Who is subsidising whom? Water supply cross-subsidisation policy, practice and lessons from Zambia

This paper looks at the policy and practice of cross-subsidisation in the water sector, focusing on the Zambian experience. Setting a price for water services is a sensitive and controversial issue. Pricing water services below cost recovery can threaten the sustainability of the service and human welfare in the long term, while water pricing at full cost recovery often restricts access to water services for poor households, compromising their well-being. This paper looks at one of the approaches that policy makers use in an attempt to balance the trade-offs ? cross-subsidisation. Lessons from the experience of implementing the cross-subsidy policy in Zambia are identified and discussed. This paper argues that while the objectives behind the cross-subsidisation policy are clear, the results from the implementation of this policy are, at best, unclear. The Zambian experience shows that for an indirect subsidy, such as cross-subsidisation (as opposed to a direct subsidy), to generate positive results, a careful consideration of the actual context in which the policy is to be implemented must be a precondition to its implementation.