ENG_Understanding water tariffs

Journal of Ecology and the Natural Environment Vol. 3(13), pp. 400-409, 12 November, 2011 Available online at http://www.academicjournals.org/JENE ISSN 2006 - 9847Š2011 Academic Journals

Review

Understanding potable water supply costs, pricing, tariffs and cost recovery in low income and developing countries: A comprehensive synthesis Folifac F1* and Gaskin S2 1

School of Urban Planning, McGill University, Canada.

Department of Civil and Mechanical Engineering, McGill University, Canada.

2

Accepted 7 October, 2011

Potable water supply involves costs and the recovery of these costs is important for the provision of adequate services and the sustainability of water supply systems. User fees through tariffs constitute an important source of cost recovery, thus the pricing of water services is a key issue in the provision of potable water. This paper, based on a literature review, provides a comprehensive synthesis of water pricing, water tariffs and cost recovery with the aim of providing a single concise, yet comprehensive piece that demonstrates the connectivity of the three. The paper discusses the costs involved in potable water supply, water pricing, some common types of applicable water tariffs, cost recovery, and some strategies to improve cost recovery through tariffs.

Key words: Potable water supply, water pricing, water tariffs, cost recovery, water system sustainability.

INTRODUCTION Potable water supply is a fundamental human service essential for human welfare, protection of public health, poverty alleviation and economic development. The provision of this fundamental service involves costs. This suggests that it is imperative for utilities to generate revenue to support these costs if they must operate adequately and continue to provide improved services.

This is particularly important with the increasing concerns on universal coverage, the performance and sustainability of potable water supply systems, and decreasing public investment in the potable water supply sector in the face of increasing and competitive water demand due, in part, to rapid population growth and urbanisation.

A traditional and increasingly advocated source for revenue generation and cost recovery in the potable water sector is user’s contribution by way of payment for water services. This entails water pricing and the setting of water tariffs for cost recovery.

The literature on the costs associated with potable water supply, water pricing, water tariffs, and cost

*Corresponding author. E-mail: fidelis.folifac@mail.mcgill.ca.

recovery is vast; however, with a limited comprehensive discussion of these issues in a single literature. Thus, the relevance and contribution, to the potable water supply literature, of a paper that provides a comprehensive synthesis which clearly highlights their connectedness and links cannot be overemphasised. This is particularly important in the context of developing and low income countries and sub Saharan Africa in particular. These are regions with rapid growth in population and urbanisation with corresponding unprecedented increase in demand and competition for water (Morel and Corel, 2005).

Furthermore, in these regions universal coverage is lagging, potable water supply services are largely inadequate and deteriorating, and there is the pressing need for capital investment to rehabilitate existing infrastructure, expand distribution networks, improve the quality and level of services, as well as promote public education and outreach to encourage efficiency in water demand and use (Magnusson, 2004).

This paper, based on a review of the literature, provides a comprehensive synthesis of the costs associated with potable water supply, sources of cost recovery, water pricing as well as some common applicable water tariffs. In addition, it examines ways of improving cost

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recovery within the framework of water tariffs. However, the debate on water as a social or economic good and what is an acceptable price for potable water services though important, are beyond the scope of this paper.

The rest of the paper is structured as follows: costs involved in potable water provision, sources of cost recovery, water pricing, water tariffs and mechanisms for improving cost recovery through tariffs.

POTABLE WATER SUPPLY COSTS The provision of potable water supply services involves costs which are incurred at the design, construction and operational stages of any water supply system. However, the magnitude of these costs is utility specific and would depend in part on the type of technology used, management practices, and the hydrogeology. These costs can be generally classified using three approaches: a) Environmental life cycle analysis: Proposed by Brent and Landu, (2006), the classification is based on the steps involved in the life cycle of water consumption.

Within this framework, the classification is as follows: 1) Source water protection costs such as the purchase of surrounding land and enforcement of zoning regulations to avoid pollution from, or enhanced by, human activities such as agriculture and construction; 2) Water abstraction, treatment and distribution costs such as capital for the purchase of land, the design and construction of the treatment plant, and administrative buildings. It also includes the cost of equipment and materials such as chemicals for water treatment and office supplies, the costs of support services and the costs of serving capital; 3) Costs of sustaining services such as institutional capacity building, training, research and development, initiating policy reforms, education and outreach; and 4) Costs of wastewater collection and treatment to reduce the risk of environmental and source water contamination.

