Water supply and sanitation in Ecuador is characterized by (i) low coverage levels, particularly in rural areas; (ii) low service quality and efficiency; and (iii) limited cost recovery and a high level of dependence on financial transfers from national and sub-national governments. Furthermore, there are overlapping responsibilities both within the national government and between different levels of government.

Service quality
A study commissioned by the government under financing by the World Bank concluded that nationwide, tariffs covered only about 2/3 of system operation and maintenance costs in 2001. National and sub-national (provincial and municipal) government transfers are required to cover the operation and maintenance gap and to finance coverage expansion.

Tariffs
The Sub-Secretariat of Water Supply, Sanitation and Solid Waste (SAPSyRS) of the Ministry of Urban Development and Housing (MIDUVI) is legally vested with the role to set sector policies, while the country's 219 municipalities are responsible for service provision either directly or through autonomous municipal companies. However, there is no clear definition of roles and responsibilities between various national and sub-national actors, nor is there an independent regulator of water supply and sanitation services. Stakeholders in the sector include the Fondo de Solidaridad, the Banco del Estado, the Social Fund FISE, regional development corporations, various government ministries and provincial and municipal governments, among others.
While Ecuador has a National Water and Sanitation Policy

Efficiency
Financing for urban and rural water supply investments is provided by a multitude of national and sub-national actors under different terms. However, the government has recently taken a bold step to improve Ecuador's incentive framework for water and sanitation investments by adopting an Executive Decree on national government transfers to municipalities earmarked to WSS investment under a special tax on telephone calls (Impuesto sobre Consumos Especiales, ICE). The level of the transfers is higher for poorer municipalities, and – most notably – higher for those that improve operator performance or choose to delegate service provision to autonomous operators. The system of sub-national transfers thus provides incentives to improve both performance and more sustainable institutional arrangements at the local level.