The design of tariffs for water and sanitation service provision has become a significant development issue. It is magnified as donors encourage public-private partnerships (PPPs) and private sector participation (PSP) in order to improve water and sanitation services for the poor. Is it possible to set tariffs at levels that the poor can afford but which also provide incentives to private companies to invest in the delivery of these services?

The Water, Engineering and Development Centre of Loughborough University and Suez-Environment assessed the challenges of setting tariffs that are both affordable to the poor and able to provide incentives for companies to sustainably expand services to poor consumers. Based on case studies undertaken in Africa, Asia and Latin America, it considers how the needs of the poor can be secured in PPPs that provide water and sanitation services.

The costs of water services must be covered either by users through water charges, by government subsidies, or by a suitable combination of cost recovery and subsidies. Inadequate capacity to expand infrastructure to cope with urban growth is penalising unsupplied poor households. In many cases the tariffs do not even cover operation and maintenance costs. Most tariff structures make it hard for new operators to track who designed them and the key assumptions they used. Politics remains the dominant element in setting tariffs.

Analysis of current tariffs in developing countries shows that:

• As poor households spend higher proportions of their income (typically more than 10%) on water than better-off families any unit reduction in the price of water benefits them more.
• Weak property rights and limited access to credit make it difficult to provide services to the poor on a contractual basis.
• There is a conflict between a low willingness to pay for sewerage and the high cost of provision: pre-PSP sewerage charges are often very low and based on property size or outdated value rather than on volumes of water consumed.
• Industrial consumers often subsidise domestic ones: tariffs with steeply rising blocks result in substantial revenue from non-domestic consumers and may make spending in low-income domestic areas unattractive and delay the introduction of PSP.
• Poor information about socio-economic characteristics of communities and failure to disaggregate consumption information hinders tariff design.
• PSP contracts are often vague on objectives to improve and extend services to the poor. Instead, they depend on good will or public relations motives.

Reforming tariff structures to achieve cost recovery is not incompatible with the objective of making water available and affordable to all households. The greatest scope for establishing transparent and equitable charges lies at the planning stage and the degree of commitment given to pro-poor policies. Once arrangements are set in place however, it becomes progressively harder to implement a pro-poor policy unless these are anticipated in regulatory mechanisms.

The author argues that:

• Tariff reform can turn provision of water services to the poor from a high risk negative financial transaction to a secure and profitable enterprise.
• Good information on consumer usage and household properties, together with modern billing systems, can allow a wide variety of tariff structures to work equally well in emerging economies as they already do in industrialised states.
• There may be opportunities to make significant changes during preparation of a PSP that should be taken advantage of.
• Although dependent on the operator’s contract and regulatory arrangements there is no reason why post-PSP tariff reforms cannot gradually be incorporated in the PSP contract – provided they are clearly specified. Operators must be provided with all available statistics – including income, consumption and willingness to pay for improved services – of communities they serve.
• Constant communication and discussion between companies, clients and regulators is crucial.

The construction, operation and maintenance of water systems entail huge costs. Sustainability cannot be achieved unless costs are fairly shared among all system customers. Water sector reforms are essential to achieve water for all. A better understanding of cost recovery mechanisms and the application of a fairer tariff structure will help to achieve what is currently a dream for millions of people in the world.

Source(s):
Water and sanitation tariffs for the poor: guidance notes’ edited by M. Sohail, Water, Engineering and Development Centre, Loughborough University, 2004 Full document.

Funded by: DFID KaR7388

id21 Research Highlight: 28 February 2005

Further Information:
M. Sohail
Water, Engineering and Development Centre
Loughborough University
Leicestershire
LE11 3TU
UK

Tel: +44 (0)1509 222885
Fax: +44 (0)1509 211079
Contact the contributor: m.sohail@lboro.ac.uk; WEDC@lboro.ac.uk

WEDC, University of Loughborough

Alain Mathys
Environment & Sustainable Development
Suez-Environnment
18 sq. Edouard VII
75316 Paris Cedex 09
France

Tel: +33-1-58-18-50-00
Fax: +33-1-58-18-50-50

Suez-Environnment

Other related links:
Public-Private Partnerships: getting water and sanitation services to Asia’s poor

Private sector participation in water supply: too fast, too soon?

New roles, new rules: does private sector participation benefit the poor?

Towards good water governance

The Virtual Water Forum Final Report