The life cycle classification approach adequately highlights, at the beginning and the end of the cycle, the costs of preventing pollution for water quality protection (environmental cost). This is an important cost which is not usually considered in water pricing (Raghavendra, 2006), most probably because of the lack of skills and tools to identify, quantify and evaluate its monetary value. b) Unbundling of costs by subunits of operation: The costs associated with potable water provision can be classified according to the subunits of operation (Nyoni, 1999; Whittington, 2003) such as: 1) Production costs such as reservoir, tanks, pumps and treatment plants;

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2) Transportation costs such as major pipelines and pumping facilities; 3) Distribution costs which include house hook-up, metering and local reticulation; and 4) Administrative costs such as billing, collection and consumers relation. c) Finance, economic and support costs: This is the common classification approach of costs into three general types; investment costs, operation and maintenance costs, administrative and environmental costs (Cardone and Fonseca, 2003).

For the purpose of this paper, and to provide context for later discussion on water pricing, the common classification approach is adopted. This is a more flexible and easy-to-understand classification because the costs cannot only be separated into tangible and intangible costs, but also into consumable and non-consumable costs. This can facilitate the adjustment of tariffs to reflect short and long term costs. In addition, the environmental costs of potable water supply can be adequately signalled to consumers in the applicable water tariff, at worst as a percentage of investment or operational cost and at best based on an adequate identification and quantification of the costs. In summary, the costs involved in water supply can be classified in different ways. Theoretically, the sum of all these costs constitutes the ‘full cost’ of water supply. However, as shown in Figure 1 (note: the relative sizes have no significance), the term ‘full cost’ can be used otherwise, suggesting the need for clarity (which costs are included) in context.

Investment costs/capital expenditure Investment costs are the initial or sunk costs of the utility for the purchase of movable and immovable assets.

These include, but are not limited to, all capital costs related to the purchase of land, the design and construction of the utility, the purchase of water treatment and office equipment, storage tanks, vehicles, pumping stations, distribution mains and pipes. These are the most tangible costs due to the fact that they have a market value. They are usually very huge and constitute the block of the costs associated with potable water supply (Cardone and Fonseca, 2003). Capital expenditure has traditionally been financed by government grants and external aid packages, which suggests why these costs are not typically up for recovery unlike the operation and maintenance costs.

Operation and maintenance costs These are recurrent costs incurred in the daily operations of the utility. According to ri and Rojas (2001), an

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Opportunity Costs

Environmental costs

Ecological Costs

Full Cost of supply

Administrative or Support costs

O&M Costs Investments Costs

Full Financial Cost

Financial Cost

Figure 1. Variations of ‘full costs’ (not drawn to scale), modified from Rogers et al.

(2002).

adequate understanding - identification and estimation- of the operation and maintenance costs is critical for the sustainable delivery of potable water supply services.

The components of these costs are typically wide, varied and utility specific and may include: cost of chemicals for water treatment, cost of electricity and other utilities, purchase of software and capacity building, cost of fuel for equipment and vehicles, personnel costs, costs of support services, costs of repairs, rehabilitation and extension, costs of billing and collection, payment of contractors and suppliers. The amortization and depreciation costs of assets and equipment (movable and immovable) should also be accounted for in operation and maintenance costs so as to provide capital funds for future growth – extension of distribution network, additional storage and pumping facilities, as well as replacement of computers and other such equipment.

The operation and maintenance costs constitute a key component of the costs involved in potable water supply because of the daily occurrence of these costs needed for the functioning of the utility and delivery of services.

Administrative costs Administrative costs typically include all charges and

expenses incurred by a water supply utility through the servicing of capital such as interest on loans, bank fees, cost of depreciation and impact of amortization, and effects of inflation - if loan is in foreign currency (Cardone and Fonseca, 2003). It may also include expenses related to the preparation of tenders and contracts, as well as expenses on litigations and compensations.

