Towards a green economy %

100 90 80 70 60 50 40 30 20 10 0

2. Tax revenue can be used to subsidise operating costs and cover capital costs; and

3. Grants and other forms of transfer payment can be sourced from other countries.

Figure 17 shows how different countries combine each of these approaches. Very few countries rely only upon tariffs to finance infrastructure investment, even though economic theory would suggest that charging people a tariff in proportion to the service provided is the most efficient option. Reliance on tax revenue is common and, when donors are willing, transfer payments (donations) can play a significant role. In OECD countries, it is now common for urban water-supply utilities to set a tariff that is sufficient to cover the full operating costs of supplying water (OECD 2010).

Tariffs Taxes Transfers1

1. Includes ODA grants as well as private grants, such as through non-governmental organisations. 2. Water supply 3. Wastewater 4. Composition of capital investment for water supply and sanitation 5. 2005/06 6. Rural WS, 2006 7. 2006 8. 2005 9. 2007

Figure 17: Array of mixes of transfer, tax and tariff approaches to the provision of infrastructure

Source: OECD (2009b), Strategic Financial Planning for Water Supply and Sanitation, OECD internal document, www.oecd.org/water

finance Source: OECD (2009)

From a greening economy perspective, we recognise, however, that there is little agreement about the best way to charge for access to water and sanitation services. Three background papers were adapted to assist with preparation of this chapter – a primer on the economics of water use, a primer on financing and a paper on South African experience with the supply of free access to basic water (Beato and Vives 2010; Vives and Beato 2010; Muller 2010). Relevant insights can also be gained from the background paper on Indonesian experience with the provision of water to Western Jakarta (Fournier et al. 2010). The United Kingdom is pioneering various pricing arrangements that reflect the full costs of providing water. The approach emphasises the role of pricing and charging in catalysing innovation and in encouraging communities to share access to water resources.

Sources of revenue Known as the “3 Ts,” in essence, there are three ways to finance water infrastructure and the costs associated with operating that infrastructure (OECD 2009):

1. Users can be charged a tariff for the water provided to them;

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Charging for access to water Shifting to a green economy usually involves a commitment to begin charging for the full costs of resource use. With regard to water, however, there is a dilemma as access to clean water and adequate sanitation services is a human right (United Nations 2010a). In a green economy, the efficient use of resources is encouraged, as is investment in built infrastructure. There is also an emphasis on equity.

When considering the most appropriate charge to set, from an efficiency perspective, it is useful to distinguish between:

■ The capture, storage, treatment and supply of water for public rather than private purposes;

■ Situations where water supplies are abundant and when supplies are scarce;

■ The supply of water to households, to industry and for irrigation;

■ Regions where institutional capacity charges is strong and when it is weak; and

■ The need to recover daily operating costs and the need to make an adequate return on capital so that the supplier (whether public or private) can afford to maintain both natural and built infrastructure.

Complicating the issue, there is also a need to consider the implications of charging people for the full cost of providing sanitation services. First, sanitation service provision generally requires access to water. Second, there are important public health issues to consider. When, for example, one person defecates in the open, health risks are imposed on all who live nearby. In an attempt to avoid the emergence of such problems, governments

to collect

Austria WW3 Austria WS2 France

Korea

Czech Republic inv WSS4

Mozambique6 Ethiopia5 Mexico

Armenia8 Moldova7

Egypt (Cairo) Georgia9