The Issue of Increasing Tariffs

01_ Basic Sanitation (hereinafter BS) refers to the set of services that handle Potable Water + Sanitary and Storm Sewage + Waste + Vector Control. With the explosive growth of the population and urbanization, these services are becoming increasingly essential, which is only possible with adequate resources and management.

02_ Just like telecommunications and electricity, BS needs to be self-sustainable to avoid shortages, prevent waste of already scarce resources, and not overburden the health sector since BS is preventive health.

03_ To achieve this, it is necessary to charge a tariff to cover all costs, including investments, operations, maintenance, staff training, improvements, expansions, reinvestments, management, time invested, and an inherent risk that should be modest in this case. And nothing more.

04_ It is important to remember that in BS, there are natural monopolies, and the market is of very low elasticity to the price charged, meaning that no one can significantly alter their water needs, their trips to the bathroom, or their daily waste production just because the unit cost is higher or lower. Therefore, tariffs need to be reasonable since the market is guaranteed.

05_ Other activities, which are difficult or unfair to charge proportionally based on usage, such as education, emergency health, transportation, and security, need state resources as a priority. Education is necessary when citizens are not yet producing and cannot pay their bills, emergency health is necessary when citizens cannot produce and cannot pay their bills, transportation equalizes distances and housing, and security does not seem fair if measured and charged on a case-by-case basis.

06_ The “BS” implemented around the world has three institutional arrangements: it is either managed and regulated by the state, managed by the private sector and regulated by the state, or managed by “user cooperatives” and regulated by the state, with each of the three cases having various nuances.

07_ State regulation is justified because it is a natural monopoly.

08_ It is also a corollary that any entity regulating itself results in at least inefficiency, which is why the systematic failure of this state & state arrangement occurs.

09_ Taking advantage of the moment when the sector is being widely discussed, sometimes with the inherent superficiality of ideological issues, as if the water or waste from the rich and poor were different, and sometimes with the superficiality of mere MBA exam questions (merely legal or merely accounting and novice views), this article suggests incorporating into the debate the existing tariff structures in the water and sewage market, a topic that has been systematically forgotten or relegated and is paramount.

10_ The prevalence of “increasing block tariff structures per meter” (internal cross-subsidies), which we will call IBTS, abstracts from “economies of scale,” one of the basic principles of this science (economics) and distorts the principle that the poor consume less water than the rich (due to economy, per meter), when the opposite occurs.

11_ This article aims to at least raise the question of whether this IBTS model harms the sector to the point of making it unmanageable, whether by the state, private companies, cooperatives, or anyone else.

12_ One does not need to look too far back in time, perhaps about 50 years, when water and sewage services had decreasing tariffs as consumption per meter increased. In rational economic schools, the argument that justified this decreasing unit price structure was called "economies of scale." Although this remains rationally valid, immediate interests, whether intentional demagoguery or not, have prevailed, especially in BS.

13_ It is said that these IBTS originated in Brazil, specifically in Rio de Janeiro, and were promptly internationalized by the World Bank and the IDB as a "Colombian egg" to increase revenues, ensure payments to development banks and their financiers. Their genesis was around 1973, during the Médici administration with Delfim Neto as Minister of Economy. For some reason, they decided to “freeze” inflation, measured at the time by FGV, only in the municipality of Rio de Janeiro, applicable to the entire country. To do this, they froze "public services" in Rio de Janeiro [*2].

14_ Well, in those days of 1973/74, what did the then CEDAG (Guanabara Water Company) and ESAG (Guanabara Sanitation Company responsible for sewage) do? Both had large debts to pay to the World Bank and the IDB, arising from financing for the Guandu system and the oceanic interceptor and sewage outfall, and created [*3] a "basic tariff," which was frozen according to instructions from Brasília, and a growing “tariff structure” with consumption: those who consumed more paid more per unit price of the service.

15_ To justify this, a demagogic discourse was created, with the fallacious assumption that the water connection that consumes more water belongs to the wealthiest.

16_ In practice, revenue increased significantly without appearing in immediate inflation, which was a pleasant surprise for financing agencies that began to receive their loans on time. And that is why these “banks” began to enthusiastically support these structures.

17_ Initially, timidly, small differences, until the scandalous variations of today, where, for example, the same cubic meter of water charged in Rio, and practically throughout the country, varies more than seven times between the lowest value (R$ 4.91/m3.month, residential consumer in zones B of municipalities) and the highest (R$ 34.35/m3.month industrial consumer in zones A) [*4]. Since the cubic meter of sewage follows that of water, the problem is sublimated; that is, a consumption of merely 30 m3/month, or 1.0 m3/day (5 normal people consuming 200 liters/day each) can result in a bill of R$ 2,000.00 (US$ ± 375.00) in January 2023 [*4].