Environmental costs The environmental costs of potable water supply, result from expenses related to the protection of source water and water quality deterioration. These may include expenditure to combat saltwater intrusion, due to overabstraction, costs of vegetation to protecting water intake points and recharge zones, costs involved in the prevention and removal of sediment which can cause fouling of equipment and water pumps and consequently disrupt supply. The costs of sewage collection, treatment and disposal to abate source water pollution also constitute environmental cost. According to Nyoni (1999), the environmental costs of water reflect the value of water to the society and the environment. These are intangible and subjective in nature because they deal with the impact of water allocation decisions (opportunity costs) and the impact of over-abstraction and

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contamination of water sources (ecological costs) which have no market value.

Water utilities must be able to pay for these expenses, at the worst the operation and maintenance costs, related to the production and distribution of potable water services. This is essential for the continuous provision of services and adequate functioning of the utility. Cost recovery is an important approach to generate the much needed revenue, involved in the production and distribution of water. It is important to note that the debate on what costs should be recovered is beyond the scope of the following heading. Rather, focus will be on the sources of cost recovery, in particular water pricing and water tariffs.

SOURCES OF COST RECOVERY The recovery of the expenses involved in water supply is fundamental to water utilities, to provide revenue that will enable them to continue to provide good quality services to consumers, and expand their coverage (Brikke and Rojas, 2001). Some of the traditional sources of revenue generation for potable water supply in low income countries include: Overseas Development Assistance (ODA), subsidies and water tariffs.

Overseas development assistance (ODA) ODA is an external aid package provided by developed and industrialised countries to developing and low income countries, to foster development in specific sectors, such as water supply (Hecht, 2004). It is a significant source of capital investment in potable water supply in developing and low income countries, and traditionally includes: money, materials, capacity building and provision of services. In addition, this may include the cancellation of all or portion of previous debts as well as freezing interest on previous debt. In the recent past decade, some industrialised countries, such as members of the G8, have committed to increase their ODA contributions to 0.7% of their GNP with increased attention to the financing of capital investment in the potable water sector (Hecht, 2004).

Subsidies Subsidies are local assistance in the form of money, materials, or free services provided to water utilities to foster their activities (Whittington, 2003). These can be government grants, tax rebates or donations from private sectors and civil society. Government subsidies are usually provided within a framework of a poverty reduction strategy to promote access and affordability of improved water supply (Cardone and Fonseca, 2003).

They have traditionally been provided to promote network

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extension to poor areas, support a social tariff structure, subsidise connections of new consumers, as well as to provide incentives for source water protection. Subsidies can be broadly classified into three types: 1) direct, 2) cross-sectoral and 3) out-put based. Direct subsidies are donations provided to a water utility by governments or external donor while cross-sectoral subsidies are local subventions from other sectors, such as the telecommunication sector, to the water sector. This is different from cross-customer subsidies where the rich, commercial and industrial clients are charged higher tariffs to subsidise the cost of supply to the poor. In simple terms, output-based subsidies are concessions given to a water utility as recognition for achieving a specific target such as reducing the amount of unaccounted-for-water within a timeframe or for achieving a high rate of collection. In summary, subsidies should provide or free up revenue and therefore reduce the costs that have to be recovered from consumers.

Water pricing Water pricing is generally subjected to two ideological views (Whittington, 2003). On the one hand, water is viewed as a social good that should be provided for free and on the other hand, it is considered as an economic good that should be priced. However, in the past few decades, there seems to be a consensus that water should be priced despite increasing diversity on what is a ‘fair’ price for water (Raghavendra, 2006). Water pricing is based on user pays principle whereby users are charged for the services provided (Nyoni, 1999). The World Bank (1993) and other international donors have argued that public (government) funds can no longer provide for all the expenses associated with the provision of potable water services. According to critics of free water supply, this practice promotes unsustainable use of water and is partly responsible for the poor financial stability of water utilities in many low income countries.

They argue that with increasing competition and debt burden on state budgets, governments can no longer afford to provide water for free.

