In this second video on subsidies I will describe two subsidy schemes that attempt to target poor households. First one word of caution. My understanding of these two subsidies schemes is based on this paper by Andres Gomez-Lobo and Dante Contreras published in the World Bank Economic Review in 2003. There may have been changes made to these scheme since then. The Chilean Subsidy Scheme was designed to provide financial assistance to poor households with pipe connections to help them pay their water bills. It was started in 1990. The target population of the program was households that were spending more than 5% of their income on water and sanitation services. Households who wanted assistance had to apply. They were then interviewed in their homes by a social worker to see if they were eligible. The social worker asked about 50 questions to determine if a household was sufficiently poor to receive assistance. Assuming that the respondent answered these questions accurately, it seems to me that the answers to these many questions, should provide the government with plenty of information to determine the socio-economic status of the household. The amount of subsidy each household receives is different because it depends on it's income, the amount of water it uses, and the terrafuse by the water utility that provides the household with service. The subsidy works like an IBT, poor households receive a subsidized volumetric rate up to 15 cubic meters per month. If a poor household uses more water than that, it must pay the full unsubsidized price. The percent of subsidy that a household receives varies by region of the country and it can range from 25 to 85% of the water bill. Once a household is awarded a subsidy the water utility is notified. Then the water utility calculates the household subsequent monthly water bills net of the subsidy and sends the household a reduced bill. So how does the water utility get paid the difference between the household's original bill and the reduced bill? Once a month the water company bills municipalities in its service area to recover the subsidies given to beneficiary households in the last billing period. So where does the municipality get the money to pay this monthly invoice from the water company? The funds for the subsidy program are included in the national budget. Funds flow from the budget office in the Ministry of Finance to the regions. And from the regions funds are transferred to municipalities. And then the municipalities pay the water utilities. These payments to the Chilean Water Utilities represent about 6% of their revenues. In 2004 the subsidy program was amended to provide additional assistance to households determined to be in extreme poverty. This change in the program triggered an increase in program beneficiaries from about 450,000 households in 1994 to about 750,000 in 2006. From my perspective, there are two important features of the Chilean subsidy scheme. First, the scheme tries to deliver subsidies only to poor households that need them. Not to all households through a general subsidized price. This approach has the potential to better target available subsidies to poor households, and to send the correct economic signal to non-poor households about the cost of water services. Second, the scheme takes the responsibility for the subsidies out of the hands of the water utilities and gives it to the government. To me this makes a lot of sense. Water utilities can then concentrate on their core competence, the efficient production and delivery of water and sanitation services. Water utilities are not in the business of designing and implementing social policy. This is not their area of expertise. Let's now turn to our second example. Colombia has tried a different approach called geographic targeting. The objective is the same as the Chilean system, to target the available subsidies to poor households, not to everyone. In Colombia, municipalities are responsible for classifying households into six socioeconomic categories, ranging from very poor to rich. The National Planning Department, provided the guidelines and methodology for doing this classification. The classification procedure, tried to classify geographic areas of a city that had similar housing units. All the dwellings within this geographic area were classified in the same socioeconomic category. Provision was made, however, for individual housing units to be reclassified into another group. Individuals can request a revision of their dwelling's classification. Of course, this is unlikely if someone has a nice house in a poor neighborhood. The plan for the Colombian scheme was that the funds for the subsidy would come from two sources. First, general tax revenues, and second, cross-subsidies from industries and high-income households. This slide shows the tariffs paid as a proportion of the cost-recovery tariff for 15 Colombian water utilities by the socioeconomic classification of dwellings. As shown, households in the two poorest categories, low-low and low, pay less than half the average cost of water supply. And only households in the highest category pay more than the average cost. What this table does not show is how many households ended up in each of the six socioeconomic categories. Another important issue is whether Colombian Utility estimated average costs accurately. These costs may be too low, to allow cost recovery. As we've seen in this course, estimating the full capital and ONM costs of water and sanitation services is challenging. How well do you think the Chilean and Colombian subsidy schemes worked in practice? In the next video, we will look at some empirical evidence on this question.
