Subsidy Mechanisms

SUBSIDIES AND SOCIAL EQUITY
GENERAL PRINCIPLES FOR SUBSIDY DESIGN
SUBSIDY MECHANISMS

 

Mechanism

Strengths

Weaknesses

Subsidies for latrine construction

  • Direct link between input and output
  • Targets those households without access
  • Helps to achieve a minimum acceptable level of service and benefits
  • Can help achieve a higher level of service and benefits
  • Can be ineffective if demand for sanitation is not strong
  • Stifles innovation and the local market
  • Prone to corruption
  • Resources available for subsidies may limit the number who gain access

Social subsidies

  • Lower per-latrine costs
  • May support latent local suppliers
  • Targeting may be poor
  • Requires national social policy framework

Consumption subsidies through the tariff (Urban networks)

  • Uses existing tariff collection and payment system
  • Poor targeting (does not reach the unconnected)
  • May not overcome access barriers
  • Does not support in-house costs

Access subsidies (i.e. reduced sewer connection charges) through the tariff (urban networks)

  • Addresses access problem directly and may be better targeted
  • Usually links water and sanitation – may not reach some households who require sanitation alone

Subsidies for Latrine Construction

Direct Subsidies for latrine construction have been provided for many years in many countries. In this approach, public funds are usually made available to households to cover all or part of the cost of construction of a latrine that meets the government’s minimum standard. The funds may be delivered to the household in advance, in installments during construction, or in arrears. Alternatively, the household can apply for a latrine which is then built under the direct supervision of government engineers with no money handled by the householder at all. These subsidy arrangements are characterized by a number of problems. They tend to be:

  • expensive and complex to administer (usually a government engineer needs to certify each latrine, often more than once);
  • unresponsive to the bulk of demand, because costs are too high, or because there is insufficient capacity to respond

Nonetheless they have proved popular because they deliver a quantifiable product and, particularly in rural areas, are one of the only ways in which many technical departments of government can respond quickly to the sanitation challenge.

Social Subsidies

In a very few cases, social subsidies based on overall poverty indicators are available to the poorest households. These can then be spent on whatever services are most needed by the household. These systems (of which Chile has the best known example) have lower per capita costs than dedicated sanitation subsidy schemes and do not distort the market for sanitation goods and services in the same way, as households are free to purchase whatever they require on the open market. However, such a system is only feasible if there is a national policy framework in place across all the social sectors.

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Subsidized Consumption in Urban Areas

In areas with piped water and sewerage, government subsidies are commonly delivered via the tariff. In these cases the subsidy for sanitation is usually achieved by proxy through subsidized consumption of water. The most common form is a cross-subsidy linked to overall water consumption (by means of an increasing block tariff). This type of approach only benefits those people already connected to the network – which usually excludes the poor. It also contains a number of inherent biases against poor households depending upon the tariff structure. In flat rate schemes, poor families who may use less water will benefit from a lower proportion of the subsidy; with increasing block tariffs, poor households who share connections can end up paying at the higher rate. It also does little or nothing to help households with the costs of in-house facilities (taps and toilets) which are needed if private health benefits are to be realized.

Subsidized Access to Piped Networks

More interesting approaches have been developed in some cases, to support new customers connecting to the water and sewerage network in urban areas. High lump sum connection fees to sewerage networks contain a strong bias against the poor not yet connected to the network. some utilities are attempting to structure subsidies by increasing the general tariff and removing or reducing the one-off connection fees associated with joining the network. Alternatively, subsidized credit schemes for “social connections” can be considered. Targetting of both approaches may be geographical.

As with water supply, however, the policy of subsidizing access to piped networks needs to consider the reality that in many cases those most in need of sanitation often lie beyond the reach of the network.

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