Price-setting for Residential Water: Estimation of Water Demand in Lahore

The Water and Sewerage Agency (WASA) of Lahore is facing soaring demand and rising costs. But while massive investments are made to augment supply, tariffs remain low and are not adjusted in line with growing expenses. This has resulted not only in heavy and increasingly unsustainable reliance on loans and subsidies, but also in consumers undervaluing the resource, resulting in its inefficient utilisation. In this scenario, water tariffs badly need to be reformed. This study explores the potential of a pricing policy to regulate residential water demand in order to achieve the objectives of cost recovery, efficient water use, and equitable allocation of water resources. To this end, a demand function is estimated using household level data about water consumption and socio-economic characteristics of 156 households supplied by WASA, Lahore, for the period 2004-2006. Under block-rate tariffs the price variable is endogenously determined and a system of simultaneous equations emerges, solved here using two-stage least squares method. The estimated model explains 57 percent variation in water demand. The study finds water demand to be inelastic to price and, considering WASA’s exceedingly low tariffs, recommends up to 50 percent increase in the current tariff structure. Further computations show that a 50 percent increase will not endanger lifeline water supply. However, tariff increases may not be felt uniformly across all income groups, and absence of income data remains a limitation of this study. The study also recommends linking the non-volumetric part of tariffs to wealth-determined variables, such as property value and income.