Pumping resources: the new groundwater tariff in Peru and its contribution to water supply infrastructure funding

Aquifers are natural sources of resilience to seasonal drought and extreme weather events, and yet, in many parts of the world, they face the threat of over extraction and depletion. In 2015, Peru implemented a new regime in which water utility companies can assume the responsibility for groundwater monitoring and management, benefiting individuals, businesses, and industries extracting groundwater through wells. In return for this service, the water utility company can charge them a tariff, calculated by the water and sanitation regulator. The tariff calculation includes the financial costs of monitoring water levels and recharging aquifers, but also enables the recovery of part of the investments that were deployed to supply drinking water to the city, considering that they indirectly benefit groundwater extractors by contributing to availability of water in aquifers. This is an innovative approach that allows to account for externalities in water pricing, avoiding that piped water customers inadvertently subsidize groundwater extractors. The paper analyzes the case of Lima, where revenues coming from groundwater extractors make an important contribution to infrastructure funding. The estimations indicate that, under a counterfactual scenario where no groundwater regime exists and water customers must bear the entire burden of water infrastructure projects, there would be an average tariff increase of 9.7%. The results of this paper are significant in a context where policy debate in infrastructure service transitions from a model reliant solely on customer tariffs to one incorporating complementary mechanisms to recover not only financial but also environmental and resource costs. By documenting this successful experience, the paper quantifies the capacity of innovative mechanisms to capture the value generated by infrastructure projects, while contributing to sustainable groundwater abstraction and affordable water services.