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COST REFLECTIVE TARIFFS

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					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                    O&M
Subsidy                    Capital


                                6
     Tariffs = Opex + Dep(CapManex)+ Cost of
                       Capital
 Operating Expenditure    Capital Mtce Expenditure
  – Labour                  – Depreciation
  – Chemicals                   • Above ground
  – Power                   – Infrastructure
  – Materials                 Renewals
  – Equipment              Cost of Capital
  – Overheads                   • Loans -> Interest
     • Communications           • 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 .
The Water Utility Example                             BALANCE SHEET                          2002     2001
                                                                                            '000s    '000s
                                                      ASSETS EMPLOYED
                                                      Fixed Assets                           30367    27559
INCOME AND EXPENDITURE ACCOUNT                        Development Expenditure                           706
                              2002     2001

OPERATING INCOME
Sale of Water
                             '000s

                               5903
                                      '000s

                                        4506
                                               Total Tariffs
                                                      CURRENT ASSETS
                                                      Stores                                   123      122
                                                      Accounts receivables

                                               (should) =
Miscellaneous                   137      131           Consumer                                578      352
                               6040     4637           Divisional                              433      440
OPERATING EXPENSES                                     Other                                  1318      932
Chemicals
Divisional adminstration
                                 33
                                644
                                          31
                                         455   Opex   Short term deposits
                                                      Bank and cash balances
                                                                                              4126
                                                                                               973
                                                                                                       4544
                                                                                                        172
Electricity                     455      448                                                  7551     6562
Maintenance
Salaries and wages
                                175
                                564
                                         119
                                         464   +      CURRENT LIABILITIES
                                                      Accounts payable
                               1871     1517            General                               1872     1972
                                                        Divisional HQ                         1135      729
OPERATING SURPLUS              4169     3120          Interest payable                         737      690

Depreciation                    933      588
                                               Dep (CapManex)
                                                      Loan repayments due within one year
                                                      Consumer deposits
                                                                                              1314
                                                                                                16
                                                                                                       1097
                                                                                                         14

FINANCE CHARGES                                +                                              5074     4502

Interest payable               2212     1686
Less: interest receivables     -404     -461   Cost of Capital
                                                      NET CURRENT ASSETS
                                                      NET ASSETS
                                                                                              2477
                                                                                             32844
                                                                                                       2060
                                                                                                      29619

SURPLUS FOR THE YEAR           1428     1307          FINANCED BY
                                                      Consumer Capital Contributions           893      892
                                                      General Reserve                         2516     1927
                                                      Capital Reserve                         3563     3137
                                                                                              6972     5956

                                                      Long Term Loans                        25872    24369
                                                                                             32844    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
                                                   Tariffs
        Profile of Water Tariff in
                  Kenya
       Average Tariff and Lowest                 Bigger WSPs tend to have
                                                 lower tariff due to:
      Block Tariff per WSP Category
                                                 Lower operational costs.

                                                 Large customer base
                         129
140               111                            leading to cross subsidy,
120                        83                    hence ability to address
        78
100                 64                           needs of the poor(lower
 80          40
 60                             Average Tariff   block tariffs) without
 40                             Lowest Block
                                                 compromising their
 20                                              commercial viability.
                                 tariff
  0
      Very Large Medium Small
      and Large
              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




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