In order to recover costs from consumers, the operator responsible for cost recovery (be it public or private) has a number of options. For operating and maintenance costs in relation to water and sanitation, the supplier can impose a consumer tariff. This tariff can be structured in a number of different ways, such as:
• a (fixed) standing charge and a (variable) rate dependent on consumption;
• a unit rate for consumption;
• a fixed monthly charge - often the mechanism for communal standpipes; or
• a fixed rate per vessel - water vendors selling water by the bottle.
The tariff structure commonly adopted by utilities/municipalities aiming to introduce a socially equitable system is the rising block tariff. This form of tariff subdivides consumption levels into blocks (e.g., 0-20m3, 20-50m3, 50-80m3, etc.) and then applies an increasing unit charge to each successive block. This seems to have the benefit of penalising high- consumption users with higher and higher tariff levels, thus promoting water conservation, and providing an affordable tariff to poorer households that consume only small amounts of water.
Despite the view that the rising block tariff is the most equitable tariff structure, evidence also indicates that the approach can have perverse outcomes because it assumes that usage patterns are the same for the poor and non-poor. As we have seen in the previous section on payment mechanisms, by assuming that one meter for one household is the norm, it overlooks the density of low-income areas and the livelihood strategies employed by the poor to gain access to services. For the poorest groups, services tend to be shared or sub-supplied, and multiple lettings lead to much greater consumption levels per meter.10 The higher rates charged for higher consumption under the rising block tariff system mean that those vulnerable groups who share also pay some of the highest unit rates for water consumption.
In order to counter this limitation, in Cartagena (see Box 7.19) a rising block tariff structure is combined with a household strata resulting in a tariff that acknowledges different consumption patterns in increasingly poor areas. In Córdoba, a zone coefficient was introduced to factor in the relative income of the neighbourhood. Both aim to introduce a mechanism that acknowledges multiple use of meters.
In developing countries where network sewerage services may be limited and a range of different levels of non-network facilities are provided, the tariff structure for sanitation services may be more complex. It might include:
• a (fixed) monthly charge;
• a standing charge plus a charge per toilet;
• a flat charge (e.g., septic tanker service) and a variable charge (by weight and distance); or
• a charge per service (e.g., cleaning of septic tank).
Often, however, where the sewerage network is limited or non-existent, poor consumers will have no access to sanitation services. Yet there is often a tendency to combine water and sanitation tariffs, and poor households end up paying a charge for sanitation services whether or not they receive them. This combined tariff works against the poor (making the effective cost of their water supply exorbitant), and does little to create incentives for private operators to extend the sanitation service to these areas.
In situations relying on non-network sanitation services such as septic tanks, evidence suggests that the poor are also heavily penalised because they only have access to these service alternatives. Typically, for instance, annual costs of septic tank cleaning are higher than for piped sewerage systems. This discourages effective maintenance practices, often with dire public health consequences. Other participatory assessment work exposed corruption among vacuum tanker crews, who reprioritised municipal work schedules in poor areas in relation to informal financial incentives.11
For solid waste services, the approach to tariffs is more varied and more difficult, there being a much lower willingness to pay for collection. Some operators charge a flat rate fee for a collection service. Municipalities might add that fee to property tax, and thus those paying property tax are the only ones contributing to solid waste cost recovery. Under a franchise arrangement, operators collect a fee from consumers based on frequency of collection or the amount of waste collected. Further information is provided in solid waste guideline documents.12
In developing the tariff structure, municipalities and their advisors will need to consider the factors that will affect implementation. These may include, for instance:
• the failure to link tariff regimes to productivity and thus ensure private sector incentives;
• the low metering levels in poor areas - thus undermining the 'user pays' principle;
• the distortions that pro-poor tariff structures produce in the market incentives for the private operator; and
• the lack of a clear mechanism for tariff setting and revision.13
The tariff regime selected must be designed in the knowledge that outcomes are complex and sometimes indirect. One of the primary problems for municipalities is that they have no experience in the intricacies of tariff design, the nature of outcomes and the implications of various approaches. Although tariffs have been a fact of life in municipalities for decades the objective has not always been cost recovery, and even today few have examined the impacts of their existing tariffs (see Box 7.17 on regressive tariffs in Stutterheim).
