Efficient use of subsidies in the financing of water and wastewater investments

Compliance with the European Union (EU) standards in the provision of water supply and wastewater services, as set forth in the relevant EU Directives, may require a significant investment effort for some countries and more specifically the new Member States. In order to ease this effort, these countries have the possibility of receiving subsidies from the European Commission to finance their investments. Using as a reference the standard methodology applied by the European Commission to define its intervention rate in a project, this paper focuses on the economic rationale and risks behind the investment subsidies in the sector. The questions asked are (a) what is the economic justification of this kind of investment subsidy and who are the target beneficiaries; (b) what factors may cause these subsidies to reach other economic agents; and (c) what measures would prevent those unexpected transfers of taxpayer resources. The results of the analysis indicate that, although the underlying methodology is economically sound, there is a significant risk that part of the subsidies may end up benefiting economic agents other than those originally targeted. However, this risk can be easily mitigated with some basic checks and balances during the calculation of the intervention rate. The views expressed in this paper are strictly personal.