recent developments in the pricing of water services in oecd countries

Recent developments in the pricing of water services inOECD countries

p

Tom Jones

OECD Environment Directorate, 2, rue Andre Pascale, 75016 Paris, France

Received 22 April 1999; received in revised form 23 August 1999; accepted 21 September 1999

1. Introduction

In 1987, the OECD completed a study on the Pricing of Water Services in Member countries(OECD, 1987). A second overview on this theme, a type of `10-year progress report', hasrecently been carried out. This new study provides country-speci®c information (andcomparative interpretations) about water pricing practices and trends in the 29 OECD Membercountries. This information is organised around the three key water-using sectors of theeconomy: households, agriculture and industry. It also addresses several `cross-sectoral' pricingissues, such as subsidies, institutional change and a�ordability.This paper provides an overview of some of the main results of the recent study (see OECD,

1997, 1999a, 1999b, 1999c, 1999d). Its focus is on changes in water pricing practices since 1987,especially in terms of tari� structures and tari� levels1.

2. Changes in the institutional context

2.1. International

At the level of principle, both the polluter pays principle (PPP) and the user pays principle

Water Policy 1 (1998) 637±651

1366-7017/98/$ - see front matter # 2000 Elsevier Science Ltd. All rights reserved.PII: S1366-7017(99)00012-4

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pPaper prepared for a `Workshop on the Political Economy of Water Pricing Implementation', World Bank,

Washington, DC, November 3±5, 1998. The opinions expressed in this paper are those of the author and do notnecessarily re¯ect the views of either the OECD Secretariat or any individual OECD Member country.1 The focus of the paper is on household and industrial water pricing. Agricultural prices are not discussed,

although they were part of the original study.

(UPP) are being interpreted more broadly now than in the past, in addition to being applied toa wider number of situations. The PPP was originally intended as a way of encouragingcountries not to subsidise the investments necessary for ®rms to comply with pollution controlregulations. However, OECD countries later accepted that not only pollution prevention andcontrol costs, but also pollution damage costs, should be borne by the polluter (OECD, 1991).More recently, the 1992 Maastricht Treaty also contains a speci®c reference to the PPP in itstext, as does Principle 16 of the Rio Declaration (United Nations, 1992).The UPP has also become more widely accepted during the past decade and the `water'

applications of this principle have expanded considerably (Smets, 1999). The OECD formallyadopted the UPP in its 1989 Recommendation on Water Resource Management Policies,stating that (OECD, 1989): `` . . .resource pricing should at least cover the opportunity costs ofthese (water) services: the capital, operation, maintenance and environmental costs''.Other important statements of principle have also been made recently with direct reference

to the water sector. For example, the Dublin Statement on Water and SustainableDevelopment (1992) explicitly recognised at the international level that `` . . .water has aneconomic value in all its competing uses and should be recognised as an economic good''.(http://www.gwp.sida.se/gwp/gwp/dublin1.html). A 1997 UN resolution focused on the needfor `` . . .pricing policies that are geared towards cost recovery and the equitable and e�cientallocation of water, including the promotion of water conservation.'' (United Nations, 1997).A 1998 UN-sponsored Conference on Water and Sustainable Development made the same

point, emphasising the need to `` . . .mobilise adequate ®nancial resources from public andprivate sectors'' [in order to achieve e�ective water management] and to provide for`` . . .progressive recovery of direct service costs and overheads, while safeguarding low incomeusers'' (http://www.iisd.ca/sd/water/sdvol13no4e.html).The European Union is currently considering the adoption of a `Framework for Community

Action in the Field of Water Policy' (Water Framework Directive). This proposed Directiverepresents an ambitious plan to integrate several disperse pieces of European legislation relatedto water issues. The principle of full cost recovery (including environmental costs) lies at theheart of the Directive (Article 9) and pricing is expected to play a major role in achieving thatgoal.

2.2. National

There is some tendency for OECD water supply systems to evolve toward the formation ofgroupings of municipalities in order to organise supply at a larger scale. This re¯ects arecognition that the provision of water services can be ine�cient when there are too manyindependent water providers involved in the process. (Italy has 13500 water networks and 6600municipalities that manage their own water supplies nation-wide.) Thus, some consolidationhas been occurring in several OECD countries. In the Netherlands, for example, the number ofwater boards has been reduced from 129 in 1990, to only 66 in 1998.There is also a tendency for the degree of management autonomy enjoyed by local water

utilities to increase. Broadly, the role of the national or regional government in watermanagement seems to be shifting from that of `primary service provider' to being the `creatorand regulator' of the water supply system. In a small, but increasing, number of countries,

