Underpricing can cause utilities to capture less than 40 percent of the revenues they need to operate, imposing an economic burden of 0.9 percent of GDP in the worst cases (see figure). The associated deficit debilitates the financial position of the utility, deferring investment and thus delaying expansion of the service area.
Average water tariffs stand at around $0.67 per cubic meter, two-thirds of the cost-recovery threshold. Tariffs are already relatively high by developing-country standards, but they cover only operating costs, which can be as high as $0.60 per cubic meter in Africa, owing to inadequate selection of technologies, low population density, country risk premiums, and the high cost of inputs.
Capital costs have been almost entirely subsidized by the state or by donors, but subsidies are highly regressive, especially in urban areas. Since most poorer households are not connected to the water-supply network, they cannot benefit from subsidies embedded in prices for piped water.
Tariffs representing full capital-cost recovery (equivalent to a monthly utility bill of around $10) should be affordable for half of the population in Africa—and about 40 percent in the low-income countries. Most of the remaining 60 percent would be able to afford bills of around $6 a month.
The economic burden of underpricing water can run to 0.9 percent of GDP