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improving collection, but this is particularly difficult in settlements where formal tenure is not even recognized. Nevertheless, there are examples in GOLD III of the successful implementation of adapted payment collection systems by local governments or service providers with the support of community organizations (e.g. in Manila, Philippines). Striking a balance between affordability and financial sustainability is a central challenge of tariff-setting, but these goals are not mutually exclusive. According to UNDP, to guarantee the right to water, tariffs should not exceed 3% of household income. In Europe in 2011, tariffs made up a small share of average household incomes (1.7% for water and 4.4% for electricity), but these averages hide substantial variation. If affordability is a concern even in high-income countries, it is even more of a problem in low- and middle-income countries. The affordability debate can be approached from two perspectives: a) a market perspective, assessing household incomes and setting tariffs which poor groups can afford; b) a human rights approach, in particular for water, guaranteeing free access to a minimum level of consumption.40 The rights-based approach has been boosted by the UN General Assembly’s recognition of the right to drinkable water and sanitation in 2010.41 In South Africa, the poor are guaranteed minimum levels of free access to water, electricity and solid waste collection.42 This strategy has dramatically increased access over the past 15 years, though it has not provided universal access to drinking water. It is more common to differentiate prices, generally through cross-subsidization, to support low-income households.43 An alternative is direct subsidies through targeted income support or cash transfers, as practised in Chile and Colombia. There are examples of subsidies for service connections rather than consumption in Asia, effective in targeting the poor where network
access is low. Subsidies should be predictable, transparent, targeted and, ideally, phased out over time. This report also gives examples of differential tariffs: social tariffs based on volume or block tariffs in Latin America and Europe; tariffs that vary by geographical area or service standards (e.g. public standpipes with cheap or free water in Africa and Asia); support for community-action that lowers costs and prices (like the construction of public toilets in partnership with NGOs and community associations, in Mumbai); and the use of safety nets.44 Policies that keep tariffs low for all users are generally problematic, failing both to target poor and to ensure financial sustainability. For example, in Africa, about 90% of people who enjoy subsidies for piped water or electricity services belong to the richest 60% of the population.45 Affordability for unserved households that rely on informal vendors is also critical. They often pay more than users of network services, with dramatic impacts on household incomes. Local governments should monitor this situation.
Local budgets: a problematic source service financing46
key but of basic
In most countries, there is greater decentralization of responsibility than of revenues. In OECD countries, sub-national governments account for 22% of general government revenues, but 31% of public expenditure. In Latin America, local governments represent 12% of general government revenues but 19% of expenditure;48 in Sub-Saharan Africa, around 3% of revenues and 8% of expenditure.49 There is a striking contrast between high-income countries and most middle and low-income countries in terms of local government’s share of total public expenditure. In the EU27 it averages 24.3%, 1.3 times that of Latin America and Asia,
A Directive of the European Commission also prohibits disconnection of electricity to ‘vulnerable customers’ in critical times. Same protections exist for water. See European chapter. 40
UN General Assembly, Resolution 64/292, The human right to water and sanitation, 28 July 2010 41
See Africa chapter: every poor household receives the first 200 litres of water per day and around 50-100 kWh per month for free. In 2012, the program reached 86% of all households. 42
Some international institutions are critical of subsidies arguing they ‘undermine efficient management’. See Komives et al (2005). 43
See OECD (2009) pp. 2122 for a more detailed analysis of the pros and cons of different social tariffs. 44
Foster and Briceño- Garmendia (2010) p. 11. This policy is also criticized in Eurasia and in some countries in Latin America. 45
Information for this section is extracted primarily from GOLD II Report and refers to the late- 2000s. 46
OECD, Claire Charbit (2011); in 27 European Union countries subnational governments represent 5.8% and 33.6%, respectively, of public sector the revenues and expenditures in 2011, for Europe see CEMR-Dexia, Subnational public Finance in the European Union, Summer 2012, 11th edition. The GFS-IMF, give the following average values: In 2008, local governments globally were responsible for 17.8% of public expenditure; for 12.2% of public revenues. In developed countries these percentages are: 22.6 % and 16.3% respectively and in developing countries: 14.5 % and 9.4% (Om Prakash Mathur, 2012).). 47
48
Source GOLD II.
Source GOLD II. Thierry Paulais (2012), calculated the ratio of local expenditures /public expenditures at 11.7% in 2010. 49