It is also possible to identify constraints to the effective collection of tariffs - not least because in many situations the tariffs have been set at levels that many of the poorest and most vulnerable groups cannot afford. While the concepts of affordability and willingness to pay are at the core of the debate over pro-poor tariffs, Chapter 5 has detailed the importance of understanding affordability in relation to livelihoods, and has stressed the need to understand the varying capacities of those who are called 'poor', and the opportunity cost of the payments they make.
A recent BPD study analysing tariffs in pilot areas14 identified a number of 'strategies' for improving cost recovery. Apart from efforts to reduce the cost of provision and the tariff payable by the poor consumer, these strategies included rewards and punishments, payment options, customer education, community mobilisation and participation and communal billing; but they also highlighted the simple observation that one of the keys to increasing tariff collection is to ensure that it is associated with a better service.
Box 7.17 Regressive Tariff Structure | |||||||||||||||||||||||||||||||||||||||||
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Tariffs for water and sewerage services in Stutterheim are tightly controlled by the council; the operator, WSSA, plays no role whatsoever in setting or advising on tariffs. Given the elected council's explicit concern for improving basic services and the past conflict over non-payment and disconnection, it might be expected that a major revision of the tariff structure would have been undertaken. This is not the case. The current tariff structure has evolved since 1994 and is not one that has been structurally designed to meet the council's stated pro-poor objectives, nor does it respond to any affordability or willingness-to-pay surveys. In practice, the tariff structure is unfair and unfavourable for poor households. It is interesting to consider how this has happened, because it was not the intention of the council. Domestic service tariffs
Note: Prices quoted in US$ (US$1 approximately equivalent to 7.2 rand) Analysis shows that the tariff works to the benefit of middle-income rather than poorer groups. For any amount over seven litres, the poor are charged more for their water than their better-off neighbours. It is not uncommon in developing countries for the poor to pay more for their water than wealthier groups because they are procuring water informally. It is likely that this reflects a lack of capacity in the council to understand the implications of tariff structures. Moreover, the tariff structure does not differentiate between low-volume and high-volume users, i.e., the unit cost of water remains constant no matter what quantity of water is used. Far from being beneficial to the poor, this tariff structure penalises low-income households and, in a country verging on water scarcity, provides no incentive for conserving water. Examination of sewerage service standards versus charges tells a similar story. The majority of people in the low-income areas of the town may well be charged more for sewerage services than middle-income households. While network sewerage charges in Mlungisi are US$5.20, the majority (70-80%) of households use septic tanks and request two removals a month. For this service they are charged US$9.96. This is 22% higher than the charge of US$7.80 for middle-income households connected to the sewerage network and receiving a higher level of service. In addition, these inequitable tariffs for water and sewerage are compounded by refuse removal charges, which are the same for low-income and middle-income households, despite the fact that there is marked evidence that low-income households generate significantly less waste. The inequity of the tariff structure for low-income households is countered by two factors: A remission system for the poor on service payments. Approximately 30% of the households are subsidised through a remission system funded by a national government grant. This is calculated on a sliding scale in relation to their income. An income of R300 (US$42.00) per month draws the full rebate. The remission system means that approximately 10% of the population receive services free of charge or with payments of less than R6 (US$0.80) per month. However, this fund can be used for any purpose and there is an opportunity cost associated with its use to subsidise water and sewerage payments. The pattern of non-payment for services among low-income groups. Cost recovery in the low-income areas is very low (28%) compared with the middle-income areas of the town. While, in practice, this results in a cross-subsidy for service delivery to those low-income households that are not paying, current efforts to install pre-paid meters will gradually remove this indirect subsidy and reinforce the impact of the biased tariff structure. This practice also only assists those obtaining a service and not those who are unserved. | |||||||||||||||||||||||||||||||||||||||||
Source: Plummer, 2000a | |||||||||||||||||||||||||||||||||||||||||
Box 7.18 Changing Tariffs and Fees | |