T. Jones /Water Policy 1 (1998) 637±651638

independent economic regulators have been set up to regulate water prices on an autonomousbasis. These economic regulators are usually in charge of setting prices, but may also haveother responsibilities as well, such as establishing service performance standards.Water supply regimes remain, on the whole, publicly-owned, mainly because of the `natural

monopoly' characteristics of these systems, which limit both the political and technicalpossibilities for introducing private markets into the management of water supplies. Theselimitations notwithstanding, an increasing number of countries are now experimenting withvarious forms of private management of these regimes. Some countries have gone considerabledistance toward full privatisation of the supply system, most notably in the UK. Theprivatisation of the UK water industry took place in 1989 and it remains the most signi®cantwater privatisation experiment in the OECD Region today. However, some parts of the UShave also moved in this direction and full privatisation is currently being considered by theCzech Republic.Even where the water supply system remains publicly-owned, service management is

increasingly being delegated to private operators. This approach seems particularly well-suitedto decentralised systems, in which municipalities see delegation as a useful way of overcomingtheir own lack of technical expertise and/or ®nancial resources. In several countries, serviceproviders are permitted to decide whether they want to manage the service themselves (directmanagement) or to delegate management responsibility to a private operator. `Concessions'(i.e. the delegation of authority to private concerns) already involve 75% of public watersupplies in France (although only one-third of waste-water services). The same approach hasalso been adopted in the Czech Republic and is spreading rapidly in Spain and Portugal.Hungary and Poland are also considering moves in this direction.A wide range of recent government Acts, Decrees, Orders and decisions in OECD countries

are also changing the institutional context in which water pricing is being carried out. Much ofthe radical reform currently being implemented in Australia are being driven by the 1994Council of Australian Governments (COAG) agreement to implement a Strategic WaterReform Framework.In the US, the Safe Drinking Water Act (including the 1996 Amendments), the enforcement

of which is largely delegated to individual States, is often cited as a force driving toward higherprices for water services. Signi®cant legislative reforms have also occurred recently in France,Belgium, Denmark, South Korea, Italy and Portugal, among others. For example, in France,the 1992 Water Law prohibits the use of `¯at fee' tari�s, thereby ruling out both entirely non-volumetric schemes and two-part tari�s. Although some exceptions are allowed, the result hasbeen a decisive move towards one- or two-part tari� systems, without minimum consumptioncharges.In Denmark, a recent law imposes an obligation on water utilities to ensure that all

properties newly connected to the public water supply have a water meter installed.Furthermore, at least some portion of water deliveries must now be charged using a volumetricrate. South Korea issued (1996) the Comprehensive Water Management Countermeasures, aimedat both full cost recovery and demand management objectives. The result has been asigni®cantly reduced emphasis on ®xed rates.Portugal has developed (1993±1994) a new legal framework for water services, in which

private companies will play a larger role. A 1994 law also completely restructured the Italian

T. Jones /Water Policy 1 (1998) 637±651 639

water industry, based on `optimal management areas' (similar to river basin authorities).Again, the private sector is expected to play a major role in the new structure.

3. Evolution of tari� structures: households

Given the widely di�ering demands on water supply systems, and the di�erent institutionaland cultural frameworks within which pricing policies have to operate, it is not surprising thatthere continues to be considerable variation in pricing structures across OECD countries. Inparticular, the rates at which countries are moving toward marginal cost pricing, full costrecovery, and better targeting of support for low-income users, vary widely.Nevertheless, there does seem to be a general movement away from the pricing of water

services solely to generate revenues and towards the use of tari�s to achieve a wider range ofeconomic, environmental, and social objectives. Awareness also seems to be growing aboutwhich particular elements of water price structures (connection charges, volumetric and ®xedcharges, etc.) can best achieve which particular policy objectives.

3.1. Metering

The metering of water consumption is a prerequisite for the application of marginal costpricing principles. About two-thirds of OECD Member countries already meter more than90% of single-family houses and others are actively involved in expanding their meteringsystems in some way (Table 1). On the other hand, the trend towards metering is not universal;it is still a very controversial policy issue in some countries, largely because of its potentialimplications for low-income households.There has therefore been interest expressed in some countries in the idea of `selective

metering' of houses. For example, this can involve compulsory metering where new waterresources are scarce, where households are consuming signi®cant amounts of `discretionary'water (e.g. for luxury use) and where the initial installation costs of meters are likely to berelatively low (e.g. new homes).The situation in apartment blocks, where most of the OECD population lives, is more

varied. Although the water supply entering apartment buildings is metered in nearly everycountry, it is only in a few countries that separate metering is available for individualapartment residents. In most cases, the owner, manager, or another responsible person receivesa volumetrically-based water bill, but then recovers this charge, together with the chargeapplying to waste water services, from residents, using some ¯at rate criterion (such as m2 of¯oor space).For both equity and e�ciency reasons, some countries are moving toward metering water

use in individual apartments. In Germany, signi®cant moves of this type have been made sincethe 1980s in Hamburg, Berlin and Frankfurt (Kraemer & Nowell-Smith, 1997). In France too,the number of meters in apartments appears to have grown signi®cantly in recent years.However, the trend toward apartment metering is much less marked in most other Europeancountries.


