From tariffs to trust: making water pricing work

Published on: 07/10/2025

This blog shares our reflections from the recent One For All alliance “Finance Connect” conversation series on tariffs. This session was chaired by Leslie Pories (WaterAid) who opened with  “Only this group could get excited about tariffs!”.

Tariff reform isn’t just a technical exercise—it is a political, social, and communication challenge.  It is vital as it is one of the most important tools we can use to achieve sustainable, equitable water and sanitation finance. The session focused on how to design and deliver tariff reforms that are financially sound, socially fair, and politically feasible.

Let’s get the terminology right: pricing vs. tariffs (and why words matter)

Water pricing is the overarching concept - the economic logic behind what water should cost across different uses and users. The conversation some people have heard about “valuing water correctly” would fall into this category. Tariffs are one specific tool for recovering some of those costs from customers. It is what we all pay to our water provider when we receive a bill.

Tariff reform is frequently a stepping stone to broader pricing reform. Making this distinction clear helps prevent tariffs from being burdened with tasks that are better handled by other policy tools (e.g., social protection, conservation incentives, or polluter-pays regulation).

The myth that won’t die: blanket subsidies help the poor

It is not true that existing subsidies in the sector are targeted at the poor. In country after country, untargeted subsidies mostly benefit wealthier, already-connected users. Untargeted subsidies waste scarce public budgets and entrench inequalities.

A World Bank review across ten countries showed that only a fraction of the subsidies reaches the poorest quintile, with the lion’s share benefiting the richest. Meanwhile:

• Unconnected and informal settlements pay more per litre (vendors, tankers, sachets).
• Cross-subsidies often have the opposite effect (domestic users subsidize agriculture/industry).
• Utilities lacking maintenance funding can’t maintain their assets; billions in capital investments quietly disappear. 

What are we optimizing for? Less objectives deliver more

Real reform starts by choosing and prioritizing just one or two objectives for tariffs:

• Financial sustainability (cost recovery, revenue stability)
• Economic efficiency (right price signals)
• Equity/affordability (protecting vulnerable households)
• Simplicity and transparency (administrative feasibility)
• Political acceptability (yes, it matters)
• Conservation and environmental sustainability

Attempting to address multiple policy objectives exclusively through tariff structures results in trade-offs that are often unmanageable and counterproductive. Depending on the specific objectives, it may be more effective to use tools like vouchers, rebates, lifeline grants, pollution charges, or demand management, rather than relying solely on tariffs.

Tariff structures and tariff levels: stop conflating the two

Two design layers often get mixed up:

• Tariff structure: the methodologies and calculations used to apply the charges (uniform volumetric; fixed and volumetric; increasing block tariffs, connection fees, etc.).
• Tariff level: the average price paid and the degree of cost recovery (the amount and nature of the costs of service providers that are recovered through tariffs).

Increasing block tariffs (IBTs) remain common in many least developed countries because they can support conservation and revenue goals. However, they can become regressive if the first block is set below production cost, or where multiple low-income households share one connection and therefore  “spill” into higher blocks where the price per cubic metre is higher. Designing the structure without understanding household realities yields a policy that looks progressive on paper but isn’t in practice.

Who pays for what? The 3Ts and the reality of covering costs

Across contexts, tariffs, taxes, and transfers (the 3Ts) combine differently:

• Urban water tariffs tend to cover minor and regular maintenance. In middle-income settings, this extends to cover some capital maintenance or even portions of capital expenditure.
• Rural water and sanitation typically rely more heavily on taxes and transfers, with tariffs covering a smaller share.

For recovering costs from tariffs as opposed to taxes, the level of income of the country and the average population matter, but so does sector maturity and regulatory enforcement. Tariff realism refers to aligning tariffs with the actual costs of providing services to different user groups. It makes the funding mix of the 3Ts explicit and predictable, helping utilities and service providers avoid financial deficits.

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“Show me it can be done” — reference points

Singapore often comes up as a model, for good reason, they have:

• Two-block tariffs with full cost recovery in the first block and marginal-cost pricing beyond it.
• Water conservation tax and targeted vouchers for low-income households (affordability handled via social protection, not by under-pricing water).
• Nationwide conservation campaigns to help reduce per-capita use.

Benin offers a newer, macro-led example:

• A Ministry of Finance–driven reform package: utility modernization, rural water agency restructuring, investment strategies, and tariff reform linked to affordability.
• Even more unusual: standardized rural tariffs—raising important questions about how to balance different cost structures across dispersed geographies.
• Improved credit profile enabled Eurobond issuance for water investments.

Ukraine (see the UNICEF policy brief ):

• Modelling scenarios (see image below) where commercial/industrial tariffs shoulder more of the maintenance burden, minimizing immediate impacts on domestic users amid rising poverty.
• The lesson: technical modelling plus transparency can create political room to move ahead with reforms.

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Politics, trust, and the service-quality trap

The room coalesced around a sobering truth: you won’t win tariff increases if a service is noticeably poor. When non-revenue water is 40–70%, billing systems are unreliable, or where continuity and quality are poor, any tariff conversation hits a wall of mistrust—and rightly so.

The roadmap that seems to work:

1. Invest first in visible service improvements (pressure zones, leak reduction, meter accuracy, customer care).
2. Communicate relentlessly—evidence, progress, timelines, before/after stories. Politicization and sectoral lobbies (notably agriculture) show how easily tariff debates can be reframed—often drawing the focus away from the largest users.
3. Link tariff increases to performance milestones that customers can feel at the tap.

Leadership opens the window, but regulation keeps it from slamming shut

We heard different cases with stark contrasts regarding the value provided by political leadership: in some contexts, strong executive leadership helps to push reforms through with resistance from customers diminishing as results become visible. Elsewhere, however, tariff setting fluctuates with election cycles. Politicians may promise the reduction of water tariffs as part of a political campaign, and then, once elected, ignore their own experts and demand this adjustment. In addition to challenging effective pricing structures, such practices undermine investor confidence and disrupt utility planning.

Bridging that tension means protecting the revenue streams of service providers through regulation:

• Independent tariff regulation grounded in transparent methodology.
• Ring-fencing utility revenues so water bills don’t end up subsidizing unrelated line items.
• Predictable, annual adjustments indexed to inflation/cost drivers.

The takeaway is that a creditworthy entity + ring-fenced revenues + credible regulator promote financeability.

In many places (e.g., India, parts of Latin America, the Netherlands), municipalities borrow and on-lend funds, or operate departments with ring-fenced budgets. Access to municipal development banks (or pooled facilities) can significantly reduce the cost of capital.

What “good” looks like

When tariff reforms work, they tend to share these elements:

• Constant, transparent communication (before the figures change).
• Explicit subsidy audits—who benefits now, who should benefit instead?
• Credibility by performance—fix something tangible first.
• Incrementalism—small, predictable increases beat big shocks.
• Regulatory protection from political manipulation—methodologies, automatic pass-throughs, ring-fencing.
• Leadership—to open the window—and institutions—to keep it open.

Closing thoughts

Tariffs are not just random numbers. They are a promise about service, a signal about value, and a test of institutions. If we start with people, tell the truth with data, protect those who need it, and fix what’s broken before we charge more, tariff reform stops being a sensitive issue—and becomes a path to durable, inclusive water and sanitation services.

This session focused on tariffs and the real cost of producing each cubic metre. But water is getting scarcer, and users value it differently. The next conversation in October will push us into shadow pricing and value-based approaches—how to reflect opportunity costs, sectoral trade-offs, and environmental externalities without breaking equity or trust.