Unaccounted losses, poor collection and tariffs below cost recovery generate implicit subsidies

Unaccounted losses, poor collection and tariffs below cost recovery are generating implicit subsidies to the consumer. In comparison with direct subsidies that are formally allocated and properly accounted, implicit subsidies are accumulated within utility and not recorded.

The implicit subsidies consist of unaccounted losses, poor collection and tariffs below cost of operation. Unaccounted loss is a cost for the utility similarly to poorly collected revenue for the services provided. And, if the current system for determining cost does not correspond to true cost of water operations and there is no compensation for this loss, then utility generates additional subsidy to its consumers.

The burden of such implicit subsidies results in reduction of maintenance effort, absence of investment and attrition of the expensive personnel. The Government will have to eventually absorb the accumulated debts in consideration of the vital necessity of the water sector. However, the losses that been incurred at the accumulation stage cannot be recovered easily as they require higher investment and repair efforts. In many cases the abandoned structures are impossible to regenerate or rehabilitate. This applies to wastewater treatment, advanced technologies in water treatment.

The methodology for calculating implicit subsidies has been elaborated in the World Bank publication by Jane Ebinger: Measuring Financial Performance in Infrastructure: An Application to Europe and Central Asia (WPS3992).

Three elements of implicit subsidies for water services are calculated for Brazil, Russia, India, China and South Africa (BRICS) on the basis of the IBNET reports (www.ib-net.org).

This is how the implicit subsidies are formed in BRICS

And this is how much they cost now for the Governments, municipalities and utilities, and how much they will be in 2020 with current urbanization trends and if no action is taken by the BRICS water authorities.

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