The Dilemmas of Boosting Water and Sewer Access

In recent years, several countries in Latin America have sought to enlist private investment to the task of expanding piped water and sewage systems. Millions of people in the region still lack access to safely managed drinking water and sanitation, and with governments short on money to provide the necessary infrastructure, private investment has been seen by policymakers as a potential solution.   

The problem with this approach, however, is that it is often costly to extend infrastructure to underserved populations, and those populations, in turn, may be largely unwilling to pay to connect to additional services, creating a trade-off between financial viability and social inclusion.

A Study in Brazil

Given this dilemma, we sought in a recent study to examine policies that would improve water and sanitation connections. We did so by focusing on the 2020 New Sanitation Regulatory Framework in Brazil which encourages municipalities to contract with private providers and sets connection targets of 99% of households with piped water and 90% with piped sewer collection.

We looked at detailed household billing data from a major private provider in the country and combined it with demographic information from the national census. This gave us detailed consumption information and showed which postal codes the firm expanded to and which services it installed (water or water and sewage) within its concession.

We found that the firm tended to prioritize expansion of the infrastructure into wealthier neighborhoods where consumers can better pay for the services, as well as areas closer to existing networks, leaving low-income and remote communities behind. Moreover, using simulations, we showed that even if the firm extended water and sewage infrastructure to every possible neighborhood within its concession area, only about half of the households would connect to the sewage system.   

This creates a difficult situation. Firms may not expand their infrastructure because they cannot recover their costs. And households may fail to take advantage of the valuable service of sewage connection because they face high-up connection costs, may be unwilling to pay for monthly sewer fees, and may not take into account the wider social benefits of having proper sewage collection. What can be done?

Our policy simulations looked at three different options:

1. Connection Subsidies Alone
   Reducing or eliminating the up-front cost of connecting households to the sewage network by providing those households with subsidies has limited effects. While it helps in neighborhoods where sewer service is already available, it does little to incentivize firms to expand because regulated monthly tariffs still do not recover the full cost of network expansion.
2. Subsidies + Higher Tariffs
   Combining connection subsidies with an increase in the monthly tariff for the sewer service proves far more effective. It significantly boosts both supply- and demand-side incentives, raising connection rates to around 82%. This is a dramatic improvement compared to the baseline, but it requires substantial government investment to fund the subsidies, and the higher tariffs could face political resistance.
3. Sewer Availability Charges
   Charging households a fee if sewer infrastructure is already available—regardless of whether they connect—also increases adoption of sewer service, bringing connection rates to around 55%. But this is still far from the connection target of 90%. The policy is self-sustaining under current regulations and creates an incentive for both firms and consumers. However, it shifts the financial burden onto households, raising concerns about equity and affordability for low-income families.

The most effective strategy appears to be the second one: a moderate increase in sewer prices combined with subsidies to consumers so they can pay for the connections—an approach that encourages both expansion and adoption.  

The Path to Universal Sewer Access

Private firms will not expand sewage infrastructure if tariffs do not cover the costs of expanding and operating the network, and households will not connect to the network if it is too expensive.  Private decisions alone will lead to underinvestment.  Governments should be willing to step in with policies and regulations that create incentives. Although it can be politically and fiscally complicated, they should consider subsidizing the household connection and creating price structures that allow firms to recover the costs of expansion into underserved areas. That would not only stimulate take-up; it would create benefits for society at large by creating cleaner environments and generating better health.