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Study Session 13  Financing Urban Water Services

Introduction

The Water Resources Management Policy of Ethiopia recognises that water is a vital socio-economic resource (MoWR, 1999). It also states that the cost of providing water services should be recovered from the people using it. However, when considering the price to be paid for water, the national policy states that ‘the price of water should be neither too high (and discourage water use) nor too low (and encourage abuses and over-use of water)’. It also acknowledges that different approaches are needed for rural and urban dwellers.

In this study session you explore how cost recovery can be achieved, including billing and smart meters. You will also look at how small loans can help to improve water supply.

Learning Outcomes for Study Session 13

When you have studied this session, you should be able to:

13.1 Define and use correctly all of the key words printed in bold. (SAQ 13.1)

13.2 List reasons why water tariffs need to be set. (SAQs 13.2 and 13.3)

13.3 Describe how tariffs are set for different types of users. (SAQ 13.3)

13.4 Explain the billing process, including the use of smart meters in assessing water usage. (SAQ 13.4)

13.5 Describe how microloans can be used to improve water supply. (SAQ 13.5)

13.1  The rationale for water tariffs

One of the ways of ensuring sustainability in water supply is to make sure that the cost of providing the supply is covered by the revenue from payments by consumers. For this to happen, water tariffs must be set. A water tariff can be defined as ‘the price paid by consumers for water’ (MoWE, 2013).

As you have been reading in previous study sessions, the process of providing safe drinking water for large communities in towns and cities requires several steps, from identifying and developing an appropriate water source through to delivery to consumers via a distribution network. In many locations, large-scale water treatment is also needed, involving a series of processes in a water treatment works.

  • Can you recall the main steps in water treatment?

  • The main steps in a large-scale treatment works are screening, aeration and/or pre-chlorination, coagulation and flocculation, sedimentation, filtration, and chlorination. Supplementary treatment may also be needed.

Producing the water, storing it and ensuring it gets to consumers requires the input of expertise, labour, energy and chemicals, all of which cost money. The aim in a water supply system should be to recoup this expenditure and also gather funds for maintenance, renewal of equipment, management costs, repayment of debts, building up of financial reserves, and expansion of the water supply system (when the need arises). Water tariffs provide a way for the money to be gathered from consumers.

13.2  Different types of water tariff

There are four types of tariff that are most often applied in the water sector. Different countries or areas may adopt different systems depending on their policies and circumstances. For example, in some places all households with a piped connection are required to have a water meter that measures the volume of water used. In other places, water meters are not compulsory. The four main types of tariff are as follows:

  • Uniform flat rate: The consumer pays a flat rate regardless of how much water is used. This tariff is used in areas that are not metered. While, for the customer, the expense of installing and reading meters is eliminated, this tariff does little to discourage water wastage by consumers, and everyone pays the same no matter what their consumption.
  • Single-block rate: The consumer is charged a fixed rate for each unit (or block) of water used, based on meter readings. A block is defined as the quantitative interval of water consumed (in cubic metres), for which a given tariff is set. This is a fairer system, as people only pay for what they use, and also it encourages water conservation.
  • What are the benefits of water conservation?

  • Water conservation through the efficient use of water means that the available water can be used to supply more people.

  • Two-part tariff: In this tariff, in addition to charging for the volume of water consumed, a fixed charge is imposed. This fixed charge is to cover several items that are not related to the level of water consumption, such as the cost of meter reading and billing, repayment of loans, and capital improvements.
  • Rising block tariff: Here the consumer pays more as consumption increases. A certain basic allowance of water, the first block, is supplied at a minimal price (or even free) and subsequent blocks of water are charged at increasingly higher rates. The rising block tariff encourages water conservation but is sometimes seen as being disadvantageous to large families who tend to use more water. In these circumstances, a financial subsidy can be given.

There is another tariff, which is not very widespread, called the ‘seasonal tariff’, which is applied in Chile (Whittington et al., 2002). The tariff is low in the rainy season and high in the dry season, thus encouraging water conservation when water is scarce.

13.2.1  Water tariffs used in Ethiopia

In Ethiopia, the rising block tariff is used for both domestic and non-domestic users. The National Guideline for Urban Water Utilities Tariff Setting recommends that no more than five blocks should be used. The recommended blocks for medium and large towns are shown in Table 13.1. The Guideline also recommends a set of block ranges for small towns.

Table 13.1  Guideline water tariff blocks and ranges for medium and large towns in Ethiopia. (MoWE, 2013)
Block Block range (m3 per month)
Domestic usersNon-domestic users
1st                         0–5                          0–5
2nd                       6–10                        6–10
3rd                     11–15                      11–25
4th                     16–20                      26–40
5th                        >20                         >40

Based on these block ranges, the price paid by each customer is calculated according to the volume of water they use. The actual costs of water supply differ from town to town, depending on various factors such as the ease of treatment of the raw water and the cost of laying distribution pipes, etc., so the price paid by consumers also varies between towns.

