COST REFLECTIVE TARIFFS: A
Prerequisite For Financial
Sustainability of a Water Utility
Innovative Water Sector financing .7th – 12th
November 2011, Mombasa Kenya.
Eng. PETER NJAGGAH
WASREB, Kenya
Contents
 Why the need for a water tariff?
 Tariff Types
 Setting a water tariff
 Tariff design
 Water an economic or financial good?.
Implementation and Monitoring.
 Conclusion.
Water tarriff : a contraversial Topic?
Why Water Tariff?
Important economic instrument for:
 improving water use efficiency,
 enhancing social equity
 securing financial sustainability of
WSPs.
Sustainable Water Management
Price < Costs?
• What effects?
– 1 Quality will fall
– 2 Not sustainable
– 3 Kills entrepreneurship
– 4 Affects other projects
– 5 Demand too high
Basic balance: Sustainability
Levels of service
Quantity, Quality
Income
Infrastructure
Tariffs
Subsidy
O&M
Capital
6
Tariffs = Opex + Dep(CapManex)+ Cost of
Capital
 Operating Expenditure
– Labour
– Chemicals
– Power
– Materials
– Equipment
– Overheads
• Communications
 Capital Mtce Expenditure
– Depreciation
• Above ground
– Infrastructure
Renewals
 Cost of Capital
• Loans -> Interest
• Equity -> Dividends:
Incentive & Rewards for
risk - ‘profit’
KENYAN WATER SERVICES SECTORTariffs Types
Wasreb recognizes that WSP differ by category
and size, and has developed different
requirements accordingly.
 Type 1: Full coverage of Operations and
Maintenance costs is still not achieved.
 Type 2: Full coverage of Operations and
Maintenance cost achieved, but repayment of
debts is pending.
 Type 3: O&M costs are covered between 100%
and 150% and repayment of debts is achieved
or ongoing.
Options for Calculating Tariffs
•
Leave tariffs as they are, hope for the best
•
Aim for full recovery of operation and
maintenance costs.
Set a tariff to recover operation and
maintenance costs plus depreciation (capital
maintenance)
•
•
Set tariffs to recover operation and
maintenance costs plus full amortization
(interest payments and repayment of
‘principal’) of the capital costs .
The Water Utility Example
BALANCE SHEET
INCOME AND EXPENDITURE ACCOUNT
ASSETS EMPLOYED
Fixed Assets
Development Expenditure
2002
'000s
OPERATING INCOME
Sale of Water
Miscellaneous
OPERATING EXPENSES
Chemicals
Divisional adminstration
Electricity
Maintenance
Salaries and wages
OPERATING SURPLUS
Depreciation
2001
'000s
5903
137
6040
4506
131
4637
33
644
455
175
564
1871
31
455
448
119
464
1517
4169
3120
933
588
FINANCE CHARGES
Interest payable
Less: interest receivables
2212
-404
1686
-461
SURPLUS FOR THE YEAR
1428
1307
Total Tariffs
(should) =
Opex
+
CURRENT ASSETS
Stores
Accounts receivables
Consumer
Divisional
Other
Short term deposits
Bank and cash balances
CURRENT LIABILITIES
Accounts payable
General
Divisional HQ
Interest payable
Loan repayments due within one year
Consumer deposits
Dep (CapManex)
+
Cost of Capital
NET CURRENT ASSETS
NET ASSETS
FINANCED BY
Consumer Capital Contributions
General Reserve
Capital Reserve
Long Term Loans
2002
'000s
2001
'000s
30367
27559
706
123
122
578
433
1318
4126
973
7551
352
440
932
4544
172
6562
1872
1135
737
1314
16
5074
1972
729
690
1097
14
4502
2477
32844
2060
29619
893
2516
3563
6972
892
1927
3137
5956
25872
32844
24369
30325
Tariff Objective(1)
Tariffs should be:
• Conserving
– Structure of tariff should influence
consumption to the extent that customers
will purchase enough to satisfy their neds
without being wasteful
• Adequate
– A level of resources must be produced
which will enable financial commitments to
be met
Tariff objective(2)
• Fair
– This level of revenue must be allocated
between consumer groups in a fair and
equitable manner having particular regard
to the needs of the poorer members of the
community
• Enforceable and Simple
– The tariff should be simple to administer
and enforce and easy for customers to
understand
CAFES Tariffs – The Practice
• Flat rates/area charges/property
charges
• Metering (metering costs - 25%?) Fixed Charges ?
• Block Pricing (increasing/decreasing)
• Prices for the poor:
–
–
–
–
–
–
Lifeline blocks (15m3?6m3?)
Free Allowances (South Africa)
Cross Subsidies (10 times ? 20 times?)
Multi-users losing out
Paying at standposts/kiosks
Direct subsidies (Chile)
Water tariffs design(1).
Is water an economic or financial
good?
• The Dublin Declaration said that ‘water is
an ‘economic good’ – not a financial good
• How should we treat it as an ‘economic
good’?
• Does it relate to a ‘financial good’ ?
Is water an economic or financial good?
• Financial analysis details what has to be paid for
in cash terms by a sponsoring agency,
government department, customer, consumer or
householder for any project and for subsequent
outputs or services.
• Economic analysis describes the total resource
cost of a project to a country or region including
potentially under-valued items such as voluntary
labour and pollution
Profile of Water Tariff in
Kenya
Average Tariff and Lowest
Block Tariff per WSP Category
Tariffs
Bigger WSPs tend to have
lower tariff due to:
Lower operational costs.
129
140
120
100
80
60
40
20
0
111
83
78
64
40
Average Tariff
Lowest Block
tariff
Very Large Medium Small
and Large
Large customer base
leading to cross subsidy,
hence ability to address
needs of the poor(lower
block tariffs) without
compromising their
commercial viability.
CONCLUSIONCost Reflective Tariff is a Prerequisite for:
 Financial Sustainability of a WSP leading to improved and
efficient service delivery.
 Making access to drinking water affordable for different income
groups.- tariffs should not be too high to drive consumers to
unsafe alternatives .
 Sending appropriate price signals to users about the relationship
between water use and water scarcity;
 Acessing Market finance
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ATTENTION