3.2. Water supply

Table 2 summarises the current situation with regard to household price structures in thepublic water supply system. Broadly, there is a trend away from ®xed charges, and toward

Table 1Metering penetration in single-family houses and apartments connected to the PWSa

Year Metering penetratrion (%) in:

single-family houses individual apartmentsb all individual households

Australia 1998 95±100 insigni®cantc n.a.

Austria 1998 100 very fewd n.a.Belgium 1997 90 many cases n.a.Canada 1998 55 few n.a.

Czech Republic 1998 100 n.a. n.a.Denmark 1996 64 1 in Copenhagen n.a.Finland 1998 100 very low n.a.France 1995 100 > 50 88

Germany 1997 100 10±20 55±60Greecee 1998 100 100 100Hungary 1998 100 n.a. n.a.

Iceland 1997 0 0 0Ireland 1998 0 0 0Italy 1998 90±100 many examples < 30

Japan 1997 100 94 100Korea 1998 100 100 n.a.Netherlands 1997 93 n.a. n.a.

New Zealand 1997 25 n.a. na.Norway 1998 low 0 or very low 10±15Poland 1998 100 0 about 10Portugal 1998 100 n.a. n.a.

Spainf 1998 nearly 100 nearly 100 95Sweden 1998 100 0 about a halfSwitzerland 1998 100 0 n.a.

Turkeyg 1998 nearly 100 nearly 100 > 95United Kingdom:England and Wales 1998 12+ a few 11

N. Ireland 1997 0 0 0Scotland 1997 near 0 near 0 0.002

United States 1997 90+ n.a. n.a.

a n:a: � not available:.b This applies to cold water metering; hot water provided in apartments under district heating schemes is normally

metered but even here, the practice varies widely.c `Insigni®cant' in Sydney only; the situation elsewhere is unknown.d It is estimated that `perhaps about 20' apartment buildings in Vienna have individual meters.e Athens only.f Barcelona only.g Ankara only.


Table 2Public water supply: household tari� structures (% of utilities (U) or population (P) with a given structure)a

Year Number ofutilities insample

Unit Flat fee Constant volumetric rate Increasing-block schedule Decreasing-block schedule Usualnumber ofblocks

no ®xedcharge

plus ®xedcharge

plus ®xed+min

no ®xedcharge

plus ®xedcharge

plus ®xed+min

no ®xedcharge

plus ®xedcharge

plus ®xed+min

Australia 1997 15 P (U) ± 1 (1) 68 (8) ± ± 27 (5) ± ± 4 (1) ± 2Austria 1993 U ± ± 80 ± ± 20 ± ± ± ±Belgium:Flanders 1997 U,P ± ± ± ± 100 ± ± ± ± 2Wallonia 1997 U,P ± 24 24 24 ± 76 ± ± ± ± 2Brussels 1997 U,P ± ± 100 ± ± ± ± ± ± ± ±

Canada 1996 1452 U 56 27 27 27 4 4 4 13 13 13 2Czech Rep. 1998 U,P ± 100 ± ± ± ± ± ± ± ± ±Denmark 1998 U,P rural mostFinland 1998 U,P ± ± 100 ± ± ± ± ± ± ± ±France 1990 500 U 2 5 46 47 ± ± ± ± ± ± ±Germany 1998 U,P ± ± 100 ± ± ± ± ± ± ± ±Greece 1998 1 U ± ± ± ± ± ± 100 ± ± ± 5Hungary 1997 268 U ± 95 ± ± 5 ± ± ± ± ± 2Iceland 1997 1 U 100 ± ± ± ± ± ± ± ± ± ±Ireland 1998 all domestic water charges have been consolidated into general taxation since 1 January 1997Italy 1998 P yes ± ± ± ± 100 ± ± ± ±Japan 1998 1900 U ± ± ± 42 ± ± 57 ± ± 1 2±7Korea 1998 P,U ± ± ± ± 100 ± ± ± ± 6±10Luxembourg 1997 U ± ± yes ± ± yes ± ± yes ± 2±3Mexico 1996 U ± ± ± ± 74 74 74 26 26 26N. Zealand 1998 P 75 ± 25 ± ± ± ± ± ± ±Netherlands 1996 28 P(U) 7 (1) ± 90 (25) ± ± 3 (2) ± ± ± ± 2Norway 1998 P 87 ± 13 ± ± ± ± ± ± ± ±Poland 1998 mostPortugal 1996 ± most 2±5Spain 1994 389 P (U) ± 10 (65) 10 (65) 10 (65) 90 (321) 90 (321) 90 (321) 0.2 (3) 0.2 (3) 0.2 (3) 3Sweden 1998 288 U ± 100 ± ± ± ± ± ± ± ±Switzerland 1998 P (U) ± 95 (235) ± ± 5 (1) ± ± ± ± 2Turkey 1998 P ± ± ± ± 100 100 100 ± ± ± 3UK: 1998 P 90 ± 10 ± ± ± ± ± ± ± ±Eng and Wales 1998 P 89 ± 11 ± ± ± ± ± ± ± ±N. Ireland 1998 P 100 ± ± ± ± ± ± ± ± ± ±Scotland 1998 P 100 ± 0.002 ± ± ± ± ± ± ± ±