Furthermore, they point to the fact that the weak financial stability of water utilities constrains the expansion of the services to the poor and also improvement of the quality of services provided. As such, they have argued that for water utilities to improve their performance, continue to provide quality service to consumers and protect the environment, they must be able to generate revenue through water pricing in the form of water tariffs. This is an important objective of water pricing.

OBJECTIVES AND STRUCTURE OF WATER PRICING Water pricing can be implemented for different reasons

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under different structures.

Objectives of water pricing Four principal objectives of water pricing are: 1) To provide revenue (cost recovery) to utilities for the efficient delivery of potable water services. The recovery of at least the operation and maintenance cost is essential for the financial sustainability of water utilities, adequate system maintenance, and hence the provision of quality services (Brikke and Rojas, 2001); 2) To promote efficient and sustainable use of water. This is essentially a water demand management and resource conservation tool, aimed at fostering wise water use and demand-driven service delivery (Magnusson, 2004); 3) To promote fairness and equity in access to water and water use (Whittington, 2003). Based on the principles of user-pays, it is argued that there is the need for equity and thus transparency in pricing. A consumer who consumes twice as much water as another consumer should pay a bill that is at least twice as large as that of the latter. Fairness is more about pricing consumption on the basis of affordability and socio-economic characteristics of the household given that water is essential for human survival (Brown and Holcombe, 2004; Ruijs et al., 2008). Fairness in water pricing is essential to prevent negative externalities associated with the lack of access to safe and sufficient water supply; 4) To promote poverty alleviation. This seems to be a controversial objective at first sight considering that paying for water will reduce disposal income and could prevent access to other fundamental services. However, the argument is that water pricing will generate revenue for the extension of improved water supply services to the poor with relatively high social and economic returns (World Bank, 1993).

The poor usually spend their limited finances on medical bills due to the consumption of water of poor quality, pay more for less to vendors, waste productive time in the process of water collection (walk long distance to, and spend long waiting times, at collection points), lost productive time due to ailments caused by the consumption of unsafe water. Aiga and Umenai (2002), and Thompson et al. (2000) have documented that the presence of improved water sources within households in Manila and East Africa, respectively freed up time for water collectors to engage in productive activities which generate revenue for their households, as well as reduced their medical bills due to improvement in health.

Thus, the importance of the structure of water pricing.

Structure of water pricing The structure of water pricing can be based on average

or marginal cost principle. In average cost pricing, the unit price is calculated by dividing the total cost of production by the total quantity produced. Using Trinidad as an example, Mycoo, (1996) demonstrated that average cost pricing does not provide the correct cost signal to consumers regarding their water consumption behaviour. The author noted that this incorrect signal was responsible for the inefficient use of water which triggered the need for additional production capacity in Trinidad. In marginal cost pricing, the consumer is charged the additional cost of providing an increase in output. In economic thinking, the net benefits of an activity are maximised when prices are equal to the marginal cost of production, because the allocation of resources is demand-driven (Nyoni, 1999).

Although marginal cost pricing includes the full costs of providing a service, adopting marginal costs pricing in water pricing can be difficult and costly because the marginal cost of supplying water differs by customer, location, and time of use. To fully reflect these different parameters, the marginal price of water may result in a complex tariff structure that is not only expensive to design and administer, but also complicated to understand, especially by consumers (Ruijs et al., 2008).

Despite the structure adopted in the pricing of water services, water pricing should fulfill some common criteria.

Common criteria for the structure of water pricing Water pricing is a policy instrument that can be used to pursue, multiple and sometimes conflicting objectives.

This suggests that the decision to implement a specific pricing structure usually involves blending and/or tradeoffs in economic efficiency, social acceptability, administrative, and political acceptability (Bahl and Linn, 1992).

Economic efficiency This is probably the most important criteria and is aimed at ensuring adequate revenue for the utility. Thus, the pricing structure should be one that will generate the needed revenue for the present and future operations, as well as financial stability of the utility. The amount of revenue to be generated is utility specific and is based on what costs and what percentage that has to be recovered through pricing.

