Introduction
Context and historical perspective
Cost recovery is still today one of the major obstacles to achieving a sustainable drinking water supply in developing countries, despite major efforts in the sector over the past decades.
The Expert Meeting on Cost Recovery held in Delft[1], in January 2001, and a literature review of the subject, have highlighted a number of major problems concerning cost recovery:
- obtaining good cost data on water supply and sanitation,
- the need to differentiate between capital and recurrent costs,
- lack of awareness by communities of the costs of safe water and sanitation and who is responsible for meeting them,
- methodological problems with studies on willingness to pay and demand,
- knowing how to derive equitable tariffs from willingness to pay and demand studies,
- tariffs do not cover all costs,
- equity objectives are rarely taken into account in existing cost recovery principles,
- poor regulation and enforcement,
- monopoly problems, political interference and cultures of non-payment,
- poor management capacity of communities,
- misuse of funds.
It was thought[2] for a time in the 1970s that appropriate technology that communities could afford would contribute to solving the problem. The 1980s brought an understanding of community involvement that grew later into community management and gender awareness. Community financing came to be considered as a community affair, which communities could resolve, if they were given responsibility for it, and if they participated in the whole project cycle. In the early 1990s, the International Community stated in Dublin that "water has an economic value in all its competing uses and that it should be recognised as an economic good". This was the springboard for a new era during which professionals took various positions.
Economists argue that "the basic principle behind user charges (urban or rural) is that users should pay the economic cost of water services, as the economic price of water should ensure the optimum economic efficiency of water charges. The appropriate cost for users to pay is the long run marginal economic cost, which is approximated by the average incremental cost derived from the least cost method analysis[3]". However, rural or low-income urban communities who are managing their system have problems in understanding this language and applying its concept. Social scientists give an "emphasis on water as a basic need[4]" and fear the economic approach as a possible threat to equity, as it does not fully allow for the social dimension. Environmentalists agree that "managing water as an economic good is an important way of encouraging conservation and protection of water resources[5]", mainly by including the cost of preserving water in user charges and by applying the principle of the polluter pays. Governments and municipalities, who are going bankrupt because consumers don't pay for services, apply the "principle of 'user pays' so strictly that the plight of the poor is overlooked[6]".
Furthermore, when considering specifically drinking water and not water resources in general, sector professionals today prefer to mention water as a social and economic good rather than only as an economic good. According to this view, it is not water but the services involved in providing safe water that have a price; hence water should be considered as a commodity rather than as a good. Clearly, however, the concept of water as an economic good has helped considerably to trigger the principle that water services have a price which consumers should pay, and this has been a definite, not yet sufficient, step towards improved cost recovery.
More recently, specialists and governments have understood that development had to be demand-driven, in order to encourage feelings of ownership and willingness to pay. Finally, today, there is a trend towards believing that the involvement of the private sector is essential for financial efficiency and sustainability.
So, what has to be done to reach sustainable cost recovery? One would be tempted to say that the solution lies in a balanced application of all the concepts and principles mentioned above, a sort of syncretism where everything mixes in a melting pot.
Decades of conceptual evolution, directly or indirectly linked with cost recovery, have managed to highlight some commonly accepted basic principles, such as the fact that users should pay for water services, and that communities should have a role in managing their water supply and adopt a gender perspective. At the same time, one of the results of this evolution has been to show that there are no blueprints generally applicable to all situations and contexts. There are however certain factors which can contribute to sustainable cost recovery, and which can be adjusted or adapted to local circumstances.
These problems become even more crucial, as communities are progressively made responsible, or co-responsible, for the financial management of their water supply system, and as consumers begin to pay for a service they were not paying for in the past.
Is there a right strategy for cost recovery?