US 1997 151 U 2 1 32 32 1 30 30 34 34 34 3

a Belgium: Antwerp meters high water-users in the residential sector, and o�ers a choice to other households. In Flanders, following a regionaldecree which came into force on 1 January 1997, all utilities introduced a free allowance of 15 m3 per person per year (about 41 lhd). That is the

reason all Flanders utilities are recorded as having an increasing block system. Without the free allowance, only two utilities would be recorded ashaving an increasing-block system; all the rest would in that case be classi®ed as `constant volumetric rate plus ®xed charge'. France: old surveydata. Water Law of 1992 ruled out (with some exceptions) a ¯at fee and constant volume rate+®xed+minimum charge. These categories are now

in decline. Germany: some water suppliers apply a linear tari� with no ®xed element for household consumption. Greece: Athens only. Iceland:Reykjavik only. Italy: a very small ®xed charge (meter rent) is applied and (often) a free minimum allowance as well. Japan: while Japanese utilitiesdo levy a minimum charge (applicable for the ®rst 10 m3), they do not levy a ®xed charge. Netherlands: Amsterdam is unmetered; Rotterdam and

a few smaller water boards are partly unmetered. Most of these plan to meter all households soon. Two smaller water supply utilities o�er meteredhouseholds a free allowance (30 m3/year and 25 m3/year) before a single volumetric rate begins to operate. Turkey: information applies only tourban areas and metropolitan cities (covering 65% of Turkey's population). England and Wales, Scotland: a choice is o�ered to all households,except those living in new houses (which are generally metered when they are built) and (i) users of garden sprinklers and swimming pools and (ii)

under some water companies, certain other selected groups of high-use houses or households are also compulsorily metered. Apartments: there isno necessary consistency in the data concerning how individual apartments and apartment buildings are treated in di�erent countries; the best pre-sumption is probably that the percentage ®gures refer to single-family houses and apartment buildings.

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volumetric charging. Even where ®xed charges persist, there is there is evidence of a shifttoward the reduction (or even abolition) of large minimum free allowances. Australia andSouth Korea have each made signi®cant strides in this direction, and Japan has recently beendebating the continued use of its `basic rate'. In South Korea, for example, the ComprehensiveWater Management Countermeasures led to the abandonment of minimum ®xed charges by 59of 167 local governments.

Some eastern European countries (Hungary, Poland, Czech Republic) already use pricingsystems based solely on volumetric pricing, with no ®xed charge element at all. Discussion of amore volumetrically-based approach is also under active consideration in the Netherlands(Waterspoor ). A new law was proposed in Italy in 1994, which would intensify the volumetriccomponent of the existing price structure.

Within the volumetric charge, there is a shift underway away from decreasing-block tari�sand toward increasing-block ones. Sample data for the US, for example, about a 16% shift ofthis type between 1987 and 1997. Canada exhibits a similar pattern, as do Spain, Italy, Greeceand some regions of Belgium.

There are also some experiments occurring with `peak pricing' arrangements, especiallyseasonal pricing. A 1991 survey of US utilities found 7 utilities out of 121 using some form ofseasonal pricing; by 1997, 10 of these utilities were doing so (Lippiatt & Weber, 1982; RaftelisEnvironmental Consulting Group, 1998). On the other hand, not much interest is beingexpressed in other forms of temporal variation in price structures (e.g. time-of-day).

3.3. Sewage treatment

The price structures in place for (public) sewage-related services are not always clear, mainlybecause responsibility for sewerage, sewage treatment and drainage are typically held bydi�erent parts of the public service, each with its own principles and practices. However,available data suggest that sewage charges are directly related to volumes of water deliveredfrom the public water supply system. Thus, the structure of waste water charging systems tendsto closely follow that of domestic water supply systems in most OECD countries.

The trend toward more incentive-based charging for the public water supply has thereforegenerally led to more wastewater revenues being recovered through volumetric charging. Thispressure is being increased in some countries by other factors, such as the 1996 decision inItaly to levy sewerage and sewage treatment charges on 100% of invoiced water, rather thanon only 80%. Similarly, in Belgium, purely volumetric wastewater levies at the regional levelwill soon replace other, less direct, mechanisms.

