Principles of tariff design for water and wastewater services

It is intended primarily for: (1) A.I.D. and host-country personnel involved in program design and evaluation; (2) A.I.D. and host-country program administrators; and (3) technical and financial staff of utilities. Tariffs are used primarily to recover costs and achieve financial stability but also for efficient allocation of scarce sector resources, equitable income distribution, and fiscal viability. Even the most carefully designed tariff cannot accomplish all these objectives without trade-offs among them. The underlying principle is that the beneficiaries of a public service should pay the costs, but controversy surrounds the question of which costs a tariff should cover. A utility must meet the costs of operations and maintenance, capital, short-term loans, and fund reserves. The magnitude of these costs is determined by the levels of service it provides, and the levels of service in turn are influenced by several institutional and technical factors. Cost centers, an accounting device for disaggregating costs into discrete units or activities, facilitate the design of tariffs. But establishing realistic tariffs must also take into account the efficiency of operations, unaccounted-for water, the utility"s institutional capability, and the accurate prediction of ability and willingness to pay. Once the costs of providing water and wastewater services have been correctly identified, a suitable method of cost recovery must be selected. This report discusses a wide range of options and examines their advantages and disadvantages. The two most commonly used methods are metering and lump-sum payments. But in the final analysis, a utility should choose the method or combination of methods it believes will work best. (Author abstract, modified)