Existing approaches: what costs need to be recovered?

The traditional approach to cost recovery considers only the financial costs of a project or programme, such as operations and management (O&M) costs, capital costs and possibly investments for future growth and rehabilitation (which includes accounting for depreciation of assets over time). National policy then dictates whether part or all of these costs should be recovered from consumers, making tariff design and billing a crucial element in the recovery of financial costs.

A less narrow economic perspective considers, in addition to the financial costs, opportunity and environmental costs (and benefits) to society and the broader water resources environment of delivering secure water and sanitation services, in addition to the external impacts on individuals or communities. This approach allows, for example, savings on reduced health care or benefits from income-generating activities to be brought into the positive side of the equation. On the negative side, especially in water-scarce regions, it is necessary to bring in the lost industrial or agricultural production if water is allocated for WSS services. Environmental costs may arise from increased wastewater flows or from reduced water available for ecosystem maintenance, but there are also possible benefits if improved sanitation reduces water pollution.

Even full recovery of the financial costs associated with the operation and management of a system and those related with the environment does not guarantee that the system will continue to operate after it is constructed.

Neither of these approaches considers costs associated with for instance:

• developing the skills of the staff of the provincial office that has to ensure that the local water supply companies are providing a good service at an affordable price to the local communities;
• the field worker that needs to conduct willingness to pay studies;
• the availability of supply chains or technical know-how;
• the existence of financial management and accounting systems;
• the organization that is trying to make the necessary institutional arrangements to ensure that the new regulation for financing poor rural households is put into practice.

Financial estimates to meet Millennium Development Goal 7 - Ensure Environmental Sustainability (to halve the proportion of people without sustainable access to safe drinking water and sanitation by 2015) range from US$8 billion per year for water supply, and

US$17 billion per year for sanitation (for a total of US$25 billion per year) by WaterAid, to US$17 billion for water supply by GWP. The first set of estimates considers low-cost solutions without considering replacement or financing costs; the latter set includes full water and sewage connections as well as primary wastewater treatment for urban areas. Either way, relative to other expenditures, this number is comparatively small. Selim Jahan quotes these figures for comparison: total expenditures on alcoholic drinks and cigarettes in Europe are US$150 billion per year; agricultural subsidies in OECD countries amount to US$327 billion per year.

Looking beyond the amount of money that would be required to meet development targets for water supply and sanitation, a critical question remains: after the construction phase, how do we make sure that the systems keep working? How do we ensure that the existing 1.2 billion people who currently lack safe water will be able to have access to improved water services and most important of all, will have it for their children and generations to come?

IRC's approach to cost recovery

IRC's approach to cost recovery broadens what are usually considered financial and economic costs. It aims to look beyond the individual water system, its users and the three-year horizon of most projects or programmes financed by support agencies. It considers not only the construction, but the lifetime, rehabilitation and extension of water supply systems and all the elements that are necessary to providing longer-term support to users in poor rural communities and peri-urban neighbourhoods, while guaranteeing equitable access and use of water services taking into account opportunity and environmental costs.

In summary, IRC sees cost recovery as the matching of all costs related to providing a sustainable service, with all the available sources of funding. These funding sources may lie entirely with the users, but may also include external funding from governments or donors. The crucial point is that unless all of the costs related to providing and maintaining a service (technical, human resource, institutional) are identified, organized, and covered in a coherent manner with sources of funds, a system cannot be considered to be sustainable.

Both financial and economic approaches to cost recovery typically consider the system construction, the system maintenance, and some training to the community and local NGOs during project implementation. Often not taken into account are the system rehabilitation and extension costs as a result of population growth or increased demand for service levels and the maintenance of the existing capacities and institutions within the community.

Too often, caretakers leave their communities in search of better jobs after they have been trained, or the recently created water committee falls apart after a corruption scandal. The costs for extension staff to monitor and maintain the existing structures and capacities within the community are usually overlooked.

Most projects and programmes also rely too often on the community, local NGOs or the private sector, and do not sufficiently involve local governments during implementation. However, when there are serious system breakdowns or when there are conflicts within the communities and the implementing agency has left the area, some support and mediation is required from outside the community.

The costs of ensuring that the local government staff have the capacities to help the communities when systems break down or to monitor private sector performance are never included in cost calculations.

Other important elements not traditionally included in cost recovery are the costs incurred to attain a high level of skills, policy, and institutional arrangements within a local, regional, and national governance structure to determine such things as tariffs, subsidies, loans, contracts with the private sector, methods of payment, achieving poverty reduction goals and many others. These require a high level of skills, institutional arrangements, guidelines and policy making, for which costs are also never calculated.