How water tariffs are set
The basic principle behind the concept of water tariffs is that the income from water sales should be sufficient to cover the expenses of water supply. Essentially, there are two major categories of costs to be considered when setting water tariffs:
- Operation and maintenance (O&M) costs: The O&M costs are incurred in the day-to-day running of the water supply system, and include staff salaries and benefits, administrative costs, office running costs, and the cost of water production and distribution (chemicals, energy, repair and maintenance, water analysis, etc.).
- Capital costs: The capital costs include the cost of new equipment to replace or upgrade old treatment units, and a fund set aside for future expansion of water supply services when the need arises (for example, for the purchase of additional storage tanks, distribution pipes and new connections). Capital costs also include money used for professional and technical support obtained from outside organisations.
Water tariffs for rural areas should seek to recover O&M costs where possible. However, in urban areas the tariffs should seek to recoup total costs – that is, O&M and capital costs. This is called full cost recovery. Full cost recovery ensures the sustainability of the water scheme because it is not dependent on outside sources of funding. It enables investment in the future development of water provision for the benefit of all. If the water supply service were not able to recover its costs, this would restrict the opportunities to develop and extend the water supply network, which would particularly disadvantage poor people.
When deciding on the specific price for a water tariff, financial experts consider all the O&M and capital costs, and arrive at a price for each cubic metre of water produced and distributed. Suppose, for example, that the total cost works out at Y USD per cubic metre of water. Usually the cost for domestic users will start at some figure, X, which is lower than Y. For non-domestic users (such as industrial and commercial users), however, the price will be higher than Y, say Z. The higher price paid by non-domestic users subsidises the price paid by domestic users. By subsidising the price to domestic consumers, the pricing policy ensures that poor people have access to reliable and safe water.
Equitable and affordable
Water tariffs must be easy to administer for the water utility, and understandable and equitable for the consumers, with each type of consumer paying their fair share.
For domestic users, a price will be decided for each of the blocks, similar to Table 13.2, taking into account affordability. The price of ‘affordable’ water varies depending on the local situation, but several sources suggest that for water to be affordable, its price should not exceed 5% of the income of the household (Coalition eau, n.d.; AICD, 2008; Simpson, 2012).
Low-income households, and households with many young children, older or retired people, disabled people, or people with a long-term illness (where money might always be needed for medical treatment), are the most vulnerable segments of the population, since their financial burden will be high. (Vulnerable here means exposed to the possibility of being harmed through the lack of access to water, due to finances.) Water has to be made accessible and affordable for them. Currently, these types of households pay a high price for water (higher than charged for piped supply) by buying water from public taps or water kiosks. Households like these should be charged less than the standard domestic rate for water.
Social tariffs should be set up for poor communities, based on recovery of O&M costs only. These are fixed rates (or single-block rates) and are applied for communal water services such as hand pumps and public taps (also referred to as ‘public fountains’, ‘standposts’ or ‘standpipes’). The principle behind such a policy decision is that each person should have the right to access a minimum level of water supply for cooking and drinking, at a price that is affordable to low-income households.
Reduction of water tariffs
Water tariffs should be reviewed annually, because customers find small increases in water costs easier to cope with and accept than a large increase every few years. However, it is possible that water tariffs may be reduced with time. If water sales go up, the fixed costs per cubic metre of water produced will be reduced. If non-revenue water is minimised, this will serve to increase the available supply and the income to the water supplier. Increased usage can be achieved by increasing the number of customers, through installing more taps.
Can you remember what non-revenue water is, and what its biggest component is?
From Study Session 7, it is water that is used but does not generate any income for the water supplier; its biggest component is leakage.
Water tariffs may also be reduced if the income to the water supplier is increased through more efficient billing and collection of payments due.