It is widely believed that tariffs in Buenos Aires decreased significantly as a result of the shift to a PPP in 1993 (see Box 3.8). Yet the issue of consumer payment - of tariffs, tariff revision, connection fees and infrastructure fees - is both complex and controversial. Prior to the tender the government embarked upon a process of sectoral reform to counter inflationary pressure and prepare for the impending privatisation process. • In 1991, the government announced a 25% tariff increase to account for inflation. • In 1992, government imposed an 18% goods and services tax to be added to water bills (this was subsequently increased by another 8% in 1995). • In 1993, the government announced a further 8% increase on the tariff. Following the commencement of the concession in 1993, the operator Aguas Argentinas offered a reduction of 27%, the figure frequently quoted as being the reduction in tariff. Opposers might be forgiven for construing this government and private sector action as a strategy to curb any potential opposition to the concession. Yet the story has developed further since then. The tariff level is determined by two primary factors: the price cap and the cost index. One of the primary financial requirements of the original contract was the inclusion of price caps in the first 10 years - a clause that effectively blocked price increases (from the price cap factor) for that period. However, this requirement was accompanied by the possibility of increasing prices through the company's composite price index (based on the costs of fuel, chemicals, electricity, labour, debt servicing etc.). If costs increase by more than 7%, the contract allows for the operator to apply for a tariff increase. However, when the operator applied for a 13.5% tariff in 1994, it was not due to an increase in the company's cost index, but due to what the operator saw as extra-contractual requirements for extension to poor areas and immediate upgrade in one particular municipality. That ETOSS (the regulator) granted this increase is a cause of concern for a number of reasons: • The extension creates a fixed one-off cost, while the tariff increase generates revenue across the city for the remainder of the contract. • This tariff increase sent a message that the contract was negotiable. • It removed the incentive for private financing extension to expand the customer base. • By 1998 it was known that the Buenos Aires concession was extremely profitable, with rates of return nearing 40%. Equally problematic and contentious is the issue of the infrastructure charge in the original contract - a means of financing expansion plans that was applied as a surcharge to new network customers. Given the poverty profile of Buenos Aires, it is no surprise that the charges this implied (between US$43 and US$430 for water and over US$550 for sewerage plus a connection charge) were being imposed upon poor households that were unable to pay (with the possibility of a loan at 12% for two years). It is estimated that 30% of the population stopped paying. By 1997, it is estimated that the operator was US$30 million in arrears, and key stakeholders ETOSS, Aguas Argentinas, the Public Works Secretariat and the Natural Resources and Human Development Secretariat began a renegotiation of the contract (in fact, the negotiation ultimately by-passed ETOSS). As a result the infrastructure charge was replaced by a universal service and environmental fee (SUMA), a surcharge of US$3 to fund environmental clean-up operations and network expansion. This system, which is currently in place, has resulted in a one-off connection cost to new users of US$120. Yet the implications of this renegotiation have been challenged and have raised a number of important issues for stakeholders elsewhere: • Despite massive profit from the concession in the early years, the operator argued that its risk should be reduced and tariffs increased. • The price cap system that has functioned effectively elsewhere was casually replaced by a system whereby the regulator had to respond to the operator's rate of return. • Financial risk was further reduced by applying the charge in advance of any expansion works. • Substantial charges might be accrued, requiring the operator to significantly reduce the level of private investment envisaged under the contract, to a level that the public utility could have achieved with the same tariff restructuring. The controversy has led to some concern about the disrespect stakeholders show towards the contract, and particularly to the regulator's inability to impose penalties for failure to meet performance targets (instead providing an incentive for further stalling and price renegotiations). Unsurprisingly, later in 1998, Aguas Argentinas applied for a further 11.8% tariff increase and was granted 4.5% following another intervention by the national government; at the end of 2000, it was granted an additional 15%; and in January 2001, it successfully negotiated a clause that effectively released it from expansion targets. | |
Sources: Alcazar et al, 2000; Loftus and McDonald, 2001; Rivera, 1996; Artana et al, 1998 | |