For many water supply and sanitation (WSS) utilities in the developing world, achieving financial sustainability depends on containing costs and increasing revenues. Often this requires reducing per-unit costs, increasing billing and collection rates, and adjusting tariffs.

Pricing and subsidy policies need to be structured to meet social, technical, and/or economic objectives. Often the average prices charged by utilities for WSS services are well below costs. Full cost recovery, including operation and maintenance costs as well as investment costs, is a worthy goal (because financially autonomous service providers provide better services), but difficult to achieve in the near future in many countries.

Connection subsidies benefit unconnected households that choose to connect to a WSS network, and can help significantly to increase access to WSS.

Most WSS utilities have implemented some form of consumption subsidies based on the volume consumed. The most common form is the increasing block tariff. Research shows that the volume-based subsidies are regressive: all or virtually all residential customers receive a subsidy and richer consumers receive more than poorer ones. Other consumption subsidies include quality-based subsidies that certain levels or types of service. Public tap subsidies and condominial WSS can be effective at targeting benefits to the poor who lack household connections. Administrative selection of subsidy beneficiaries can be effective but is costly and time-intensive to administer.

Tariff increases need to go hand in hand with service improvements. Because most existing WSS customers are non-poor, the bulk of any price increases stands to be paid by non-poor households. Resistance against price increases therefore often comes from middle-income groups, and it is not surprising that moving towards cost recovery has proven to be politically difficult. To gain support for restructuring subsidies, a utility must convince the public that they will feel the benefit of improved service.

Public funds for sanitation may be better used to promote demand for sanitation than to subsidize construction; many subsidized latrines have not been used. In middle-income countries where sewage and wastewater treatment is required and affordable, subsidies will often be required for connecting households to systems they would otherwise not choose to connect to.

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