PEIP Project

Tariff Policy for Water and Wastewater Services

Session overview

    Rationale behind the sound tariff policy The key determinants of a sound tariff policy Generic model for calculating cost-reflective tariffs Conclusions and discussion

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The Tariff Policy Rationale

  The key question when we propose to the water tariff is whether the consumer view a tariff increase as: increase   Technically and financially justified, and hence inescapable , or They perceive it as being the result of factors such as:    Inefficiency, losses and poor planning of the water company Gains to the politicians who are viewed to be corrupt “Excessive” profits being taken by private investors Another aspect is whether consumers feel discriminated against lower prices or against different consumer group Adopted from DANCE funded Toolkit: Water Prices in CEE and CIS Countries

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Why there is a need to reconsider tariff policy in water infrastructure planning?

 To properly assess future demand for water and wastewater services and analyze key people determinants for such demand: Demand for water services

Customer perception and willingness to pay Affordability (ability to pay) Political acceptability

Adopted from DANCE funded Toolkit: Water Prices in CEE and CIS Countries

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Customer perceptions, Willingness to pay and Demand for Services

  The term ‘ willingness to pay ’ describes the consumer’s preference in relation to changes in the water & wastewater services and tariffs.

Two accepted methods: 1.

2.

Revealed preference data Stated preference data Adopted from DANCE funded Toolkit: Water Prices in CEE and CIS Countries

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Willingness to Pay Determinants

Perception of fairness of changes Trust in the water company History of price and service level Effectiveness of PR efforts Affordability of the tariffs Public acceptability of increased water tariffs Importance of public health and environmental issues Public involvement in the process Political/media reactions to tariff level Adopted from DANCE funded Toolkit: Water Process in CEE and CIS Countries

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Household Tariff Affordability

   Affordability is closely linked to the willingness to pay which gives information of whether the households are price prepared to pay the increased However, affordability of households is an indicator of tariff objective ability to pay the water The notion of affordability in households is related to the: “

Upper limit of expenditure on water and wastewater services”

Adopted from DANCE funded Toolkit: Water Prices in CEE and CIS Countries

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Household Tariff Affordability Assessment

  Overall assessment of the household affordability can be based on macro-economic data on average:   Household income Expenditure for water services and food expenditure as share (%) of total household income  Rule of a thumb: water service expenditure are affordable if they do not exceed 3 – 5 % of disposable household income If possible, a more detailed household data is recommended to gather in order to assess the nature and size of the affordability issue.

Adopted from DANCE funded Toolkit: Water Prices in CEE and CIS Countries

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Political acceptability of tariffs

  Political acceptability refer to attitudes to a specific water sector investment that entails changes decision maker’s in water tariffs.

Local decision makers are:     Local politicians Civil servants and administrative municipal units Local population (as voters) NGOs with interest and some national actors

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Four aspects of political acceptability

1.

2.

3.

4.

Political acceptance ultimately determines whether a project is feasible There will often be a degree of discrepancy between public acceptability and political acceptability Political acceptability analysis illuminates the different risks at stakes in the case of changes in the water sector Different time perspectives of project economic life (20-40 years) and time horizon of local government democracies (4 years)

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Tariff Policy Design

 Assessment of full service cost level. Full cost recovery implies that revenue is fully adequate to meet all cost categories:     

RR = (O&M + DS) + T + CC

RR – Revenue requirement O&M - Operations and maintenance costs D – Depreciation T – Taxes CC – Cost of capital (interest or opportunity cost)

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What costs are to be reflected in the water tariffs?

    O&M - Operations and maintenance costs D – Depreciation T – Taxes CC – Cost of capital (interest or opportunity cost)

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Water Tariff Strategies and Issue

     Flat rates Consumption based tariffs:   Constant tariff rate Block tariffs (two consumption intervals) Subsidized tariffs Price discrimination issue Subsidies for poor

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Conclusions

    Tariff policy is closely connected to the demand for water services, i.e. customer’s perception, willingness to pay and affordability Political acceptability should not be neglected Assessment of full service cost is key to structuring sound tariff policy Different approaches and strategies for setting tariffs

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