6.4.2  Tariff Design

Tariffs need to balance a number of objectives: (i) stipulated service standard and associated costs, (ii) customers' willingness and ability to pay, (iii) resulting cost recovery, (iv) required economics (return on investment) for private operator, and (v) need for/availability of subsidies. The right combination of factors must be determined through an iterative optimization process using the project model (see Figure 11).

Figure 11: The Iterative Process of Designing Tariffs

Source: Heather Skilling and Nils Janson. 2006.

This process is made more complex if differentiated/complex tariff structures (e.g., unit price as a function of consumption to help low-income users) or tariff adjustment mechanisms (e.g., for input cost changes, exchange rate changes) are used. It is critical to employ qualified and experienced specialists for this modeling and optimization task.

The following objectives provide an appropriate starting point for designing tariffs:

•  cost recovery/return on investment, 

•  incentives for efficiency, 

•  fairness and equity, and 

•  simplicity and comprehensibility.