Increasing Block Tariff structures as a water subsidy mechanism in South Africa: An exploratory analysis

Abstract

The primary goals of water pricing are to ensure that water is used sparingly and that sufficient revenues are earned. Pricing can, however, also be used to address equity concerns. One such policy often applied in developing countries is to charge a higher marginal price as consumption increases, to encourage a more efficient use of water, and to finance water subsidies by crosssubsidising water use. However, in reality water subsidies do not necessarily reach their intended beneficiaries. This paper explores the efficacy of such a pricing structure in subsidising water consumption for poor households in South Africa. The main finding is that this pricing structure does not ensure that water subsidies reach the intended targets; that is, the poorest. A further important result from these findings is that the magnitude of redistribution via the water tariff system is relatively small compared with other components of social spending.

Counteracting Inequality in Markets via Convex Pricing

“…Since the pricing rule from Theorem 4.1 is strictly convex for ρ < 1, an agent can decrease her payment by masquerading as multiple individuals and splitting her purchase across those identities. 10 In Appendix 7, we propose a model for analyzing Sybil attacks in markets, and show that if these attacks are possible, there exist instances where no pricing rule can implement CES welfare maximization in WE (Theorem 7.3). 11 Additional results.…”

“…Convex pricing is especially pervasive in the water sector, where such pricing rules are known as increasing block tariffs (IBTs) [48], typically implemented with discrete blocks of water (hence the name). IBTs have been implemented and empirically studied in Israel [4], South Africa [10], Spain [20], Jordan [25], and the United States [37], among many other countries.…”

Addressing the social consequences of tariffs for water supply and sanitation

“…Source: Burger and Jansen, 2014;Calfucoy et al, 2009;Van der Berg et al, 2009. There is broad consensus that subsidies delivered through tariffs for water supply and sanitation services tend to be poorly targeted and regressive. Studies show that such subsidies even lead to more unequal distribution of resources as compared to if subsidies were equally distributed among the population, due to errors of inclusion as well as of exclusion from the subsidies (Fuente et al, 2016).…”

Water Pricing Experiences and Innovations

“…Komives et al ( 2005 ) also draw from their experience in developing countries that IBTs have, in fact, regressive effects, because poor households are often large ones, so their consumption ends up in the upper blocks. It is, for instance, the case in South Africa, where the government's decision held in 2001 to provide a basic amount of water, free of charge, to all citizens was translated into 6 free cubic meters per household (in fact per subscriber and then behind him sometimes many households) and per month (Smith 2012 ;Burger and Jansen 2014 ). This tariff was challenged in the court by Soweto residents, who previously had access to unlimited water from standpipes against the payment of rates.…”