With the potential introduction of the Waterspoor tari� in the Netherlands, householdwastewater would then be charged volumetrically in that country as well. Conversely, only one-third of the urban population in Australia pay their sewerage and sewage treatment charges ona volumetric basis and the volumetric share is typically very small (except in three utilities),despite the general thrust in that country toward consumption-based charging.


4. Evolution of tari� structures: industry

Direct abstractions from the environment represent roughly 75% of total water consumptionby the industrial sector, on average, in OECD countries. Clearly, the public system is not themajor source of industrial supply. This makes it very di�cult to generalise about pricestructures in the industrial sector as a whole.

4.1. Public supply component

Industrial water services on the public system are almost always metered. Most of theseservices are subject to two-part tari�s, involving ®xed and volumetric components. Thevariable part can be either decreasing-block or increasing-block. Connection charges also existin some countries (Denmark, France, Finland). Industries often bene®t from special contractarrangements related to their water services. Conversely, they sometimes are expected tocontribute to special `one-o�' investment costs (e.g. Ireland, Hungary).Non-discriminatory pricing principles are explicitly mentioned in the UK, France and

Germany, but cross-subsidisation remains the norm in Central Europe, where industrial usersstill bear much of the burden of price liberalisation.There is also movement toward marginal cost pricing in some countries (some industrial

groupings in Germany face lower prices o�-peak; some seasonal pricing for industrial users isemployed in parts of the US and in France).The volume and characteristics of industrial sewage vary considerably from one company to

another. Industrial water consumption levels therefore do not represent a good proxy forindustrial sewerage and sewage disposal costs. As a result (and closely related to the shifttoward more cost-re¯ective water tari�s for industry), there has been a trend towards theseparate identi®cation of sewerage and trade e�uent prices for industrial sewage (Table 3).There are now only a few OECD countries in which the costs of industrial sewerage servicesare still included in the price of water supply (or in general local taxes).In most countries, standard sewerage charges are supplemented by `special strength' charges,

designed to recover the costs of any extra capacity that is required to treat particular industriale�uents. Some municipalities do not use these charges because they are concerned about thecompetitiveness implications for local industry; others do not use them because they perceivethe monitoring costs to be too high.Trade e�uent charges usually depend on the metered volume of pollutants and/or pollution

content. In France, for example, a charge is levied on the 8 types of pollutant deemed to bemost dangerous and di�cult to treat (heavy metals, phosphorus, soluble salts, etc.). The chargeis calculated as a function of pollution produced in a normal day, and during the period ofmaximum activity. In other cases, the charging formula can re¯ect the costs to the watertreatment company of treating a particular e�uent, or the `environmental sensitivity' of thereceiving waters.Service providers generally receive the proceeds of trade e�uent charges. Revenues can also

be channelled into an investment fund, which can then allocate funds to water serviceproviders, or it can commission waste water treatment investments directly. In France, forexample, industrial users discharging to the public sewer have to pay a pollution charge which


Table 3Price structure for industrial sewage services from the public systema

SC Tari� structure FCR ND MC DTS Subs Special tari�s

Australia yes ®xed (various bases)+volume (various bases) yes no yes yes yes n.a.Austria yes ®xed (property size) or volume based (on water use) yes no n.a. no yes partial rebates if less discharges than water usedBelgium yes depends on load yes yes n.a. yes no n.a.Canada yes treatment costs included in water bill if ``no extra strength'' n.a. n.a. no yes n.a. n.a.Czech Republic yes n.a. n.a. n.a. n.a. n.a. n.a. n.a.Denmark yes ®xed (size of property)+based on water volume yes n.a. n.a. n.a. no n.a.Finland yes paid within the water bill (volumetric+connection charges) yes yes no no negl. n.a.France yes percentage of water bill n.a. n.a. n.a. yes n.a. contract-basedGermany yes based on water volume or surface area yes yes yes yes no rebates if less discharges than water usedGreece yes based on water volume n.a. n.a. n.a. n.a. no n.a.Hungary yes based on water volume n.a. n.a. n.a. n.a. yes n.a.Ireland no within water bill, not separate n.a. n.a. n.a. n.a. yes capital contributionsItaly yes based on water volume no no yes yes yes n.a.Japan yes based on water volume no n.a. n.a. yes yes n.a.Korea n.a. based on water volume yes no no no yes noneLuxembourg yes based on water volume n.a. n.a. n.a. n.a. yes n.a.Mexico yes based on water volume no n.a. n.a. n.a. yes n.a.Netherlands yes function of pollutant yes n.a. n.a. yes yes n.a.Poland no percentage of water bill n.a. no n.a. yes yes n.a.Portugal yes based on water volume or property size n.a. n.a. n.a. n.a. yes n.a.Spain yes recover operating and maintenance costs yes no n.a. yes no n.a.Sweden no ®xed (size of meter or property)+volume based yes no yes yes n.a. n.a.Turkey yes based on water volume+connection charge no no no yes yes n.a.UK (England and Wales) yes based on water volume; surface/highway drainage charges yes yes n.a. yes no large user tari�sUnited States yes uniform structure, or increasing-block tari�s n.a. n.a. n.a. yes n.a. no seasonal tari�

