OECD "moving towards" full cost water pricing

Survey finds increasing internalisation of water costs, evidence that price rises cut consumption

Member states of the Organisation for Economic Cooperation and Development (OECD) are moving towards "full cost" water pricing, but subsidies still remain common, according to a survey released by the Paris-based agency. The study provides a factual backdrop to an ongoing row in the EU, with governments resisting a European Commission proposal to include the principle in the draft water framework directive.

The OECD report takes stock of changes in water pricing policies over the last decade. Despite considerable variation between countries, it finds that there has been progress in most "toward the goal of more efficient and effective pricing" of water services. These include a general movement away from pricing solely to generate revenues and towards the use of tariffs to achieve a wider range of economic, environmental and social objectives.

Nevertheless, despite increasing water prices in real terms nearly everywhere, very few OECD countries have achieved full cost recovery and a wide variety of subsidies still in evidence, the report finds. While most countries currently support the principle of full cost recovery in water services, it comments wryly, "some...are more advanced than others in [its] actual implementation".

In Ireland, for instance, the capital costs of providing household water supplies are entirely met by the government and the effective subsidy is estimated to be 25%. Even in the UK's fully privatised water industry, the report says, there are some subsidies for household water supply, such as the exemption of most water supply from VAT (sales tax). Household water bills would rise significantly in a number of countries if full cost recovery was completely implemented, the report concludes (see table below).

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Water charges as proportion of household income
                       Existing       Full cost
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Portugal                 0.5%           2.8%
Greece                   0.4%           2.1%
Ireland                  0.3%           1.9%
Spain                    0.4%           1.6%
France                   1.1%           1.5%
UK (Eng & Wales)         1.2%           1.3%
Germany                  1.0%           1.2%
Denmark                  0.8%           0.9%
Korea                    0.6%           0.9%
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Source:  OECD, based on Ecotec (1996).
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Similarly, the OECD finds widespread subsidies to industrial water supply and even more in irrigation water supply to agriculture, which remains the area with the widest average gap between actual charges and the calculated "full cost". The report also catalogues a wide variety of subsidies to sewerage and sewage disposal.

Backing up the theoretical argument that full cost recovery ought to lead to more efficient water use both economically and environmentally, the study reports "further evidence" that households, industry and farmers alter their water consumption patterns in response to price level changes. In five countries where there have been substantial real increases in household water prices, for instance, consumption has fallen.

Follow Up:
OECD, tel: +33 1 45 24 82 00; References: "The Price of Water: Trends in OECD Countries".

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