A private operator will set tariffs so as to generate enough revenue to cover all costs including an adequate profit. The public sector does not operate with the same constraints. There are instances where a service has been provided for a long time by the public sector, prices will have little or no direct relation to costs. Low tariffs are often justified by the argument that infrastructure services are essential basic services, and should not be priced above people's ability to pay (ATP). This argument has merit, but low tariffs for all users are not necessarily the best solution.
It is often possible to provide direct support only to those who need it, thus allowing for the charging of higher tariffs up to the level of full cost recovery. This is already done in water supply pricing, i.e., segmenting the market into residential, commercial and industrial.
As a general principle, tariffs should be set at a level sufficient to achieve full cost recovery. A subsidy is specifically allowed, with such compensation paid by the LGU to the PPP concessionaire based on the ATP of users. Where tariffs are very low, it is sometimes not politically possible to suddenly move to full cost pricing, and prices must adjust over a number of years. A tariff subsidy will be necessary during the adjustment period, with the amount of the subsidy declining over time as fares rise. The length of the adjustment period is both a policy and a fiscal matter, and therefore a decision for the LGU to make. In some cases tariffs may never attain full cost recovery.