Water subsidies cost the world $456B in 2012, harm the world’s poor — IMF

By Elizabeth Harball | 06/09/2015 08:00 AM EDT

Reforming the price of water in both developing and advanced nations is essential to maintaining a healthy global economy, the International Monetary Fund concluded in a new report.

Additionally, the IMF report posits that as supplies become scarcer due to stressors like increasing global populations and climate change, careful water pricing reform could be a boon to the world’s poorest communities.

The international financial organization’s analysis, released yesterday, estimated that in 2012, water subsidies provided by public utilities added up to $456 billion — 0.6 percent of global gross domestic product at the time.


Such subsidies "benefit mostly upper-income groups in developing economies, as the poor often have limited or no access to piped water and improved sanitation," the report states. "Even when the poor have access to piped water, lower levels of use mean they capture a smaller share of the benefits compared with other groups."

In an analysis of three low-income economies — Cape Verde, Nepal and Nicaragua — IMF found that the poorest 20 percent ultimately received less than 11 percent of public utilities’ water subsidies. The most wealthy 20 percent, on the other hand, benefited from over 30 percent of the water subsidies.

The IMF considered a water subsidy to be the gap between the price users are charged for water and the actual price of providing that water, including infrastructure maintenance. This price gap often goes unreported, the IMF found, but the organization nevertheless determined that the disparity is most acute in developing Asian nations, the Middle East, North Africa and Pakistan.

"Ultimately, a large share of the fiscal costs of water subsidies is borne by subnational authorities responsible for providing water," the report states. "Given the low revenue capacity of these governments, this fiscal burden squeezes their ability to provide other essential services."

Good governance key to pricing water

The IMF report cites research finding that higher per-capita income results in more water use per person, on average, in part due to richer populations’ taste for more meat and manufactured goods. Other research cited by the IMF notes that in developing countries, poor populations spend larger portions of their income on water than the rich.

IMF leaders and the report’s authors acknowledged that global water pricing reform won’t be easy. They stressed that the needed changes will be different depending on a country’s particular water challenges, and that good governance is essential to ensure that poor populations are not harmed by increasing the cost of the essential liquid.

"It is clearly the case that switching to more rational pricing without protecting the poor could have very strong negative effects on poor populations," David Lipton, IMF deputy managing director, said during a report launch event at the World Resources Institute in Washington, D.C., yesterday. "That would be particularly important in low-income countries."

One idea the report suggests is a dual tariff structure, which would grant a set amount of water at subsidized prices to the entire population, and increase the tariff once that amount is exceeded. This would require that poor populations have easy access to public water supplies, the report notes.

Another option would be to only subsidize water connections for lower income groups, allowing private vendors to charge a higher amount to wealthier segments of the population.

Such efforts to recalibrate the value of water are becoming more urgent as time goes on, the report’s authors warned, citing crises in São Paolo, Brazil, and the California drought.

"Since water use is expected to continue to rise with population, and income growth and fresh water resources cannot easily be increased, these challenges will only intensify," report co-author Kalpana Kochhar, deputy director of the IMF’s Asia and Pacific Department, said on a call with reporters Friday. "The water demand and supply imbalances are likely to be exacerbated even further by climate change."