Rising block tariffs aim to achieve several public policy goals. A low or zero tariff applied to the first block can enhance affordability. For example, Durban, South Africa, provides 25 litres of water a day free of charge - a lifeline to many - with a steep increase above this level. Higher tiers aim at enabling utilities to increase efficiency, by creating disincentives for overuse, and at mobilizing revenues to cover costs. Block tariffs thus create the potential to align revenues with the costs of service provision, facilitating a sustainable financing model, while at the same time providing water for basic needs at below the cost of operations and maintenance. Many countries apply a low tariff for an initial volume of water, though few countries follow South Africa’s policy of free water. The size of the baseline tariff and of the increments between blocks varies across countries. Increments are particularly high in countries such as Burkina Faso and Senegal, while Bangalore, India, has limited price increases up to a high level of use.
Under the right conditions rising block tariffs can enhance water access and equity. But outcomes depend on a range of factors . In many utilities tariffs are set far below the levels needed to meet the overall costs of operation and maintenance.
Whether utility subsidies are progressive depends on the profile of connected households: the lower the proportion of poor households connected, the less progressive the subsidy. Providing a subsidized social tier is an effective strategy for reaching low-income households only if they are connected. And cross-subsidies from high-consumption (high-income) to low-consumption (low-income) households are effective only if a sufficient number of customers use the higher blocks. An obvious danger is that excessively high prices will drive users to alternate sources of provision.
Block tariffs can also create structural disadvantages for the poor in that the private operators supplying households without private connections typically purchase water in bulk at the top price. Standpipe operators, water vendors and truckers are thus reselling the highest cost water sold by utilities. Similarly, when poor households group together to share a metered connection, (a common arrangement in many countries) their aggregate consumption level pushes them into the higher price tiers. (UNDP Human Development Report 2006)