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
Why the need for a water tariff?
Setting a water tariff
Water an economic or financial good?.
Implementation and Monitoring.
Water tarriff : a contraversial Topic?
Why Water Tariff?
Important economic instrument for:
improving water use efficiency,
enhancing social equity
securing financial sustainability of
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
Tariffs = Opex + Dep(CapManex)+ Cost of
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-
Wasreb recognizes that WSP differ by category
and size, and has developed different
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
Options for Calculating Tariffs
• Leave tariffs as they are, hope for the best
• Aim for full recovery of operation and
• Set a tariff to recover operation and
maintenance costs plus depreciation (capital
• 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
Fixed Assets 30367 27559
INCOME AND EXPENDITURE ACCOUNT Development Expenditure 706
Sale of Water
Stores 123 122
Miscellaneous 137 131 Consumer 578 352
6040 4637 Divisional 433 440
OPERATING EXPENSES Other 1318 932
455 Opex Short term deposits
Bank and cash balances
Electricity 455 448 7551 6562
Salaries and wages
464 + CURRENT LIABILITIES
1871 1517 General 1872 1972
Divisional HQ 1135 729
OPERATING SURPLUS 4169 3120 Interest payable 737 690
Depreciation 933 588
Loan repayments due within one year
FINANCE CHARGES + 5074 4502
Interest payable 2212 1686
Less: interest receivables -404 -461 Cost of Capital
NET CURRENT ASSETS
SURPLUS FOR THE YEAR 1428 1307 FINANCED BY
Consumer Capital Contributions 893 892
General Reserve 2516 1927
Capital Reserve 3563 3137
Long Term Loans 25872 24369
Tariffs should be:
– Structure of tariff should influence
consumption to the extent that customers
will purchase enough to satisfy their neds
without being wasteful
– A level of resources must be produced
which will enable financial commitments to
– 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
• Enforceable and Simple
– The tariff should be simple to administer
and enforce and easy for customers to
CAFES Tariffs – The Practice
• Flat rates/area charges/property
• 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
• The Dublin Declaration said that ‘water is
an ‘economic good’ – not a financial good
• How should we treat it as an ‘economic
• 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
Average Tariff and Lowest Bigger WSPs tend to have
lower tariff due to:
Block Tariff per WSP Category
Lower operational costs.
Large customer base
140 111 leading to cross subsidy,
120 83 hence ability to address
100 64 needs of the poor(lower
60 Average Tariff block tariffs) without
40 Lowest Block
20 commercial viability.
Very Large Medium Small
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