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Can subsidies by better targeted?

Citation

Foster, V., Pattanayak, S., & Prokopy, L. S. (2003). Can subsidies by better targeted? (Water Tariffs & Subsidies in Southeast Asia). Washington, DC: South Asia Energy and Infrastructure Unit, World Bank.

Abstract

An earlier paper examined the extent to which current water subsidies in two south Asian cities--Bangalore and Kathmandu--succeeded in reaching poor households. It concluded that subsidies to private taps were very poorly targeted; since barely 30% of the beneficiaries are poor, and only 25% of the subsidy resources are captured by poor households. Building on the same information base for Bangalore and Kathmandu, it is possible to simulate alternative subsidy systems and examine whether they perform any better than the status quo. This simulation finds that targeting on the basis of geographical location or housing characteristics can double the share of subsidy expenditure that reaches the poor. However, these targeting criteria also have the effect of mistakenly excluding households that are genuinely poor. Targeted connection subsidies on the other hand do an equally good job of avoiding leakage to undeserving households, while at the same time reaching a much higher proportion of the poor.