a n:a: � not available: SC: is there a separate sewage charge? Tari� structure: what are the types of tari� structures in place? FCR: is there full costrecovery? (i.e. are total revenues required to cover operating expenditure, plus depreciation, plus a return on capital employed?) ND: is non-dis-crimination a requirement? (i.e. do the tari�s for each customers group re¯ect the costs of the customer group concerned?) MC: is there any mar-

ginal cost pricing? DTS: do industrial customers have a di�erent structure to other customers? Subs.: are there any subsidies? Special tari�s: arethere any special tari�s for industrial customers? This does not include extra strength trade e�uent charges.

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varies according to the pollution load of their discharge. The pollution charge is collected bythe service provider through the water bill and is then paid to the River Basin Agencies.In countries where sewerage service costs have risen signi®cantly, industrial users have

increasingly questioned whether the public sewer system represents the most cost-e�ectivemeans of discharging their sewage. As a result, there is evidence of a trend toward more use ofthe self-treatment and e�uent re-use options by industry.

4.2. Non-public supply component

General abstraction charges (usually levied on water abstracted outside of the public system,most of which is industrial water, but sometimes also levied on the providers of public services)are in place in about half of OECD countries. Many of the existing charges have only recentlybeen introduced in Germany (1985), the Netherlands (1995) and Mexico (1997). Portugal hasapproved such a charge, but has not yet implemented it. Other abstraction charges are mucholder, as in France, where River Basin Agencies were created in 1964 and where a verysophisticated regime of abstraction charges was set up at the river basin level.Abstraction charges typically vary by category of use and often by location (they therefore

sometimes re¯ect water scarcities). In some countries, the abstraction charge has an explicitenvironmental objective, so the proceeds are allocated to an environmental fund (Belgium,Czech Republic, Finland, France, Hungary, Netherlands). In the Netherlands, there are twoabstraction charges: one levied by the Provinces, for the protection of groundwater; the otherlevied by the state, within the general taxation regime. In Belgium, only industrial abstractionsfrom groundwater are charged and the proceeds are turned over to a special fund for theprotection of groundwater.General discharge controls are also often imposed on direct sewage discharges (i.e. those

which do not go through the public sewer). The proceeds of these charges always go to thegovernment, since there is no service provider involved. The most common form of dischargecontrol is the need to have a permit to discharge directly back into the river or aquifer. MostOECD countries regulate the quality of waters into which discharges can be made andbreaking these quality standards usually leads to the imposition of ®nes.There are variations on this theme, however. In the Netherlands, for example, it is only

discharges from the largest polluters whose performance is actually metered. For smallerpolluters, pollution loads are estimated using input±output models for each industrial sector.In Mexico, dischargers can obtain ex ante discounts on their discharge fees, if they candemonstrate that signi®cant e�orts have been made to pre-treat wastes. Similarly, in Germany,there is a 75% reduction in the basic charge, if the standards contained in the regulations(expressed as `best available technique') are met.

5. Evolution of tari� levels: households

Table 4 illustrates the broad range of practice in the OECD concerning the imposition ofwater taxes and charges, both on the piped household services themselves and at other stagesof the water cycle. VAT is the most common type of tax. Sweden, Norway and Denmark each


Table 4Taxes and levies in household water tari�sa

Public water supply Wastewater

VAT (%) abstraction charge other taxes VAT pollution charge other taxes

Australia ± ± ± ±

Austria 10 ± 10 ±Belgium 6 [ 0 [

Czech Republic 5 5 [

Denmark 25 ± [b 25 ± [

b

Finland 22 ± 22 ± ±France 5.5 [ [

c 5.5 [

Germany 7 [d

[d ± [

Greece 8%e ±Hungary 12 [ ± 12 ± ±Ireland domestic water charges have been consolidated into the general taxation system

