Some of the failures of tariff systems, especially in providing affordable services for the poor while recovering costs, can be compensated by subsidies. It is generally agreed that in poor areas of middle and low income countries, subsidies are necessary to cover basic amounts of water usage and basic levels of sanitation service for poor customers. Sanitation services may be more natural candidates for subsidies than water services, as the willingness to pay for such services is often lower than for water services, and the wider social benefit in terms of both public health and surface water quality provide an economic rationale for subsidisation.

There are different types of subsidies that achieve different purposes. Government subsidies can for example either be paid directly to the customer (demand side subsidies) or to the utility (supply side subsidies). If government finance is not an option cross subsidies can be used, where some groups of customers are charged more than the true costs of service provision, and this surplus is used to cover less expensive service provision to poorer groups (as in block tariff systems). Another possibility is to apply a uniform surcharge, of say one or two percent, on all customers’ bills and use these resources to finance any subsidies deemed necessary. Some types of subsidies might be better than others, depending on the type of project, tariff structures, and other preconditions.

However, research has shown that subsidies should rather be used to promote access to basic water and sanitation services rather than providing ongoing support for consumption. One of the reasons for this is that it is often the initial, relatively high cost of getting connected to the network that prevents poor people to benefit from water or wastewater services. Their willingness and ability to pay for the regular service fees are usually much higher.