The Business Partners for Development (BPD) Water and Sanitation Cluster[7] has recently made an interesting survey on eight water supply projects world-wide[8], and came up with the following conclusions:
"One reason that cost recovery is a difficult goal to achieve is that it is affected by so many factors and so many different parts of project design and operation. Many water and sanitation projects begin without fully acknowledging the importance of these interrelationships. The service level (e.g. public standposts, in-house taps, etc) or the institutional structure, for example, is often chosen before a project even begins - either because the project aims to reform an existing water or sanitation system or because the project planners felt they had identified the best technical solution. In this situation, the cost recovery problem is seen as the need to collect enough revenue from users to cover the cost of the system that was installed. The challenge then becomes getting people to use the system and getting people to pay. ( In this non optimal situation), strategies might include: 1. education and awareness campaigns for consumers, 2. improved customer relations, 3. introducing disconnection for non-payment, 4. altering institutional structures to change incentives to charge and to pay, or 5. revising tariff structures and connection fees; possibly through implementing different tariff structures for the poor. Getting people to cover the cost of a specific service is important, but is not the only approach to improving cost recovery. Changing the cost or the characteristics of that service can also contribute to improving cost recovery. This perspective introduces another set of possible strategies for achieving cost recovery: 1. changing technologies or service levels,2. improving service quality or reliability, or 3. reducing operational costs."
The BPD Report mentions also that: "A few projects are trying to improve cost recovery, not by improving revenue collection but by increasing water consumption. These projects are using hygiene education programs to explain the importance of using water for bathing and washing, and of having sanitation technologies (e.g. toilet) in the home". The report shows that there are no set formula to improve cost recovery, but rather a blend of possibilities which should be adapted to local circumstances and context.
This report wishes, however, to propose that setting an appropriate strategy for cost recovery can be seen in a wider perspective. Cost recovery should not only be seen as trying to apply a series of corrective measures for insufficient revenue collection, but rather that it is part of an integral approach which can be planned for right from the start. It relies on a series of mutually dependent factors, which have been grouped into two main chapters: 1. Planning for cost recovery; and 2. Putting cost recovery into practice.
Planning for cost recovery includes:
- the way the project has been introduced; demand-driven projects respond better to local realities and expectations;
- a decision about what costs should be recovered and by whom, in an equitable way; technological choices have a definite impact on level of recurrent costs;
- an analysis about the willingness to pay of communities;
- the setting of an adequate institutional framework in order to manage the system in a financially sustainable way;
- defining accompanying measures, such as setting an appropriate legal and policy framework, educational and/or promotional campaigns and capacity-building activities.
Putting cost recovery into practice includes:
- setting an appropriate tariff; there are different types of tariffs which communities can choose from, according to the context;
- optimising costs; this means being able to identify and estimate costs as well as to minimise them;
- access to other sources of funding; tariffs in most cases do not cover all costs, making it essential to analyse other potential financial sources;
- effective financial management; this encompasses budgeting; revenue collection, bookkeeping and accountability; financial control and monitoring;
- service efficiency as the best passport for an operator; this will cover system performance and reductions in unaccounted for water, as well as improving relationship with users.
This report will review each one of these elements, and try to highlight their key characteristics and advantages / disadvantages. The objective of this report is to provide the reader with sufficient insight into the various factors affecting cost recovery, so that they can subsequently be discussed and tested within a project team and with communities. Finally, IRC together with other sector professionals wish to develop this Occasional Paper into a Technical Guide that will include a wide variety of examples from the field.
1Organised by IHE and IRC 2Adapted from Poverty and water supply and sanitation services, by Len Abrams, 1999 3From Handbook for the Economic Analysis of Water Supply Projects, Asian Development Bank, 1999. Page 190. 4From Water as an economic good, by Desmond Mc Neil. In: Vision 21 : Water for People. 5From Dublin Statement, 1992, extract of principle 4. 6From Cost recovery at all costs ? in Maru A Pula, Issue N. 16, March 2000. 7Business Partners for Development - Water and Sanitation Cluster. E-mail: bdp@wateraid.org.uk, c/o Water Aid, First Floor, Prince Consort House, 27 - 29 Albert Embankment, London SE1 7UB, United Kingdom 8By Kristin Komives and Linda Stalker Propoky (October 2000). Cost Recovery in the focus projects: Results, Attitudes, Lessons and Strategies (draft).
