What is cost recovery?

Updated - Monday 05 January 2004

A simple definition of cost recovery for water services might read: to recover all of the costs associated with a water system, programme or service to ensure long-term sustainability (a useful definition of sustainability is shown in bullet form below).

Defining sustainability

A water and sanitation service is sustainable when:

it is functioning and being used;
it is able to deliver an appropriate level of benefits (quality, quantity, convenience, continuity, health) to all, including the poorest women and men;
it continues to function over a prolonged period of time (which goes beyond the life span of the original equipment);
its management is institutionalized;
its operation, maintenance, administrative and replacement costs are covered at the local level;
it can be operated and maintained at local level with limited but feasible external support; and
it does not affect the environment negatively.

Although this appears straightforward, various organizations, institutions and individuals with different backgrounds may interpret the definition differently.

For example, it is well understood that providing a public service such as water supply or sanitation costs money. However, among water and sanitation professionals, disagreements arise about:

Which costs are we talking about?

Financial costs (operating costs, capital costs, cost of servicing capital);
Economic costs/benefits (lost value of water for other uses, gains from productive use, pollution created or alleviated, ..);
Support costs (institution building, HRD, information systems, monitoring and assessment, regulation, planning and strategy development).

How are costs recovered?

Tariffs (fixed or variable);
Subsidies (direct, cross subsidies, output-based subsidies);
Overseas development assistance;
Micro-credit;
Social development funds
Community funds.

(For a more detailed discussion on identifying all the costs and how to recover costs, please download the .pdf and read chapter 5: Identifying Costs and 6: Recovering Costs.)

Resolving these questions is important both at the local level for services management, and also at the broader level, in discussions about current development goals such as the Millennium Development Goals for Water and Sanitation. Because there is no clear consensus about what cost recovery is or how cost recovery reforms should be implemented, it is necessary to set out a working definition of cost recovery. This process begins with identifying what costs need to be recovered.