Social acceptability and equity The social acceptability and equity criteria of water pricing demands that the socio-economic and affordability potential of consumers should be given adequate

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attention. In addition, the structure of the tariff should be simple and easy for consumers to understand. A simple and easy to understand tariff structure enables efficient response to price signals, and also clears suspicions of price discrimination among consumers in similar situations. A tariff structure that distorts costs, as may be the case in a monopoly, may not be socially acceptable and may fuel social unrest as was the case in Boliva and South Africa (Juergensen, 2003).

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Water tariff structures Water tariffs have traditionally been structured as singlepart or two-part tariffs (Whittington, 2003). As the names suggest, single-part tariffs consist of one part only while in a two-part tariff the consumer’s bill is the sum of two type of calculations.

Types of single-part tariffs Administrative feasibility Administrative feasibility demands that the tariff structure should be easy to administer by the personnel of the utility, and above all, should not impose any additional costs to the utility. It should be easy to calculate and implement for all consumers without additional cost implications.

Political acceptability Governments have several responsibilities so as to ensure the protection of public health, promotion of public welfare, ensure public peace as well as to promote social and economic development. The range of water supply issues that may be of political interest to the governments may include but not limited to: promotion of access to and affordability of improved water supply services, efficient allocation of water resources, promotion of sanitation and hygiene to reduce the burden of diseases and thus contribute to poverty alleviation, protect consumers from monopoly abuse, as well as to protect the business interests of water utilities.

Thus, for a pricing structure to be politically acceptable, it must not hamper the realisation of government priority.

This suggests the complexity of water pricing policy and politics. In a study of the urban water scarcity management in Botswana, Gwebu (2002) suggests that civic (social) and state (political) acceptability usually conflict; perhaps due to the fact that the wide range of government interests provides opportunities for politicians to manipulate the setting of water tariffs for personal interest.

WATER TARIFFS: STRUCTURE AND TYPES In simple terms, a tariff is the fee charged for service provided or received. According to Whittington (2003), a tariff structure is a set of procedural rules used to determine the conditions of service and the monthly bills for water users in various categories or classes.

Generally, tariffs are set in accordance with national policy by the responsible line ministry, departments thereof, or a delegated institution (Cardone and Fonseca, 2003).

Single-part tariffs can generally be classified as fixed (flat) rate or volumetric rate tariffs.

Fixed or flat rate tariffs Flat rate tariff is a simple rate schedule with a defined amount to be paid in each billing period. The amount paid is unrelated to the units of water consumed. It may assume an expected consumer in setting the rate structure among different classes. The expected level of consumption is usually based on the rated property value, the number of taps in the household, the pipe diameter connected to the main as well as the size of the meter (Mycoo, 1996). In Uganda, the yearly flat rate is based on the number of taps (Cardone and Fonseca, 2003). Flat rate tariff is based on the assumption that there is a positive correlation between the parameter used, volumetric consumption and the ability to pay, thus consumers with higher parameters are charged higher flat rates. These tariffs are commonly used in situations where water consumption is not metered, such as in community water supply systems in developing countries.

It is also prevalent in some developed countries such as United Kingdom, Norway, and Canada where respectively 90, 87, and 56% of water utilities use flat rates (Whittington, 2003). Flat rate tariffs may be attractive on the basis of their simplicity, ease of understanding and administrative feasibility.

However, the costs of monitoring changes in the parameters used in setting the tariff may be high.

Depending on how regularly these pricing criteria are updated, sufficient revenue may be generated in the short run, however based on the experience that these parameters are not adequately updated, flat rates do not generate sufficient revenues needed to operate the utility over its life span (Mycoo, 1996). Another down side of flat rate tariffs is the inability to signal to consumers their water trends and thus promote efficient water use practices. Flat rates are also highly inequitable. For instance, rich small households with high property value and low water consumption may pay more than similar households with high water consumption. Also, flat rates may be regressive in the sense that a poor household with a large pipe size and many taps may spend a

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proportionately high percentage of their income on water than a rich household with similar parameters.

Furthermore, the presumption that the presence of many taps, or large pipe diameter would translate to higher level of water consumption is very weak. It is common knowledge that poor households in developing countries usually have large family sizes with low property values. Thus, even when these households are connected with a single tap, they may consume more water than rich households. In summary, flat rates adversely affect equity, water use conservation, economic efficiency and resource allocation. It may be socially acceptable based on the ease of understanding the tariff structure and the administrative feasibility due to simplicity in application.

