NERI Seminar Dublin: Assessing Funding Models for Water Services Provision
12 November 2014, 3:50pm - 5:15pm
Assessing Funding Models for Water Services Provision
Dr Tom McDonnell (NERI)
Water services provision is a natural monopoly. This drives a propensity to market failure and allocative inefficiency in the absence of robust regulatory measures. In this context I discuss the appropriate role of the regulator and the advantages and disadvantages of pricing water usage. Beyond subsidies funded from general taxation there are potentially three main sources of revenue for a water utility. These are connection fees, recurrent fixed charges and volumetric charges based on usage.
Water policies pursue multiple objectives and a wide variety of pricing structures are employed within the OECD. These objectives can be structured around four sustainability dimensions: environmental sustainability; financial sustainability; economic efficiency and social concerns including affordability. There are trade-offs between each of these policy objectives. Full cost recovery through usage based tariffs creates affordability and equity concerns, while the most efficient allocation of water may not be consistent with water saving and environmental concerns. This paper considers the main trade-offs as a set of dilemmas and discusses the advantages and disadvantages of a variety of different water charging models.
Water charges for households are being introduced in Ireland in 2014 and I consider a number of policy options based on the premise that water charges remain. Water affordability and water poverty are important concerns in this context. A universal free allowance has been proposed as a means of protecting households from water poverty. The proposed system is highly regressive in its current form and should be abolished. A small free universal allowance will not address the affordability issue while a large free allowance undermines other policy objectives – notably economic, financial and ecological sustainability. Instead, a system of income related water allowances, or water credits, is considered. Combining a fixed cost and volume based model with a system of income related water credits may best reconcile the four main policy objectives, would address the affordability issue at a much lower cost to the exchequer, and would ensure that the combination of water charges and low income does not become a barrier to accessing water and wastewater services.
Tea and coffee from 15:50. The seminar will commence at 16:00.
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