Direct subsidies are an increasinglypopular means of making infrastructure services moreaffordable to the poor. Under the direct subsidy approach,governments pay part of the water bill of poor householdsthat meet certain criteria. This approach was first used inwater sector reforms in Chile in the early 1990s and is analternative to the traditional method in which governmentspay subsidies directly to utilities, often allowing theprice of water to fall below economic costsindiscriminately. This Note illustrates how simulationtechniques can be used to inform the design of directsubsidy schemes, ensuring that they are both cost-effectiveand accurate in reaching the target population.