18_ Perhaps for these reasons, the tariffs for so-called "public" services, which were supposed to reimburse inherent costs plus a margin for work, time, and risk involved, have ended up becoming subjects of complex discussions and proposals, out of context, almost miraculous, ranging from "income distribution" to "consumption inhibitors" (even when not necessary), to "citizenship rights" (everything becomes that), etc.

19_ In fact, since the subject lacks any logic, only administrative disarray, there are no laws (either in the legal or scientific sense) to be followed; everyone does what they want. Why not apply the same criteria to electricity, telecommunications, and fuels?

20_ And why is the price of water per cubic meter for merchants different from that charged to industries? Does commerce and industry not serve the same population that ends up paying the same way? And when the activity of commerce or industry is more or less dependent on water? Whether it is a watchmaker or a garment factory with low water consumption added to its production, or a restaurant, laundry, or beverage factory that requires a lot of water, in this case, is there no distinction? What is the idea? To expel large consumers from the customer list?

21_ Starting from the incontrovertible principle that, normally (one should not argue with exceptions), poorer residences have more residents at the same address than richer residences, it is easy to understand that under the current tariff structure, the poorer residence ends up paying more for the same cubic meter of water than a higher-standard residence. In other words, the poor are led to suppress consumption, take fewer baths, go to the bathroom less often, and drink less water. That is the truth. And no one discusses it. It is even cruel, in its injustice, in its wrongness.

22_ Technically, even accounting liabilities are being created: to avoid losing significant industrial and commercial consumers, it seems that concessionaires are making parallel agreements with some of them. Why with some? Is it a secret?

23_ Someone said: “a lie repeated many times ends up prevailing as a pseudo-truth.” Result: the false excuse, initially timid, of income distribution with a social fund turned into a pseudo-truth. If the criteria are good, why not apply them also to telecommunications tariffs? The more you talk, the more expensive the minute! Why not?

24_ Water is water, sewage is sewage; there is no ideology or differences between them; in these respects, we are all absolutely equal. BS should not be used for wealth redistribution because it will only serve as a deception. Tax science establishes the “IR” (income tax) as distributive. It is up to society to fight for it to be effective and efficient. Any other approach is either ignorance, innocence, demagoguery, or a mixture.

25_ Those who consume more, who are closer to the water source, contribute to the economy of the system as a whole and its viability, should pay a lower unit price, calculated rationally based on distances and generated economies. This does not seem to be on the agenda. Why?

26_ The “social justice” portions would be fairer by taxing real estate speculators for an "installed demand" when there is piping available in front of the empty lot or closed house. As it stands, unnecessary animosities are created, turning the cheap into expensive and the expensive into cheap.

27_ It is time to say that the emperor has no clothes, that injustices create a hostile environment for operators (public or private). These hostilities certainly create needs (legal, promotional, etc.) that cost money, reduce margins, and, in the medium term, benefit no one. In the short term, there must be some interest, some mystery, because such an illusion from so many for so long is not credible.

28_ The exceptions, the social needs that exist, should not and cannot be ignored; they could be addressed with a “water voucher” similar to “family allowance.”

29_ And the transition from the existing system to a rational system needs to be studied and evaluated to avoid failure due to lack of planning and not be left at the mercy of sabotage.

(*1) In other countries, and particularly in the United States, companies where no one owns more than 50% are called “public companies,” reserving the name State Companies for those where the state owns more than 50%.

(*2) Consult http://memoria.bn.br>per030015_1978_00132 (Jornal do Brasil, August 18, 1978, cover and page 15)

(*3) Heard by the author from several engineers from CEDAG who participated in the meetings that created the “pseudo-internal cross-subsidy” in CEDAG tariffs around 1973: Carlos M.F. Jatahy, José Carlos Chaves, Antônio(?) Turano, Reinaldo Leuzinger. CEDAE emerged in 1975 with the merger of CEDAG (1962), ESAG (1972), and SANERJ.

[*4] D.O. RJ, from October 2022 establishing tariffs starting November 2022.

Miguel Fernández y Fernández

Former engineer at SABESP, president of AQUACON, regional director of the Institute of Engineering, member of ABES (Brazilian Association of Sanitary Engineering since 1970), and occupies chair 101 at the National Academy of Engineering.

Text with 11,267 characters, Ra, April 11, 2023, revised September 4, 2024, Article Published in the IE Journal October 2023, pages 58, 59, 60.