7.1. Tariff Framework

One of the key challenges in a PPP project is to define the most appropriate tariff. Tariffs for services must ideally cover the full cost of service provision, including capital cost, operations and maintenance expense, and the cost of negative environmental and social externalities.

The level and structure of tariffs must ideally offer incentives to service providers to minimise costs, and to customers to consume services efficiently. When tariffs are inadequate, the financial feasibility assessment needs to identify a plan to improve cost recovery, and identify sources of financing the full cost of service provision. Different stakeholders have different expectations from the tariff. A framework explaining the expectations of three key stakeholders is provided below.

Source: Course Material, National PPP Capacity Building Programme

The following key options could be used, based on their merits, when defining a tariff rate setting strategy:

1. Sector specific uniform tariff setting (e.g. highways)

2. Project specific tariff setting (e.g. port projects)

3. Upfront or as bidding parameter (e.g. some of the power sector projects)

The pros and cons of each of these options should be assessed by experts taking the interests of all the stakeholders into consideration while the financial model should help assess their impact, taking into account the assumed price elasticity.

A few of the strategies used in tariff setting are determining one set of user charge per target group, setting of discount/ price differentiation within the defined target group and determining price escalation over the years.

Based on demand and tariff, revenues for the project are extrapolated over the years. Revenues are calculated from all the major sources. In the case of certain projects, revenues generated from support or related activities may be higher than revenues from primary activities.

For insights into tariff setting, refer the Asian Development Bank's study at the following link on tariff setting framework;

http://www.adb.org/sites/default/files/pub/2008/tn-24-utility-tariff-setting.pdf