The Development Path of Urban Water and Sanitation Tariffs and Subsidies: A Conceptual Framework

The provision of universal, high-quality piped water and sanitation services on a financially sustainable basis continues to elude many urban areas globally. Water services suffer from political, technical, and financial “disequilibria,” in which governments are challenged to improve services, households are unwilling or unable to pay to cover the increased costs associated with those services, and both production and consumption efficiency remains low due to insufficient capital investment, low operating budgets, and poorly designed tariffs. Cities typically move along a water development path from low- to high-quality service provision, with movement between phases facilitated by shifts in these disequilibria. In the first phase, water supply coverage increases but quality of service and efficiency of consumption and production stagnates, trapped by insufficient government transfers and low tariffs. In the second phase, economic growth facilitates increased revenues, allowing for investments in service quality and increasing access to improved sanitation. Production efficiency improves, but consumption efficiency remains low due to weak price signals and poorly targeted subsidies, and environmental quality often degrades. In the third phase—which remains aspirational for many cities—governments and citizens demand improved environmental quality as well as improved service quality. Investments are made to improve the resilience of supply, and subsidies are more carefully targeted toward the poor. China demonstrates many of these patterns, with variation across cities reflecting different levels of development. There are, however, some differences that are a consequence of the country’s centrally planned economy prior to 1978. Reforms underway in China highlight the challenges of achieving this “third phase” urban water policy. These include revisions to the existing increasing block tariffs to improve financial sustainability, increased use of information provision to improve consumption efficiency, and asset management and investment planning that weighs the benefits and costs of new capital investments in the context of climate change.