The following example uses the pricing of water to domestic users in Harar, where there are four blocks for domestic consumers. Table 13.2 shows the price in birr paid per m3 for each block.

Table 13.2  The rates for water in Harar for domestic customers. (Mohammed, 2015)
Block Volume used per month (m3)Price per m3 (birr)
1st                     0–5 5
2nd                   6–109
3rd                 11–20 13
4th                    >20 26

Here is an example of how a water bill is calculated based on these blocks. Imagine the household of Abdul Aziz and his family, who live in Harar and use 12 m3 of water per month.

Calculation of the water bill for Abdul Aziz’s household:

The first 5 m3 will cost 5 x 5 = 25 birr.

The next 5 m3 will cost 5 x 9 = 45 birr.

The remaining 2 m3 will cost 2 x 13 = 26 birr.

The total bill for the month will therefore be 25 + 45 + 26 = 96 birr.

13.3  How water tariffs are set

The basic principle behind the concept of water tariffs is that the income from water sales should be sufficient to cover the expenses of water supply. Essentially, there are two major categories of costs to be considered when setting water tariffs:

  1. Operation and maintenance (O&M) costs: The O&M costs are incurred in the day-to-day running of the water supply system, and include staff salaries and benefits, administrative costs, office running costs, and the cost of water production and distribution (chemicals, energy, repair and maintenance, water analysis, etc.).
  2. Capital costs: The capital costs include the cost of new equipment to replace or upgrade old treatment units, and a fund set aside for future expansion of water supply services when the need arises (for example, for the purchase of additional storage tanks, distribution pipes and new connections). Capital costs also include money used for professional and technical support obtained from outside organisations.

The Water Resources Management Policy of Ethiopia (MoWR, 1999) dictates that the water tariffs for rural areas should seek to recover O&M costs where possible. However, in urban areas the tariffs should seek to recoup total costs – that is, O&M and capital costs. This is called full cost recovery. Full cost recovery ensures the sustainability of the water scheme because it is not dependent on outside sources of funding. It enables investment in the future development of water provision for the benefit of all. If the water supply service were not able to recover its costs, this would restrict the opportunities to develop and extend the water supply network, which would particularly disadvantage poor people.

When deciding on the specific price for a water tariff, financial experts consider all the O&M and capital costs, and arrive at a price for each cubic metre of water produced and distributed. Suppose, for example, that the total cost works out at Y birr per cubic metre of water. Usually the cost for domestic users will start at some figure, X, which is lower than Y. For non-domestic users (such as industrial and commercial users), however, the price will be higher than Y, say Z. The higher price paid by non-domestic users subsidises the price paid by domestic users. By subsidising the price to domestic consumers, the pricing policy ensures that poor people have access to reliable and safe water.

Equitable and affordable

Water tariffs must be easy to administer for the water utility, and understandable and equitable for the consumers, with each type of consumer paying their fair share.

For domestic users, a price will be decided for each of the blocks, similar to Table 13.2, taking into account affordability. The price of ‘affordable’ water varies depending on the local situation, but several sources suggest that for water to be affordable, its price should not exceed 5% of the income of the household (Coalition eau, n.d.; AICD, 2008; Simpson, 2012).

Low-income households, and households with many young children, older or retired people, disabled people, or people with a long-term illness (where money might always be needed for medical treatment), are the most vulnerable segments of the population, since their financial burden will be high. (Vulnerable here means exposed to the possibility of being harmed through the lack of access to water, due to finances.) Water has to be made accessible and affordable for them. Currently, these types of households pay a high price for water (higher than charged for piped supply) by buying water from public taps or water kiosks. Households like these should be charged less than the standard domestic rate for water.

The Water Resources Management Policy requires social tariffs to be set up for poor communities, based on recovery of O&M costs only. These are fixed rates (or single-block rates) and are applied for communal water services such as hand pumps and public taps (also referred to as ‘public fountains’, ‘standposts’ or ‘standpipes’). The tariff used is the one charged for the first block in rising block tariffs for domestic users in Ethiopia. For example, in Harar, according to Table 13.2 this would be 5 birr per cubic metre. The principle behind such a policy decision is that each person should have the right to access a minimum level of water supply for cooking and drinking, at a price that is affordable to low-income households.

13.3.1  Reduction of water tariffs

Water tariffs should be reviewed annually, because customers find small increases in water costs easier to cope with and accept than a large increase every few years. However, it is possible that water tariffs may be reduced with time. If water sales go up, the fixed costs per cubic metre of water produced will be reduced. If non-revenue water is minimised, this will serve to increase the available supply and the income to the water supplier. Increased usage can be achieved by increasing the number of customers, through installing more taps.

  • Can you remember what non-revenue water is, and what its biggest component is?

  • From Study Session 7, it is water that is used but does not generate any income for the water supplier; its biggest component is leakage.

