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COST REFLECTIVE TARIFFS: A Prerequisite For Financial Sustainability of a Water Utility

COST REFLECTIVE TARIFFS: A Prerequisite For Financial Sustainability of a Water Utility. Eng. PETER NJAGGAH WASREB, Kenya. Innovative Water Sector financing .7 th – 12 th November 2011, Mombasa Kenya. Contents. Why the need for a water tariff? Tariff Types Setting a water tariff

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COST REFLECTIVE TARIFFS: A Prerequisite For Financial Sustainability of a Water Utility

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  1. COST REFLECTIVE TARIFFS: A Prerequisite For Financial Sustainability of a Water Utility Eng. PETER NJAGGAH WASREB, Kenya Innovative Water Sector financing .7th – 12th November 2011, Mombasa Kenya.

  2. 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.

  3. Water tarriff : a contraversial Topic?

  4. Why Water Tariff? Important economic instrument for: • improving water use efficiency, • enhancing social equity • securing financial sustainability of WSPs.

  5. Price < Costs? What effects? 1 Quality will fall 2 Not sustainable 3 Kills entrepreneurship 4 Affects other projects 5 Demand too high Sustainable Water Management

  6. Levels of service Quantity, Quality Income Infrastructure Tariffs O&M Subsidy Capital Basic balance: Sustainability

  7. 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’ Tariffs = Opex + Dep(CapManex)+ Cost of Capital

  8. KENYAN WATER SERVICES SECTOR-Tariffs 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.

  9. 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 . Options for Calculating Tariffs

  10. The Water Utility Example Total Tariffs (should) = Opex + Dep (CapManex) + Cost of Capital

  11. 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(1)

  12. 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 Tariff objective(2)

  13. 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) CAFES Tariffs – The Practice

  14. Water tariffs design(1).

  15. 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?

  16. 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 Is water an economic or financial good?

  17. Average Tariff and Lowest Block Tariff per WSP Category 129 111 140 120 83 78 100 64 80 40 Average Tariff 60 40 Lowest Block tariff 20 0 Very Large Medium Small and Large Tariffs Profile of Water Tariff in Kenya • Bigger WSPs tend to have lower tariff due to: • Lower operational costs. • Large customer base leading to cross subsidy, hence ability to address needs of the poor(lower block tariffs) without compromising their commercial viability.

  18. 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

  19. THANK YOU FOR YOUR ATTENTION

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