Subsidies can be used to reward actions that promote water security and mitigate the impacts of policies that are unfavorable for poor and other underprivileged groups. This Tool introduces the basic principles related to subsidies for water, showcases the differentiated use of subsidy mechanisms in the irrigation and WASH sub-sectors, provides an analytical framework for classifying subsidies, and discusses contested issues related to introducing new subsidies in the water sector.
A subsidy refers to “when a user/customer pays less for a product or service than the service provider’s cost, leaving a third party (e.g., government, other users, future generations) responsible for covering the difference” (World Bank 2019, 3). Subsidies and positive economic incentives in the water sector typically arise in the following circumstances:
- To cover debts and deficits incurred by a public water service provider that is in default
- To depress the general level of tariffs or charges for political motives
- To favour certain groups of consumers over others, through the tariff structure, or by paying water bills through social security schemes, or providing farmers with free water or subsidised power
- To encourage the take-up of socially desirable services (e.g., providing household water connections or toilet facilities free or at reduced rates)
- To promote water efficiency by households, farmers, companies etc. by subsidised loans or product prices for conversion to improved practices such as drip irrigation, or water-efficient production processes or household appliances.