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.

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.

Contents

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

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Basic balance: Sustainability

Levels of service

Quantity, Quality

IncomeInfrastructure

Tariffs O&M

Subsidy Capital

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 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.

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 .

INCOME AND EXPENDITURE ACCOUNT2002 2001'000s '000s

OPERATING INCOMESale of Water 5903 4506Miscellaneous 137 131

6040 4637OPERATING EXPENSESChemicals 33 31Divisional adminstration 644 455Electricity 455 448Maintenance 175 119Salaries and wages 564 464

1871 1517

OPERATING SURPLUS 4169 3120

Depreciation 933 588

FINANCE CHARGESInterest payable 2212 1686Less: interest receivables -404 -461

SURPLUS FOR THE YEAR 1428 1307

BALANCE SHEET 2002 2001'000s '000s

ASSETS EMPLOYEDFixed Assets 30367 27559Development Expenditure 706

CURRENT ASSETSStores 123 122Accounts receivables Consumer 578 352 Divisional 433 440 Other 1318 932Short term deposits 4126 4544Bank and cash balances 973 172

7551 6562CURRENT LIABILITIESAccounts payable General 1872 1972 Divisional HQ 1135 729Interest payable 737 690Loan repayments due within one year 1314 1097Consumer deposits 16 14

5074 4502

NET CURRENT ASSETS 2477 2060NET ASSETS 32844 29619

FINANCED BYConsumer Capital Contributions 893 892General Reserve 2516 1927Capital Reserve 3563 3137

6972 5956

Long Term Loans 25872 2436932844 30325

The Water Utility Example

Total Tariffs (should) = Opex +

Dep (CapManex)+

Cost of Capital

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

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.

Tariffs

020406080

100120140

Very Large and Large

Medium Small

78

111129

4064

83

Average Tariff and Lowest

Block Tariff per WSP Category

Average Tariff

Lowest Block tariff

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

THANK YOU FOR YOUR ATTENTION

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