COST REFLECTIVE TARIFFS: A Prerequisite For Financial Sustainability of a Water Utility Eng. PETER...
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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.
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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
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Water tarriff : a contraversial Topic?
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Why Water Tariff?
Important economic instrument for: improving water use efficiency, enhancing social equity securing financial sustainability of
WSPs.
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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
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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’
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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.
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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 .
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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
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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
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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
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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)
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Water tariffs design(1).
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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’ ?
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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
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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
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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
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THANK YOU FOR YOUR ATTENTION
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