Understanding Water Subsidies: The Case for Targeted Funds Allocation in Albania

Water is the essence of life, yet for many, access to clean water and sanitation remains a distant luxury. In response to this pressing issue, governments often implement special support programs known as subsidies. But what do these subsidies truly entail, and how effective are they in achieving their intended objectives?

Imagine subsidies as lifelines, thrown by governments to keep water affordable for all. These financial buoys are meant to support community health and well-being, allowing water utilities to offer services at prices lower than their actual cost. It's a noble intention, but like many well-meaning policies, it's not without its flaws.

Traditionally, water subsidies have been a one-size-fits-all solution. Public funds flow directly to utilities, covering costs like labor, energy, and chemicals. On the surface, it seems fair – everyone benefits from it, right? Wrong.

This type of supply-side subsidy benefits all customers equally, without considering their income, since it does not differentiate between customers who can and cannot afford to pay for services. This approach has another unintended ripple effect. They may disincentivize utilities from improving the efficiency of or expanding their services, since they receive fixed funds no matter the people served or the volume of water billed.

Ironically, this disincentive can undermine the goal of universal access because expansion into poor communities could present an additional burden on a fixed budget. In fact, some argue that these subsidies potentially create an incentive for utilities to provide service to wealthier neighborhoods with better infrastructure and higher collection rates, instead of aiming for universal access. Furthermore, distorted market conditions caused by poorly designed subsidies can be an obstacle to private sector participation.

In essence, these well-intentioned subsidies might be inadvertently widening the very gap they aim to close.

The Case of Albania: A Shift Toward Demand-Side Subsidies 

Can we find a better way to implement subsidies? The experience of Albania offers a valuable case study. Although the National Agency of Water Supply and Sanitation (AKUK) attempted to condition its supply-side subsidies on utility performance metrics from 2018 to 2019, the results were lackluster with minimal improvements in service targeting. Recognizing this shortcoming, the Albanian government, with support from the World Bank and SECO, embarked on a comprehensive reform initiative that shifted the focus from subsidizing utilities to directly aiding those who need it most.

Key features of Albania's new approach include:

1. Targeted support: The subsidies now reach specific vulnerable groups, including households with inadequate income, orphans, families in need with more than two children, and victims of human trafficking or domestic violence.

2. Smart delivery: Subsidies are applied as credits on monthly water bills, which are reimbursed by the Government to the Regional Water Utility (RWU).

3. Improved financial viability of RWUs: By allowing them to increase their liquidity; utilities will improve their technical and financial performance, and as result, increase the quality and access to services.

Projected to support 64,000 beneficiaries annually, the updated subsidy scheme allows eligible families to receive credits on their monthly water bills, covering the cost of up to five cubic meters of drinking water and wastewater—equivalent to approximately 15-20 standard bathtubs. The estimated annual cost to the Government of Albania for this initiative is around $3.7 million. Another advantage of this design lies in its reliance on existing databases to identify beneficiaries, ensuring that support only reaches those who truly require it.

In conclusion, when executed thoughtfully, subsidies have the potential to be a robust tool for promoting equitable access to water and sanitation. Albania stands as a testament to what happens when well-designed, well-targeted, well-funded and well-implemented policy measures are prioritized. This significant shift aims to ensure that vulnerable groups, rather than affluent neighborhoods, are the primary beneficiaries of water subsidies, guaranteeing that everyone has fair access to life’s most precious resource—clean water.