Volumetric charges Volumetric tariff is based on the principle of ‘pay-as-youconsume’. The consumer’s water bill is a function of the level of consumption. Volumetric tariffs can be classified in three broad types: 1) uniform volumetric tariffs, 2) block tariffs and 3) increasing linear tariffs.

Uniform volumetric tariffs: In volumetric tariffs, users pay the same price per volume of water consumed, and the price per volume of consumption is the same irrespective of the level of consumption. It is commonly used in Sweden (100%), France (98%), Netherlands (90%), and Australia (68%), (Whittington, 2003). Its computation is simple as shown below: Bill = PQ, Where P = Price per unit volume of water, and Q = quantity (m3) of water consumed.

Volumetric tariffs can be easily understood by consumers; most properly because this is how many things are priced, thus it can be more socially acceptable depending on the price per unit volume. Given that the consumer’s bill is a function of the level of consumption, it can be used to send clear signals to consumers on water scarcity, to promote water use efficiency and water conservation. Volumetric tariffs do not consider the diversity of consumers and the needs of specific consumers. This suggests that there is less complexity (effort and costs) in its application. On the other hand, since consumers pay the same rate per unit volume, uniform volumetric tariffs may be inequitable because poor households with large family sizes may pay proportionately more on improved water services. This may adversely affect affordability and the achievement of some government policies such as universal coverage, poverty alleviation and the protection of public health (Thompson et al., 2000; Jones and Duncanson, 2004).

Volumetric block tariffs: In volumetric block tariff, the volumetric charge per unit of consumption is a function of the consumption bracket and is the same for all units within the same bracket. Depending on the type, the volumetric charge may increase or decrease for consumption in higher brackets respectively for “Increasing loc Tariff –IBT or Decreasing Block Tariff – DBT. a) Increasing block tariffs (IBT) According to Cardone and Fonseca (2003), IBT are widely used in many low income countries especially in sub Saharan Africa countries such as Benin, Burkina, Botswana, Cameroon, Guinea, Ghana, Ivory Coast, Kenya and Senegal. IBTs have also been typically used in water scarce countries, for example, 100, 90 and 57% of water utilities in Spain, Turkey and Japan respectively, apply IBT (Whittington, 2003). Apart from ensuring the economic efficiency of water utilities, IBT have been used to fulfill a mix of efficiency, environmental and social/equity objectives. IBT sends stronger water conservation signals to customers by way of higher tariffs for consumption in higher bracket, and also foster affordability for non-discretional (basic) water use through low tariffs for the first block. This suggests that IBT can fulfil economic efficiency, promote resource allocation and water conservation. How well an objective is met depends on the factors considered in setting the number of units per block (especially for the first block), the charge per unit volume and the affordability of the tariff.

Theoretically, IBT can provide the poor with basic water services, ensure cross-subsidies from the rich to the poor, and generate sufficient revenue for water utilities.

This suggests that IBT may be economically efficient, politically and socially acceptable. IBT may not be equitable depending on the size of the blocks, especially the first block (Raghavendra, 2006). For example, depending on the size of the first block, poor households with low per capita water consumption and large family size could end up in higher brackets and therefore pay higher volumetric charge than small, rich households with high per capita consumption. This is especially true in cases where many households share the same meter.

On the other hand, a large first block with low social tariff will subsidize the rich and provide no incentives for water use efficiency. In addition, consumers in higher blocks may face volumetric charges that do not reflect the marginal cost of water supply. This may also affect the social and political acceptability of the tariff, especially in the case where the price elasticity of demand is low due to the value of water to the consumers. The potential to satisfy multiple objectives, its effectiveness and efficiency depend in part on: the size of the blocks especially the first block, and the volumetric charge per unit in each block.

