The water and sanitation sector has a long tradition of state subsidies, which can represent a major financial drain. Subsidies are usually justified in terms of keeping bills within affordability thresholds for low income households. However, there is mounting empirical evidence that these subsidies often fail to reach poor households, many of whom remain unconnected to water and sanitation networks. This paper reviews the Latin American experience with water and sanitation subsidies, with particular reference to Chile and Colombia. The results show that even the most carefully designed subsidy schemes suffer from very high errors of inclusion. It is argued that, in future, policy makers would be well advised to turn their attention tosubsidizing service connections as opposed to water consumption, and should increasingly consider a broader range of policy instruments for making services affordable to the poor. Includes 4 references, table, figures.