Closing the Equity-Revenue Gap: Second-Best Pricing Pathways for Unmetered Urban Water Utilities in the Global South

Urban water utilities across the Global South grapple with persistent financial shortfalls and significant inequities in water affordability, with limited tools for reform in largely unmetered systems. In this study, we evaluate alternative, second-best pricing strategies capable of improving utility revenues while reducing the disproportionate financial burden of water expenditures borne by lower-income households. Using detailed household-level survey data and property value assessments from Karachi, Pakistan, we estimate regression models to quantify determinants of bill-payment behaviors and household reliance on expensive alternative water sources. Simulation analyses based on the estimated models reveal that improved bill distribution can leverage households' latent willingness to pay, increasing utility revenues by approximately 50%. Additionally, shifting to property-value-indexed tariffs substantially enhances equity by aligning water charges with households' economic capacity. Combining such tariff reforms with targeted service-quality improvements yields the greatest overall benefits, reducing total household water expenditures by over 40%, disproportionately benefiting poorer households. Conversely, uniform tariff increases aimed solely at maximizing revenues worsen regressivity, lower payment compliance, and raise affordability concerns. Our findings demonstrate that equity-focused tariff design combined with administrative efficiency and service reliability improvements provides a viable pathway toward financial sustainability and distributional justice in urban water management.