PEIP Project

Tariff Policy for Water and Wastewater Services

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Session overview

Rationale behind the sound tariff policy The key determinants of a sound tariff

policy Generic model for calculating cost-

reflective tariffs Conclusions and discussion

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The Tariff Policy Rationale The key question when we propose to

increase the water tariff is whether the consumer view a tariff increase as: Technically and financially justified, and hence

inescapable, or They perceive it as being the result of factors

such as: Inefficiency, losses and poor planning of the water

company Gains to the politicians who are viewed to be

corrupt “Excessive” profits being taken by private investors

Another aspect is whether consumers feel discriminated against lower prices or against different consumer group Adopted from DANCE funded Toolkit: Water Prices

in CEE and CIS Countries

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Why there is a need to reconsider tariff policy in water infrastructure planning? To properly assess future demand for

water and wastewater services and analyze key people determinants for such demand:

Customer perception and willingness to pay

Affordability (ability to pay)

Demand for water services

Political acceptability

Adopted from DANCE funded Toolkit: Water Prices in CEE and CIS Countries

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Customer perceptions, Willingness to pay and Demand for Services The term ‘willingness to pay’ describes

the consumer’s preference in relation to changes in the water & wastewater services and tariffs.

Two accepted methods:1. Revealed preference data

2. Stated preference data

Adopted from DANCE funded Toolkit: Water Prices in CEE and CIS Countries

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Willingness to Pay Determinants

Public acceptability of increased water

tariffs

History of price and

service level

Trust in the water

companyPublic

involvement in the

process

Political/media

reactions to tariff level

Importance of public health

and environmental

issues

Effectiveness of PR efforts

Affordability of the tariffs

Perception of fairness of changes

Adopted from DANCE funded Toolkit: Water Process in CEE and CIS Countries

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Household Tariff Affordability

Affordability is closely linked to the willingness to pay which gives information of whether the households are prepared to pay the increased price

However, affordability of households is an indicator of objective ability to pay the water tariff

The notion of affordability in households is related to the:

“Upper limit of expenditure on water and wastewater services”

Adopted from DANCE funded Toolkit: Water Prices in CEE and CIS Countries

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Household Tariff Affordability Assessment Overall assessment of the household affordability

can be based on macro-economic data on average: Household income Expenditure for water services and food

expenditure as share (%) of total household income

Rule of a thumb: water service expenditure are affordable if they do not exceed 3 – 5 % of disposable household income

If possible, a more detailed household data is recommended to gather in order to assess the nature and size of the affordability issue.

Adopted from DANCE funded Toolkit: Water Prices in CEE and CIS Countries

www.rec.org

Political acceptability of tariffs

Political acceptability refer to decision maker’s attitudes to a specific water sector investment that entails changes in water tariffs.

Local decision makers are: Local politicians Civil servants and administrative municipal

units Local population (as voters) NGOs with interest and some national actors

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Four aspects of political acceptability1. Political acceptance ultimately determines

whether a project is feasible2. There will often be a degree of

discrepancy between public acceptability and political acceptability

3. Political acceptability analysis illuminates the different risks at stakes in the case of changes in the water sector

4. Different time perspectives of project economic life (20-40 years) and time horizon of local government democracies (4 years)

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Tariff Policy Design

Assessment of full service cost level. Full cost recovery implies that revenue is fully adequate to meet all cost categories:

RR = (O&M + DS) + T + CC RR – Revenue requirement O&M - Operations and maintenance costs D – Depreciation T – Taxes CC – Cost of capital (interest or opportunity

cost)

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What costs are to be reflected in the water tariffs? O&M - Operations and maintenance costs D – Depreciation T – Taxes CC – Cost of capital (interest or

opportunity cost)

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Water Tariff Strategies and Issue Flat rates Consumption based tariffs:

Constant tariff rate Block tariffs (two consumption intervals)

Subsidized tariffs Price discrimination issue Subsidies for poor

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Conclusions

Tariff policy is closely connected to the demand for water services, i.e. customer’s perception, willingness to pay and affordability

Political acceptability should not be neglected

Assessment of full service cost is key to structuring sound tariff policy

Different approaches and strategies for setting tariffs