In addition to the cost of the service consumed, for services delivered by a network (drinking water, electricity) there is also the cost of connecting to the distribution system. Such connection fees are an important part of financing network expansion. The possibility of covering the costs of the connections and adding new paying customers gives private firms strong incentives to expand service coverage.
At the same time, the need to pay connection fees in order to receive services can shut poorer customers out of the network. While costs per unit may go down as customers move from informal to formal providers, the need to come up with significant amounts of money just to have access to the system can be a major barrier. It may well be an investment they cannot afford, or do not prioritise. Detailed understanding of how different poor households will behave - what they will do when faced with paying US$200 for a yard or house connection for potable water for instance - is an essential part of the decision-making process, which - like the affordability studies on tariffs - should be closely linked to poverty assessments that place these costs in a range of household expenditure profiles.
Formal service providers often envisage that the costs for poor households only involve those fees payable for the service. Yet households wishing to optimise the investment and obtain maximum health and hygiene benefits will also be concerned with the costs of the household appliances - taps, sinks, toilets and their upkeep.
The alternative payment mechanisms discussed earlier in this section might assist poor consumers where the full cost of connection is passed on to them, and financial services can assist them to cover the costs of any household appliances they may wish to purchase.
In partnerships focused on the poor there are also strong arguments for revising the approach to connection costs. Efforts by those promoting pro-poor service delivery in water and sanitation15 challenge the inclusion of connection costs as a cost specifically to be attributed to new customers. It can be argued that connection costs, as a fixed asset, are capital costs and can be funded in just the same way as a treatment works; that there is little valid reason for demanding that new customers pay for connections any more than they should pay for the portion of the treatment works that they use. Given that connection charges limit new connections, ration demand and thus limit tariff increases to the rich households already connected, they are inherently marginalising the poor from the benefits of the service partnerships. The difficulties and controversies associated with connection fees are described in relation to the low-income areas of Buenos Aires in Box 7.18, where the operator was forced to reconsider the expensive connection fee and instead introduced an infrastructure fee applied to all tariffs to cover the costs of expansion and connection.
Box 7.19 Tariff Structure and Cross-subsidies | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The national water tariff policy in Colombia is derived form the public services legislation passed in 1994 and inspired by the philosophy of social solidarity. This law states that the tariff structure of all basic services, including water and sanitation, must be based on the twin concepts of efficiency and equity. On the one hand, tariff levels must be sufficient to generate income that will cover the operating and investment costs of water utilities. On the other hand, the tariff structure must incorporate a pro- poor element by making provision for cross-subsidies in the form of a 'solidarity fund'. This national policy and legislation thus aimed to standardise and make transparent the approach to cross-subsidisation in all municipalities throughout the country. In order to implement this pro-poor approach, municipalities were required to carry out sample surveys to categorise households in their jurisdiction into one of six levels (estratos). The criterion for classification is exclusively environmental, based on the nature of house construction (size, construction materials for walls and floor) and the environmental quality of the neighbourhood (services and amenities). The mayor is required to establish a Permanent Committee for Stratification (Comité Permanente de Estratificación) comprising the head of planning, the municipal ombudsman (personero), a representative from each of the basic service companies, and two citizens. This advisory committee has the task of monitoring the implementation of the stratification process, and responding, within two months, to complaints from householders who claim that their properties have been wrongly classified. In the event that the customer is still not satisfied, s/he may appeal to the national watchdog committee, the Superintendencia de Servicios Públicos (SSP). Municipalities were required to rebalance tariffs over the five-year period 1994-99. The legislation requires that owners of properties classified in the medium level, Level 4, should be charged a tariff that covers the operating and capital costs of service delivery. Those classified as belonging to Levels 1, 2 or 3 should pay a subsidised tariff, while those householders placed in Levels 5 and 6 should bear the cost of this subsidy by paying a tariff in excess of the cost of delivery. Municipalities must ensure that the cross-subsidy element is identified on the bills in a transparent manner, and that the subsidy and surcharge ceilings applied to each strata are adhered to. As shown below, the water tariff structure in Cartagena does have a strong pro-poor element. The standing charge for households in the highest (6th) strata is over 10 times greater than that for households in the lowest (1st) strata. For the lowest tariff block (0-20 cubic metres), households in the highest strata pay nearly four times more per cubic meter than households in the lowest strata. It should be noted, however, that the lack of universal meter coverage affects outcomes. Domestic water tariff structure by household strata
Note: Data supplied by AGUACAR: US$1 = 2280 Colombian pesos On 31 December 1999, AGUACAR had over 112,000 water customers and over 90,000 sanitation customers. Over 53% of its residential customers belonged to the three poorest consumer categories (Levels 1, 2 and 3), which receive a tariff subsidy. This approach does not result in a common national tariff for all water companies because the 'break-even' cost applied to Level 4 householders varies from municipality to municipality as a result of geographical factors (e.g., terrain and distance from water source) and the level of efficiency of the water utility. Cross-subsidies are not permitted between regions. Source: Adapted from Nickson, 2001a | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||