, on water and water pricing. I have myself worked quite a bit on this issue (much joint with Ian Walker, LCSHS; both of us before coming to the Bank), and with focus on Central American cities, and with experiences similar to those reported by you. Table 1 below shows the situation for water prices and consumption in various Central American cites, at the end of the 1990s (admittedly, the situation is better today). The table reveals a picture similar to what you say in your blog: Non-tap water is much more expensive than tap water, which is very often subsidized. Non-tap water is consumed mostly by the poor, and often very marginalized, in small amounts. Subsidized tap water is by contrast consumed in large amounts (higher in Central America than in most European countries where incomes are orders of magnitude higher, but where prices are more correct). “Convenient” non-tap water (such as that sold directly from tanker trucks) is often very expensive. Tegucigalpa is a particularly bad case: tap water is almost free; while water purchased from tank trucks costs about 16 dollars/m3 (the number in the table is a composite for several non-tap sources). This makes for a terrible income distribution effect of water pricing and access in that city. Average household water consumption, m3, and consumer prices US$/m3 (PPP adjusted), for tap and non-tap water, Central American cities, around 1998. City Tap cons Tap prcs N-t cons N-t prcs Santa Ana (ES) 30.5 0.26 8.6 2.08 Sonsonate (ES) 31.1 0.26 5.1 2.76 San Miguel (ES) 30.1 0.26 11.4 0.61 Panama City 31.1 0.55 Tegucigalpa 3.7 8.43 San Pedro Sula 4.8 1.34 Guatemala City 5.2 5.72 Villa Nueva (G) 7.1 5.27 Mixco (G) 8.3 5.68 Reference: Strand, Jon and Walker, Ian (2005), Water markets and demand in Central American Cities. Environment and Development Economics, 10, 1-23. ES = El Salvador; G = Guatemala Overall, the income distribution effect of “subsidized” tap water (when the price of such water is below production cost) can be very detrimental. Often only a limited group of well-off households benefit directly from water subsidies, while the poor do not have access to tap water. Worse, the water utilities are as a result under-funded, and has few incentives to provide good service or repair damaged water pipes, or to extend service to new and needy households (since it cannot expect future cost recovery from new groups). The system is stuck in a “low-level equilibrium” from which it is hard to emerge, without drastic policy change. Those without tap connections are trapped, cut off from ordinary necessities such as regular bathrooms and kitchens with running water; and with expensive or burdensome water sources. Some non-tap water (such as that taken from private wells) costs little, but can still be a heavy burden as it must be hauled to the house. This is an endemic situation not only in Central America but also in Asia and throughout Sub-Saharan Africa. Poor governance can add to the problem, and make a “low-level” situation more difficult to change. Good water pricing, allowing households to pay a normal supply price for the water would be helpful. It would (given that governance problems are not too serious) restore the incentives of water utilities to provide an adequate water supply to existing, and new, customers. It would also give households incentives to use water in reasonable amounts. Such pricing could be combined with public subsidies to the water connection for new groups of households. This cost can often be hard to finance for the poorest, and represent a major obstacle for their entry into the tap water market.

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