A subsidy (also known as a subvention) is a form of financial assistance paid to an individual, a business or an economic sector in order to achieve certain policy objectives. For example, a subsidy can be used to support a service that cannot recover its full costs (e.g. through tariffs), which is a common problem in the water and sanitation sector. Subsidies may also be given to encourage activities that would otherwise not take place, e.g. a more sustainable sanitation technology. Subsides in developing countries flow almost exclusively from government, or via government in the case of official development assistance, and sometimes through international or national non-governmental organisations. However, to be sustainable, local subsidies are encouraged.
In sanitation and water management, subsidies are very common, and many utilities have to be subsidised as they cannot recover the full costs of their services from the users (see also water pricing). This applies to services regarding water catchment, purification and distribution of fresh water, as well as the subsequent collection, treatment and discharge or reuse of wastewater.
Also in agriculture, subsidies play a major role. For example, subsidies that reduce the price for artificial fertiliser (e.g. in India) also reduce the motivation and need of producers to use sanitation-based fertiliser. Further, subsidies are often given to individual households in order to achieve certain policy objectives, such as achieving 100% sanitation coverage in a certain area.
Types of Subsidies in Sanitation and Water Management
There are many different types of subsidies and ways to classify them, such as the reason behind them, the recipients of the subsidy, the source of the funds (government, consumer, general tax revenues, etc). Some typical subsidies in Sanitation and Water Management are:
This type of subsidy is the simplest; this means directly giving money to people to achieve certain policy objectives by national or municipal government, national or international agencies or NGOs.
Examples of direct subsidies in the water sector are, for example, funds which are used to cover part of the water bill of poor households who meet certain clearly defined eligibility criteria. Often, direct subsidies are also given in total sanitation campaigns to support people to build latrines to achieve an open-defecation free status in a certain area.
Services and Indirect Financial Transfers
The second category covers any other active and explicit government intervention but which does not involve a direct financial transfer as specified under the first category. This type of subsidy has a direct short-term effect on profitability but is rarely negative. Many of the subsidies in this category are services of some kind provided by the public sector or indirect financial transfers.
Examples of services and indirect financial transfers in the sanitation sector are the construction of community toilets which are provided by the municipal government for legal slum dwellers in order to reduce the open defecation within the city.
Interventions with Different Short and Long-Term Effects
The third category of subsidies allows considering a longer time perspective and includes government interventions that have a negative economic impact on the industry in the short-term but ultimately result in long-term benefits (for example the resource base) and/or more general benefits to society as a whole (for example the environment).
Some examples of category three subsidies within the water and sanitation sector are setting higher standards for treated wastewater (especially regarding BOD values). In the beginning these interventions will have a negative impact on the industries because they have to invest in better wastewater treatment, but in the long-term perspective, this intervention will have positive influence on the entire society.
Lack of Intervention
The last category covers the area of lack of government intervention and may be the most difficult one to deal with. This category comprises inaction on behalf of the government that allows producers to impose - in the short or long-term - certain costs of production on others, including on the environment and natural resources, and that has short-term positive effects on the industry’s revenues and/or costs. In this way, the industries do not have to pay for services they are actually supposed to pay for – so they indirectly receive an economic benefit.
These subsidies are usually positive in the short-term but negative in the long-term. By definition, they do not imply a direct cost to the government and their value to the industry is implicit. Examples of this type of subsidy includes: Lack of water pollution control, free access to water, non-implementation of existing regulations such as certain BOD regulation for treated wastewater from industries.
| - If well targeted, can have very positive effect
- Can help to balance market disadvantages for certain target groups
| - Lack of financial sustainability, if there are not sufficient public funds to support it|
-Subsidies may not increase access to poor households
Subsidies can be a powerful (but also expensive) tool to optimise the sanitation and water management system and make it more sustainable in the long run. Subsidising is more expensive, but also the more sustainable sanitation or water management technology is a typical example where subsidies can be utilised to achieve higher sustainability. Subsidies can be positive for water management and sanitation, since the price relations between different options (higher or lower emission levels, more or less energy intensity, more or less transport) can be modified in favour of the environment.
Independent of the type of financial assistance, subsidies should always be applied in the public interest to maximise health benefits and increase access specifically to groups who are persistently excluded within the water and sanitation sector. Furthermore, it is important to base subsidies on solid and rigorous information about what types of service people want and are willing-to-pay for, what the affordability for the target group is, and what can be scaled up in the long term. In order to avoid distortions to the market, one should subsidise the lowest possible level of water and sanitation service and it is better to leave room for subsidies to make incremental improvements over time.
- Subsidies (RR), SSWM.