Italy 9 [ 0Japan 5f [ 5f ± ±Korea ± ± ± ± ± ±

Luxembourg ± ±Mexico [

Netherlands 6 [g 0 [

Norway 22 22Poland [ [

Portugal 5 h 0 ±h

Spain 6 [ 0 [

Sweden 25 i ±i 25 ±i ±i

Switzerland 0 ± 0 ±Turkey 15 ± 15 ±j

UK: 0Eng and Wales [ ± 0 ±i ±N. Ireland ± ± 0 ±i ±

Scotland ± ± 0 ±i ±

a An empty cell implies that data were not available; a cell with a `± ' indicates `no charge' and a cell with a `[` in-dicates that a charge is actually levied. This table lists taxes and other charges included or re¯ected in the water bills

of domestic consumers. It re¯ects charges levied in addition to `regular' piped water supply and wastewater charges(e.g. `sewer taxes').b Water levy per m3 and wastewater levy on pollution content of municipal discharge.c FNDAE tax is raised to subsidise rural water systems.d Abstraction charges are 0±0.6 DM per m3.. There are also administrative fees associated with water abstraction

which can amount to a few percent of the water bill.e An 8% tax is imposed on the price of water. There is also an 18% charge for `new projects and meter charges'

but the precise status of this charge is unclear.f 5% consumption tax.g Tax on groundwater abstractions only (which represents 60% of PWS, however).h Planned.i Currently under formal discussion.j In metropolitan areas, new rules allow wastewater levies proportional to deviations from standard municipal pol-

lution discharge parameters.


charge VAT on water services at more than 20%. At the other extreme, Finland and the UKzero-rate water services, while all other EU members have rates between 5 and 10% for pipedwater supplies (although half of these zero-rate waste water).Other distinctive charges imposed on water use are also found in France, Greece, Germany

and Denmark and are currently under discussion in Sweden. In France, for example, thecharge levied for the Fonds National des Adductions d'Eau (FNDAE) adds about 1% tohousehold water bills and provides funds to supply rural water and wastewater services(e�ectively ®nancing some capital costs).

5.1. Cost coverage

Broadly, the principle of `full cost recovery' is becoming more widespread in the provision ofboth water supply and sewage disposal services. However, actual practice does not yet fullyconform with this principle.For example, there is a considerable backlog of investment needs in wastewater treatment

capacity in several OECD countries. In this context, full cost recovery via user charges(especially of capital costs) seems unlikely. This is particularly true in Japan, where the currentsewerage connection rate is low by OECD standards, and in some European Union countries,where the implementation of the EU Urban Waste Water Treatment Directive has generatedconsiderable pressures for new investments.Water supply subsidies also remain signi®cant in OECD countries. For example, it has been

estimated that 70% of Italy's capital expenditures for water infrastructure are still provided bypublic sources (Massarutto, 1993). Sometimes, these subsidies re¯ect a perception that theresource is abundant, or that the public good is always served by building new waterinfrastructure. There is also the deeply-entrenched history of involvement by governments inthe provision of water services. Broadly, municipalities still face considerable politicalconstraints in setting water charges at levels that re¯ect actual costs.However, this situation now seems to be changing in many countries. There is a growing

awareness that: (i) water quality is often getting worse as a result of over-consumption(especially where groundwater is involved); (ii) government budgets have been stretched to thelimit and can no longer be counted on to maintain water infrastructure in good shape and (iii)more equitable ways are available for achieving social a�ordability goals in the water sectorthan by providing subsidies for water use.Table 5 summarises changes during the 1990s in household average combined (sewage and

water) bills in several OECD countries (for Germany and Luxembourg, data relate only topublic water supply). Consumer price index data has been used to convert nominal increasesinto `real' changes, which have then been expressed on an `annual equivalent' basis.Among the larger price increases indicated are those for Denmark (6.3% annually).

Denmark provides an interesting example of a country that has been trying to address itswater quality (groundwater) problems via changes in water demand.France has also experienced very large real increases in water charges over the ®rst half of

the 1990s, largely due to the impending implementation (1998±2005) of the European Union'sUrban Waste Water Treatment Directive (Cambon-Grau & Berland, 1998). Between 1991 and1996, the PWS share of the average increase in the (nominal) water bill increased 31%, while


the wastewater element increased by 90%, according to a recent survey of 738 communes andrepresenting over 40% of the French population (MinisteÁ re de L'EÂ conomie et des Finances,1996).Hungary's large real price increases re¯ect the net e�ects of: (i) signi®cant reductions in

water-related subsidies after 1992 (even though subsidy levels still remain quite high); (ii)sizeable increases in real prices related to infrastructure improvements and (iii) reducedconsumption levels overall, resulting in the need for higher per unit charges to recover the totalcosts of the system. If reliable in¯ation data had been available for the Czech Republic, asimilar experience would be seen there as well.As noted earlier, the Czech Republic and Hungary are two examples of countries where very

large absolute reductions in subsidies have been experienced in recent years. Since 1985, Spain'swater supply system has also been undergoing transformation from a situation where waterwas considered to be wholly a public good, to one where the public is increasingly acceptingthe idea that the costs of water use should generally be borne by the user. Australia is anotherexample of a country that has shown itself willing to translate principle into practice and tomove actively toward the implementation of a full cost recovery approach.

