From subsidy to sustainability: cost recovery challenges in urban water supply

Although water is increasingly seen as an economic good, the issue of cost recovery for water supply and sanitation is far from straightforward. Poor households are in some places reluctant or unable to pay for networked services while in others they pay far more for informally-provided water supplies.

To ensure the sustainability of the service, donors are urging governments to get consumers to pay for the water they use. Can public private civil society partnerships promote effective and sustainable water supply and sanitation to poor communities? What options are available to meeting this financial need at the local level and what attitudinal changes are required to place the poor more central to their own development?

A paper from Business Partners for Development uses evidence from eight urban water schemes in Africa, Asia and Latin America to assess the technical, political, economic and social challenges in building responsive and sustainable supply systems.

Most of the projects are trying to recover operation and maintenance costs but little or none of the capital cost of building and extending water networks. In Haiti and Africa, where water is mostly supplied through communal stand posts, revenue is collected either from newly created local institutions or private stand post operators.

Where there are private household connections the cost recovery relationship is between the customer and the utility.

Is full cost recovery feasible? While some managers fear the consequences of not meeting cost recovery targets, others believe water would continue to flow to communities as a result of subsidies and populist policies that water should always be available. Managers fear that failure to boost revenue will rule out network expansion, thus dooming the unconnected poor to remain unsupplied.

The report identifies two vicious cycles in cost recovery:

• Low revenue collection rates leave operators with insufficient income to do repairs, resulting in a deteriorating service which fewer people want to pay for.
• Setting preferentially low tariffs for poor consumers on the (often mistaken) assumption that subsidies will always be available. Paying a token tariff gives little sense of ownership and may not adequately protect facilities.

Other findings include:

• National governments and private sector operators are most concerned about losing revenue and/or credibility if cost recovery goals are not achieved.
• NGOs, communities and local government focus more on the community dynamic to understand what makes cost recovery challenging.
• No project has systematically studied which consumers do and not pay their bills and why.
• Only three of the projects are allowed to use disconnection as a stick to enforce payment of bills.
• Lowering price may not raise demand. Some of the highest collection rates are achieved in places where the price is highest (alternative sources generally cost even more).
• Asking even the very poorest to pay some kind of connection fee heightens ownership.

The report calls for:

• greater sharing of experience and understanding among the public, private and civil society actors committed to cost recovery
• establishment of formal oversight committees bringing together the utility, community, local government and NGOs
• co-ordinated lobbying to persuade politicians of the need for cost recovery in order to avoid the investment declines noted above, and appropriate changes to regulatory frameworks to facilitate options for improving cost recovery
• evaluation of the cost effectiveness of various strategies to increase revenue
• more research on affordability issues to develop means-tested or other targeted subsidies
• innovative thinking on how to structure billing and collection in ways compatible with the income streams of residents.

Source(s):
'Cost recovery in partnership: results, attitudes, lessons and strategies' by Kristin Komives and Linda Stalker-Prokopy, Business Partners for Development, October 2000

Funded by: BPD, World Bank, DFID

id21 Research Highlight: 30 October 2001

Further Information:
David Jones
Business Partners for Development (BPD)
c/o Water Aid
First Floor Prince Consort House
27-29 Albert Embankment
London SE1 7UB, UK

Tel: +44 (0) 20 7793 4557
Fax: +44 (0) 20 7852 0962
Contact the contributor: davidjones@wateraid.org.uk

Business Partners for Development Water and Sanitation Cluster, UK

Other related links:
'Private sector participation in water and sanitation: promises and pitfalls'

'Water privatisation in Africa: how successful is it?'

'Tapping the market. Can private enterprise supply water to the poor?'

Further research from the International Water and Sanitation Centre

Wateraid works towards a safe water supply and adequate sanitation

WSP helps the poor gain sustained access to improved water supply and sanitation services

Read the Water Supply and Sanitation Assessment 2000