Why cost recovery matters

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Water supply and sanitation services are known to provide economic benefits to communities in the form of health, opportunities for women (explained in this WaterAid publication), and poverty reduction (see the TOP on Livelihoods). Given the overall societal gains that can be achieved, it is widely accepted that water and sanitation services must be improved, especially for the poor, who are the most likely to lack access to these services (see the summary statistics from the Human Development Report in the box below). But, providing water and wastewater services is not free. As a result, strategic thinking is needed about how costs can be recovered - whether from users, donors, government or others - and what costs need to be recovered to encourage sustainability.

Source: Human Development Report (2003)

Cost recovery matters because, as Ian Johnson explains in his paper, population growth, high rates of urbanization and aging infrastructure, mean that sustaining existing water and wastewater services alone poses a daunting financial task, let alone expanding access to new communities and households, especially in peri-urban and rural areas. The numbers needing to be served to meet the Millennium Development Goals are quoted here. According to the United Nation's Global Water Supply and Sanitation Assessment 2000 Report, funding limitations and inadequate cost-recovery rank as the top potential constraints to development in every region in the world.

Source: Terry & Calaguas (2003)

Cost recovery in the water sector matters too because, although aid programmes are increasingly multi-sectoral, urgent needs for health and education, along with high debt service levels within developing country governments, constrain traditional sources of funding for the sector.

Cost recovery principles matter in the context of governance, as the gaps in institutional and administrative capacity in many governments are wide, translating into less efficient planning and budgeting for the water sector. To reduce the gaps in service provision, cost recovery should - and does - play a critical role. Without cost recovery, financially strapped local authorities are unable to finance network expansions into peri-urban and rural areas, or to properly maintain the existing services.

Low service levels and poor water quality decrease the willingness of customers to pay, which in turn lowers the service level. Poor cost recovery can lead to the waste of a possibly scarce resource, an inability to maintain machinery (such as pumps), and possible health risks if people are compelled to use alternative, and often unsafe, sources of water.

In essence, low levels of cost recovery from users and other sources leads to insufficient income for the effective and efficient operation and management of the service. This implies a poor ability to invest in the sector, whether through human investment or capital investment. As a result, poor service ensues, leading to the dissatisfaction of users thus decreasing willingness to pay, which, on top of already poor cost recovery levels, further exacerbates the system.