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b) Decreasing block tariffs (DBT) The underlying pricing principle in DBT is the reverse in IBT in the sense that consumers pay higher volumetric rate for the first block and lower volumetric tariffs for subsequent blocks of water consumed. It discourages low levels of water consumption and provides economic incentives for large consumers with no incentives for water conservation. Except in the United States and Canada, where the use of DBT is 34 and 13% respectively for water utilities (Whittington, 2003), this is not a popular tariff structure, perhaps because of adverse effect on water use efficiency, resource allocation and economic efficiency. Given that it penalises low consumers and benefits high water consumers, such industries may not be equitable, and socially acceptable.

DBT may be politically acceptable for areas with recurrent public health issues due to low per capita water use despite an excess in supply, especially when awareness campaigns may be insignificant. This may also be the case in typical industrial regions to promote the economic scale.

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consumers’ bill may employ any of the volumetric tariff schemes described earlier. The author’s field experience in Cameroon reveals the application of a two-part tariff, with a fixed charge referred to as ‘meter rents’ and the second part based on an IBT structure composed of two blocks.

The fixed charge is 1100 cfa (approximately $2.5 U.S.) per connection per billing cycle (every 2 months). The volumetric charge for the first block made of the first ten cubic meters (10 m3) is 271 cfa - about $0.6 U.S. - per cubic meter, while the second block made of 3 consumption above 10 m , has a volumetric charge of 337 cfa, approximately $0.89 U.S., per cubic meter. Twopart tariffs have the advantage that they can allow the generation of revenue to cover some or all of the administrative costs of water utilities and at the same time achieve other objectives depending on the volumetric tariff that is used. The authors’ personal field experience in Cameroon reveals that the fixed part of the tariff is unfavourable to low water consumers because it constitutes a significant part of their water bill.

c) Increasing linear tariffs

Seasonal and zonal tariffs

Although it is not commonly used, this tariff scheme shows a direct relationship with the quantity consumed.

The volumetric price increases continuously with each additional unit of water consumed. This can be considered as a special case of IBT where each volume consumed is a block in itself. Theoretically, this tariff structure can send a strong signal to consumers about the cost and environmental implications of their water consumption. Although it may generate sufficient revenue (economic efficiency) for water utilities and promote water use efficiency and resource allocation (political acceptability), increasing linear tariffs may be socially unacceptable on the basis that it may be difficult for consumers to understand why each additional unit must be priced higher. Furthermore, it is likely that consumers with high levels of consumption may face very high volumetric charges which do not reflect the marginal costs of production It may be administratively easy to administer the tariff once the increasing linear function is determined.

These tariffs have been used to signal the variation in cost of potable water supply imposed by season and location. In seasonal pricing, the tariff is higher in the dry season and lower in the rainy season. Zonal pricing on the other hand, signals the costs imposed on service delivery due to geographical location such as higher elevations that requires pumping. A key concern in the application of water tariffs is the rate of collection, thus the design and implementation of a tariff is of little significance if the collection rate is low. Thus, the importance of tools and mechanisms for improved tariff collection.

Two-part tariffs As the name implies, in two-part tariffs, the consumers’ water bill is the sum of two tariffs usually (a) a fixed charge (flat rate), and (b) a volumetric tariff structure. The fixed charge which is usually low and kept uniform for all consumers irrespective of volumetric consumption may be used as a means of recovering administrative (support) costs related to service provision, such as metering, billing and collection. The second part of the

MECHANISMS COLLECTION

FOR

IMPROVING

TARIFF

Alence (2002) and Jones et al. (2004) have documented that in some municipalities in South Africa, where tariffs were very low, there were equally low collection rates, while some municipalities with higher tariffs witnessed higher rates of collection. Some fundamental approaches to improve tariff collection are thus discussed.

Affordability The ability to pay is obviously an important factor that needs to be taken into consideration in the design of any tariff. Although willingness to pay (contingent valuation) studies, for example Mycoo (1996), have concluded that there is a high willingness to pay even among the poor,

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Venkatachalam (2006), documented that this does not translate into a high rate of cost recovery. This suggests that willingness to pay should not be considered as the sole basis for setting tariffs, rather it should be interpreted as an expression of need and the value of potable water.

Some indicators of ability to pay could be the rate of unemployment, the GDP, rate of inflation and the cost of other essential services.

while for the water utility, it puts significant pressure on cashiers and stresses customers’ relations. Improving customer relations through, for example, timely response to inquiries, and short waiting time for payments have been proven to increase the rate of bill payments (Cardone and Fonseca, 2003).

