Hugo Rojas Silva ANEAS on fiscal policy of water

The need for defined revenue structure

Mexican municipalities delivering water and sanitation face tremendous financial challenges. To turn this around, there needs to an overhaul of existing frameworks, writes Hugo Rojas Silva, general director of ANEAS.

According to the classification of the World Bank, Mexico is a developing country. By definition, our country cannot guarantee minimum essential services to its population to have suitable human development.

The French philosopher Montesquieu once defined “the State” as the guarantor of humanism with tendencies towards an individualistic position. For him, the State should always be seen as the guarantor of values such as freedom, justice, security and public services.

Translating this into water and sanitation, to guarantee these critical public services, there needs to be sufficient income, and for this, an adequate public revenue structure must be well defined.

A system of tax should favour the generation of domestic savings, and therefore economic growth. This will then provide the government with sufficient revenue to meet its objective of financing public projects, without destroying incentives for people to save and invest.

This is one of the main reasons why investments in a strategic sector for the development of Mexico are not enough. For example, in developed countries, the tax burden can represent up to 60 per cent of GDP.

While such comparisons between countries are useful, it's essential to be aware of differences in economic development, income distribution, and the power of relative individual purchases.

Understanding the challenges

To help understand the challenge, it’s important to note that in Mexico only 30 per cent of workers are subject to income tax.

Furthermore, levels of tax evasion are as high as 52 per cent, according to the Institutional Transformation of the Secretaria de Hacienda y Credito Publico (SHCP).

To compound the situation, compared to OECD member countries, where revenues of local governments (states and municipalities) are between 9-19 per cent of GDP, in Mexico, it's between 0.5-6 per cent.

“There is strong criticism of the states and municipalities for their inability to collect and manage their own income, for which they have had to delegate or concession their powers.”

There is strong criticism of the states and municipalities for their inability to collect and manage their own income, for which they have had to delegate or concession their powers.

Furthermore, there are severe deficiencies in their tax administration, as well as great corruption and a lack of planning.

Now imagine this scenario for the municipalities responsible for providing water and sanitation services. Not only must they cope with the need for large capital investments, rising production costs but also reduced federal budgets being transferred to them.

Three recommendations for a new framework

To enable change, we need to create a starting framework. Here are three recommendations that can serve as a starting framework:

Redistribution of government functions and responsibilities
Compensation: it seeks to compensate and balance the differences between the degrees of development economic and social of the members of the federal pact
Coordination, where intergovernmental cooperation relations are established, concurrence and solidarity, so that the action of the different levels of government strengthen the unity of the State, and not its fragmentation or paralysis.

It is necessary to define the co-responsibilities of each level of government according to their institutional capacities and legal faculties, and if that requires constitutional changes that reverse previous reforms, so be it.