One of the primary objectives of many municipalities is to create economically sustainable service delivery, thereby removing the drain of service operation, maintenance, replacement and expansion on ever-dwindling budgets. As a result, many governments are changing their approach to the funding of urban services, whether or not they are considering private sector involvement. Efforts are under way to introduce cost recovery policies - to charge fees that cover operating costs, if not the costs of expanding the system as well. In some cases, subsidies are being used to phase those increases in over time, to help underwrite the capital costs of system replacement and expansion, and to help ensure access of the poor to system services.
Once a municipal utility has a stream of fee income that covers both operating and capital costs, it has options. It can stay under municipal ownership and management or it can seek private involvement in a variety of forms to meet local objectives. Most importantly, it will have the funds it requires to meet the needs of its users reliably over time. But if politicians have been elected for years promising the lowest fees for municipal services - often with the result of poor service - an extended period may be necessary to build public confidence that increased fees will lead to improved levels of service. Often, increases in user fees will be combined with efforts to restructure the municipal utility in an attempt to improve services.
The costs associated with service delivery - irrespective of the public or private nature of the delivery - are often disaggregated into three cost centres:
1. Capital costs, such as those associated with building infrastructure or purchasing trucks.
2. Connection costs, costs incurred by a household or community forming a new connection into a service.
3. Operation and maintenance costs, the costs of keeping the system functioning.
All three types of costs can be recovered from two sources: consumer tariffs/fees or subsidies (illustrated in Box 7.16). In relation to service delivery to the poor, these alternatives are inextricably intertwined, as discussed below.