Sanction for non-payment

Demand-driven projects and awareness campaigns Projects that are a result of expressed need by the community have been shown to be sustainable, especially in cases where the public is involved in the planning and execution. The case of alternative water supply arrangements in Orangi Township, Karachi, Pakistan is outstanding (Ahmed and Sohail, 2003).

Stakeholder participation in a demand-driven project gives a strong feeling of ownership of the project including awareness and understanding of the rationale of payments and the importance of meeting any financial obligations (Harvey and Reed, 2007). These suggest a change in the paradigm of water supply from a supplyoriented approach where consumers are considered as beneficiaries to a demand-oriented approach where consumers are viewed as stakeholders.

The advantages of such an approach are many folds: the potential to provide a platform for social learning, access to information and strategic planning for improved customer relations, education and outreach campaigns, all of which can lead to a high rate of payment (Ven atachalam, 2006). An increase in consumers’ satisfaction, such as timely response to repairs and maintenance, and improved billing and customer care may also increase the rate of collection. Improving public awareness on the relevance of water tariff and the need for timely payment through water education and outreach campaigns can be an effective approach to increase on the rate of tariff collection (Ntengwe, 2004).

Efficient payment options and improved customer relations The introduction of efficient payment options has the potential of building a culture of payment. In a national survey of more than 300 municipalities in South Africa, Alence (2002) documented an increase in payment rates and decrease in debt ratio in municipalities where consumers were provided flexible payment options, such as small payments over time. This was also the case for municipalities which had multiple payment outlets such as in supermarkets.

In cases where payments can only be made at the office of the water utility, this causes substantial delays and loss of productive time on the side of the customers,

A culture of payment can also be encouraged by the strict implementation of sanctions for non-payment. Late payment charges and service disruption are typically used to penalise defaulters. Although service disruption may be an unpopular action, Alence (2002), noted that it was the single factor that resulted in the highest improvement in payment rates in South Africa. Service disruption may be best in cases where consumers are metered and field workers carry out the disconnection exercise with a high level of professional ethics. For any sanction for non-payment to be productive, it must also be cost-effective.

Conclusion This paper has provided a comprehensive synthesis of the costs involved in potable water supply, water pricing, water tariffs and cost recovery. The literatures reviewed suggest that there is lack of consensus on the classification of the costs involved in potable water supply. While most utilities classify costs as financial, economic and support costs, the life cycle approach and the unbundling of costs according to the units of production can also be very informative in water pricing decisions. Four principal objectives of water pricing (revenue generation, promotion of efficient and wise use of water, promotion of equity, and poverty alleviation) have also been discussed. In addition, four criteria for evaluating water tariffs (economic efficiency, social and political acceptability as well as administrative feasibility) are also discussed.

The framework for water pricing can be based on average cost or marginal cost pricing, using single-part or two-part tariffs. Single part tariffs can be further classified as flat rate or volumetric tariffs. Flat rate tariffs levy a fix charge per billing cycle irrespective of consumption while volumetric tariffs are based on the amount of water consumption. Variations of volumetric tariffs such as uniform block tariffs, increasing block tariffs and decreasing block tariffs as well as seasonal and zonal tariffs have been highlighted. In fact, it suffices to emphasize that the success of any tariff structure depends on how well it reflects the local realities. The rate of collection is a function of affordability, ease of payment, demand-driven service and sanctions for nonpayment.

Folifac and Gaskin

The usefulness of this synthesis is in many folds. It provide a quick reference and comprehensive overview of water supply costs, pricing, tariffs and cost recovery to non water professional and budding professional. It is hoped that by identifying the various costs of water supply, pricing mechanisms, evaluation criteria for water tariffs, especially the pros and cons of different tariff structures, and mechanisms for improving tariff collection, this paper has raised awareness on the complex nature of using a single policy to meet multiple objectives and contributed knowledge to the trade offs that must be done.

ACKNOWLEDGEMENTS The authors would like to thank four anonymous journal reviewers for their useful comments on the paper.

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