6. Conclusions

Most OECD countries are making progress toward the goal of improved pricing for theirwater services, as the 1987 study encouraged them to do. Although the speci®c paths being

Table 5Summary of recent changes in water price levels in selected OECD countries

Country Years Nominal (aggregate) increase Average real (annual) increase

US 1992±1998 34 2.4Australia 1995±1996 0.7 ÿ0.6Japan 1995±1998 2.5 0.3

Korea 1992±1996 45 2.6Belgium 1988±1998 65 2.7Denmark 1984±1995 175 6.3

Finland 1982±1998 234 3.8France 1991±1996 55 7.0Germany 1992±1997 36 3.8Greece 1990±1995 114 2.2

Hungary 1986±1996 3923 18.7Italy 1992±1998 39 2.0Czech Republic 1990±1997 2591 n.a.

Luxembourg 1990±1994 42 6.0Netherlands 1990±1998 73 4.6Sweden 1991±1998 35 1.9

England/Wales 1994±1998 22 2.0Scotland 1993±1997 28 3.4


taken in individual countries toward that goal di�er, as do the rates of movement along thatpath, it is possible to discern the following trends in water pricing practices which seembroadly applicable to OECD countries as a whole:

. Water supply and sewage disposal prices have generally increased over the past decade andsigni®cantly so in a few countries. Of the 16 countries for which enough data was availablefor this study, all but a few exhibited real per annum increases in water prices during thisperiod and 4 actually experienced average rates of real price increase in excess of 6% perannum.

. A trend in the public water system away from decreasing-block and ¯at-fee pricingstructures and towards uniform volumetric or increasing-block tari� systems. Most countriesalso now use two-part tari�s (i.e. with ®xed and volumetric components), with thevolumetric portion making up at least 75% of the total water bill.

. Continuing increases in the penetration of water metering. Nearly two-thirds of OECDMembers already meter more than 90% of single-family households and several countriesare now expanding their metering of apartments.

. A wide range of practices concerning the use of water taxes and charges. VAT is the mostcommon tax applied, with rates sometimes exceeding 20%.

. Increased attention to charging for waste water disposal on the basis of treatment costsactually faced by service providers. For this reason, water charges related to pollution haveincreased substantially in recent years. Several countries are also increasing their watersewage charges with the explicit objective of generating su�cient revenues to fund new watertreatment facilities. There is also a trend in the direction of separate charges for treatmentand for supply on individual water bills, a step which will inevitably encourage moreaccountability on the part of service providers.

. More acceptance of the need for `full cost recovery' in the provision of water services. Thisis accompanied by some reductions in total subsidies and in cross-subsidies among users.Even where subsidies still exist, there is now much more emphasis on the need to make thesesubsidies transparent.

. A shift in the role of governments, away from being the `provider' and toward being the`regulator' of water services. This is also accompanied by an increased role for the privatesector, but most countries have so far opted for the `concession' model (where the privatesector participates in managing some services, but the public sector retains ownershipcontrol over the system). The `full privatisation' model (i.e. complete private sectorownership) is not yet widely encountered.

References

Cambon-Grau, S. & Berland, J.-M. (1998). Sewerage charges in France. In ECOLOGIC (1997±1998). Country casestudies on sewerage pricing. Report prepared on contract to the German Federal Environment Agency, Berlin.Various mimeo reports.

Kraemer, R. A. & Nowell-Smith, H. (1997). Appendix C: Germany. In Water Research Centre (1997): The e�ectsof metered charging on customer demand for water from 1 April 1989 to 31 March 1993. Report UC2072. WaterResearch Centre: Swindon.


Lippiatt, B. C., & Weber, S. F. (1982). Water rates and residential water conservation. Journal of the AmericanWater Works Association, 74(6).

Massarutto, A. (1993). Economia del ciclo dell'acqua. Milan: Franco Angeli.Ministere de L'Economie et des Finances (1996). Enquete sur le prix de l'eau 1991±1996. Paris: Service Public 2000.OECD (1987). Pricing of water services. Paris: OECD.

OECD (1989). Water resource management: integrated policies. Paris: OECD.OECD (1991). Environmental policy: how to apply economic instruments. Paris: OECD.OECD (1997). Water subsidies and the environment. Document OECD/GD, (97)220. Paris: OECD.

OECD (1999a). Industrial water pricing in OECD countries. Paris: OECD.OECD (1999b). Agricultural water pricing in OECD countries. Paris: OECD.OECD (1999c). Household water pricing in OECD countries. Paris: OECD.

OECD (1999d). The price of water: trends in OECD countries. Paris: OECD.Raftelis Environmental Consulting Group (1998). Water and wastewater rate survey. Charlotte, NC: Raftelis

Environmental Consulting Group.Smets, H. (1999). Le principe Utilisateur-payeur pour la gestion durable des ressources naturelles. Annuario de

direito do ambiente. Lisbon.United Nations (1992). Rio Declaration on Environment and Development. Report of the United Nations Conference

on Environment and Development, Rio de Janeiro, 3±14 June.

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