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A subsidy (also known as a subvention) is a form of financial assistance paid to an individual, a business or an economic sector in order to achieve certain policy objectives. For example, a subsidy can be used to support a service that cannot recover its full costs (e.g. through tariffs), which is a common problem in the water and sanitation sector. Subsidies may also be given to encourage activities that would otherwise not take place, e.g. a more sustainable sanitation technology. (Evans et al. 2009)

One of the main problems with subsidies appears to be that the different objectives of any public subsidy remain non-explicit. Thus, different observers may attach different levels of priority to different objectives. For instance, the main objective of a subsidy scheme might be to ensure inclusion and empowerment of certain disadvantaged groups but it might equally be to protect the environment or to improve public health. It may also be political. The ‘political’ objectives behind subsidies are particularly problematic. They are rarely made explicit to the public but can have a strong impact when dealing with improvement of finances. By implementing cost-intensive subsidies, government finances mostly suffer in return. It is probably the major reasons why the topic of sanitation and water subsidies is so problematic.

Subsidies can be a powerful (but also expensive) tool to optimize the sanitation and water management system and make it more sustainable in the long run. Subsidizing more expensive, but also more sustainable sanitation or water management technologies is a typical example where subsidies can be utilized to achieve higher sustainability. Subsidies can be positive for water management and sanitation, since the price relations between different options (higher or lower emission levels, more or less energy intensity, more or less transport) can be modified in favor of the environment. Independent of the type of financial assistance, subsidies should always be applied in the public interest to maximize health benefits and increase access specifically to groups who are persistently excluded within the water and sanitation sector.

(Duch & Keller 2012)