SUMMARY FOR DECISION MAKERS

Number #18 - October, 2010

Understanding consumption and residential use of water at the household level in Quito - Ecuador
Author: Oscar Zapata
Corporacin para el Desarrollo Sustentable y Manejo de Recursos Naturales, Construir

As water has become scarcer, demand-side policies have attracted the attention of water authorities. Specifically, the use of water price, as a driver for a more sustainable use of water, has been observed in many cities around the world. The basic idea consists of managing prices in a way that consumers reduce their levels of water consumption in cities where there is excessive consumption. Per capita water consumption in Quito is one of the highest among South American capitals; every individual in Quito consumes 240 liters per day. At the same time, the city is planning to build a costly mega-infrastructure project, the Ros Orientales project, to guarantee the water provision in Quito for the next 50 years. Another important aspect of water provision in Quito is that water resources come from glacier melting in the surrounding mountains, which has been increasing as a result of global warming. Water situation in Quito The levels of utilities coverage in Quito show high percentages of households connected to potable water and sewage. According to the latest estimates from EMMAP-Q, water coverage in the city reached 98.68% of the total number of households; the coverage levels are similar even when urban neighborhoods (98.54%) and rural neighborhoods (99.13%) are taken

separately. With respect to households connected to the sewage system, the coverage levels also show high percentages: 94.09% of total households, 97.49% of urban households and 83.24% of rural households. The case of Quito seems to be different from what is observed in most cities and towns in the developing world; thus more similar to what is common in developed countries, which is the existence of high coverage levels and reliable water services. Determinants of residential water demand The marginal price of water, in average, is effectively higher as the income of the household increases. High-income households pay an average marginal water tariff of US$ 0.55 per m3, whereas middle and low-income families pay in average US$ 0.51 and US$0.47 per m3, respectively. The situation is the opposite when the comparison is done based on average prices: low-income households pay US$ 0.73 per m3, middle-income families US$ 0.72 per m3 and high-income households US$ 0.68 per m3. Households are not aware of the structure of water tariffs (only 30% of respondents say they know about water tariffs, 40% mentions knowing the components of the water bill and 95.5% do not know the cost per m3 of water). This can be explained by the fact that the information on water tariffs is not detailed in the water bills.
1/2

www.laceep.org

Water demand in Quito is both price and income-inelastic. The values of price-elasticity range from -0.33 to -0.55 for the whole sample, whereas the values of income-elasticity go from 0.23 to 0.45. Some reasons explaining the inelastic nature of water demand include the lack of good substitutes for potable water, consumers lack of knowledge and information about water prices, water bills representing a small fraction of family income, and consumers having reasons other than price to reduce consumptionsuch as environmental consciousness and watersaving campaigns. The values for price-elasticity vary among family-income levels. For low-income households it ranges from -0.78 and -0.82, whereas for middle income households it is -0.32 (although results may vary depending on the estimation procedure); water consumption of high-income households seems to be insensible to price changes. For high-income households, the effects regarding expenditure on bottled water (positive), housing (positive) and family size (negative), and adopting water purification measures (negative) are important determinants of water consumption. With respect to income-elasticity, the idea of an increasing income-elasticity as income levels grow is consistent with the results obtained for households in low and middle-income neighborhoods; for low-income households it ranges between 0.30 and 0.32, and for middle-income households between 0.41 and 0.44. The results for high-income families, however, are not clear or conclusive. Water consumption in the residential sector of Quito seems to respond to typical determinants of water demand: prices and income levels. Households in low-income neighborhoods, and to less extent households in middle-income neighborhoods, would reduce water consumption if water price increases. Depending on the size of the price change, high-income households may not change their consumption levels, because water expenditures represent just a small fraction of their monthly budget. The priceresponsiveness of water demand can raise equity issues on demand-side policies because of its regressive nature. Information on water prices is another important aspect for water policy in Quito. More detailed information on marginal and average prices of water would allow families to adjust their levels of water consumption to those levels that contribute the most to household welfare. It has been estimated that price-elasticity of water demand increases by 30% once consumers become fully aware of the prices they face (Gaudin, 2006). Such an increase would be important in Quito to make consumers more sensitive to the cost of water (mainly consumers located in high-income neighborhoods).

The subsidy scheme for water consumption can also be improved to increase the efficiency and equity of the system. The most important component of the scheme is the price of water (marginal or average) set below the production cost, which benefits households with higher water consumption levels and with higher income levels. Some subsidy leakages are also inevitably generated as a consequence of the zoning of economic sectors, with poor households located in high-income sectors and rich ones in middle and low-income sectors. An increase of water prices in Quito should be carefully considered. On one hand, this increase may reduce the consumption of low-income households and to less extent the consumption of middle-income families, whereas high-income households are not expected to respond to price changes. However, an increase in the water utility revenues may be the result of price increases. It might be more important to design complementary policies, other than prices, to reduce water consumption of high-income families and make them responsive to price changes. More information on water costs and scarcity, as well as further increases in water prices for this particular sector, may contribute to achieve more sustainable uses of water in Quito and welfare increases at the household level. As mentioned before, under current conditions, a demand-side policy based on prices can be perceived as unfair by most of the population of Quito.
Income group All Low-level Middle-level Elasticity Price Income -0.38 0.33 -0.78 0.32 -0.32 0.44

References Gaudin, S. 2006. Effect of price information on residential water demand. Applied Economics, 38:383-393. Oscar Zapata is an Ecuadorian economist, Project and Research Director for the Corporacin Construir in Quito, Ecuador. As a LACEEP grant holder, his project was supervised by Dr. Dale Whittington from the University of North Carolina at Chapel Hill. For further information and other LACEEP funded projects, please access: http://www.laceep.org This work was carried out with the aid of a grant from the Latin American and Caribbean Environmental Economist Program (LACEEP)

2/2