Catalog

Hiking Tariffs to Help the Poor

Contrary to conventional thinking, raising tariffs can provide the poor with cheaper water—and get them connected

By Arthur C. McIntosh( amcintosh@adb.org )
Principal Water Supply Specialist

Background

Winnie Flores lives on the Manggahan Floodway in Metro Manila. She is one of about 5 million people in the city who still has no access to piped water.

Many of these people pay almost as much for water as they do for rent. Winnie could greatly improve the quality of her accommodation and her dignity in the neighborhood if she could get connected to piped water.

SELF SERVICE Poor-quality groundwater for personal hygiene and washing dishes and clothes is bought by Winnie from this station about 200 meters from her home

“It’s coming next year” is the common refrain. But she has heard the same thing for the past 5 years. Recently, when her husband lost his job, the family moved their four children to cheaper accommodation costing P1,000 ($19) a month.

Yet Winnie pays P900 ($18) a month for 6 cubic meters of water, while most households on piped supply pay about P150 ($3) a month for 30 cubic meters.

Winnie gets her water from two sources. For washing dishes and clothes and personal hygiene, she buys from an entrepreneur who drilled a well and pipes it to a small number of families in the neighborhood.

The water costs P44 per cubic meter but is of poor quality. Twice a day, a vendor delivers 16-liter jerry cans of drinking water from a water main about 2 km away. Winnie buys four containers a day at P5 each.

Why are Winnie and so many others in this deplorable situation? It is not a question of land tenure—the neighborhood has concrete streets and many homes built with permanent materials. It comes down to where the funds are to make piped water a reality.

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Regulation by Contract?

When private sector participation in the delivery of water services was introduced, the much-heralded advantages were that the private sector would invest funds in water supply and improve efficiency of delivery by, for example, reducing nonrevenue (sometimes called “unaccounted for”) water.

In reality, after almost 5 years, nonrevenue water is still more than 50% of production and new funding has been much less than expected. What happened?

The “water crisis” in Manila in 1996 was the rationale for the private sector participation that was arranged in just 18 months. However, two serious oversights occurred in the process.

First, the contracts with two different concessionaires were not made on the basis of a formal and publicized government policy. There was no independent regulator to monitor the implementation of that policy and see that the contract conformed to the policy.

Instead, the former Metropolitan Waterworks and Sewerage System (MWSS), the government agency responsible for water supply prior to the concessions, was appointed as a regulator but ended up acting merely as a contracts administrator. Second, concessionaires should not have been made to compete to provide water on a low tariff.

The winning bids were 57% and 26% of the prebid MWSS tariff. What signal did that send to consumers? Use more water! This lulled them into a false sense of security.

Connecting the Poor

Along came El Niño and the Asian financial crisis, and soon one of the concessionaires started demanding a major tariff adjustment. When would they get the money to get on with the efficiency measures and connect the millions without access to piped water?

The answer was, “Sorry, it is not in your contract.” Of course, had the contract been based on a policy of connecting the poor, it would have been easy for the two parties to get together and amend the contract to align it with policy and agree on a tariff hike.

After all, both concessionaires are guaranteed a certain rate of return based on the entire contract.

But there was no policy—only a restrictive contract. So for a couple of years, the Government (not the regulator!) fought to resist the tariff increase.

Who was this hurting? Without a doubt, the still unconnected poor, like Winnie.

One of the mysteries is why nongovernment organizations did not come to the help of the poor and demand a tariff increase. In the end, poor people asked for the tariff increase themselves.

The logic was simple. If the tariff for those people connected to piped water was raised from an average of P5 to P10 per cubic meter and that allowed the concessionaires to connect the poor, then they would go from paying P150 to P10 per cubic meter—and be much better off.

Is it too much to ask those connected to water to help pay for those not connected to get the same access? In the end, the Government capitulated and gave the tariff adjustment to both concessionaires.

But Winnie and her family are still waiting. Meantime, one of the concessionaires has declared it is pulling out.

What are the lessons to be learned? First, policy is crucial, but it must be transparent to the public at all times. Second, counter-intuitively, hiking the tariffs can help the poor who are not yet connected to piped water. Third, in the future, investments in large city water supply should be financed directly from tariffs.

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