Water tariffs may also be reduced if the income to the water supplier is increased through more efficient billing and collection of payments due.

13.4  The billing process

Water meters are installed at points of water use so that the quantity of water used can be ascertained, and the water user sent a bill for payment. The type of meter in general use has a given flow rate range, which varies with different meters. Usage of water at a higher rate than can be measured by a meter will result in the usage being under-recorded. This means that the bill will be less than it should be. So before installing a water meter, the anticipated rate of water use must be estimated for the given location, and an appropriate meter then installed.

13.4.1  Simple and smart meters

A water meter can be placed below ground level, in a silo with a cover that can be lifted to reveal the meter; above ground, within the compound of the property (Figure 13.1); or on public land outside the property concerned.

Figure 13.1  Water meter inside the compound of a house.

Water meters can be simple, or fitted with automatic meter reading technology. With a simple meter (Figures 13.1 and 13.2), commonly found in Ethiopia, a meter reader employed by the water utility visits the household and physically notes down the meter reading each month to record usage. The meter reader then goes back to the water utility office and passes the reading to the Billing Department staff, who then generate a water bill.

Figure 13.2  A simple water meter.

Where a meter has the facility for automatic meter reading, a meter reader visits the property with a handheld computer or data collection device, as shown in Figure 13.3. The device has an electronic probe. The meter is touched with the probe and a signal from it interrogates the meter and downloads the data needed. Systems are also available by which a meter reader can obtain the required data by walking near the meter, or driving by in a vehicle. The data are downloaded later into a computer that can then automatically and speedily generate a bill.

Figure 13.3  Automated water meter reading.

There are also smart meters (Figure 13.4) that transmit meter readings using wireless technology every hour to the water utility that supplies the water and also to a device in the home or property, so that usage can be monitored. The water bill can be generated rapidly by a computer at the water utility, without a meter reader having to visit the meter. The meter readings are usually monitored by the water utility and a sudden rise in the meter reading can generate a warning that possibly a leak has arisen.

Figure 13.4  A smart water meter.

The different types of water meter have their advantages and disadvantages. The simple meter is robust and inexpensive, while meters with automatic reading facilities and smart meters are costly and sensitive to mishandling. Simple meters, unlike automated and smart meters, require people to take readings and generate a bill, but this gives employment. Automated and smart meters can be used to generate water bills rapidly but require technical expertise to keep them functional.

13.4.2  Prepaid meters

There is no billing process for water purchased from water kiosks because payment is simply by cash. One innovative alternative to this is the use of prepaid meters on public water points, which have been introduced in some parts of South Africa and Kenya (Figure 13.5). With prepaid meters, consumers buy credit in advance, which is registered electronically on a plastic card or token. They then insert the card or token into the meter, which automatically releases water. The cost of the water they have used is deducted from the credit. The advantage of this method is that people can budget for water by topping up their card as and when they can afford to pay. Also, the water point does not have to be managed by a person, and can be open 24 hours a day.

Figure 13.5  A prepaid water meter. The man standing to the right is holding the small blue credit token that is inserted into the meter to obtain water.

In Ethiopia, a pilot trial is underway of a prepayment system for domestic water customers. The householder pays money in advance to the water utility and then uses the water. This enables the household to proactively manage its budget, and simultaneously save time in going to pay the water bill each month. The water utility also makes savings as a meter reader doesn’t have to be sent out to take readings for a bill.

13.5  The role of microloans in improving water supply

In Ethiopia, the hurdle in water supply for many people is the high initial cost of a dedicated household water connection. The householder has to pay the cost of laying a pipe from the mains to the house; the greater the distance of the house from the water main, the higher the cost. Poor households have no capital budget or easy access to credit or loan services to invest in a tap for their exclusive use. This challenge forces such households to buy water from water kiosks and public standpipes at prices much higher than the price of water sold directly to households. Such an additional burden on poor households contributes to their cycle of poverty.

Many people in this group cannot access loans from banks because of their low income. One way out of this is to make microloans available to them. Microloans are small amounts of money lent at a low interest rate to people on low incomes. The idea emerged from the Grameen Bank in Bangladesh in 1976. Because the borrowers, being poor, did not have guarantees, ‘solidarity groups’ of five borrowers who could vouch for each other’s loans were created. This was possible in rural or village settings where all the borrowers knew each other. This fact also created peer pressure to repay the loan, with the result that the repayment rate for loans at the Grameen Bank is greater than 90% (Fonseca, 2006). The microloan system enables low-income households to obtain their own water supply at a reasonable cost. Once they have their own taps, households will need to spend less on water, and the savings made can be used towards other needs of the household, such as health and education.

Microloans can also be made to a community, say, to finance the drilling of a well. A loan such as this engenders ownership of the asset (the well, in this example), and usually results in greater care and responsibility. This bodes well for the sustainability of the asset.

Summary of Study Session 13

In Study Session 13, you have learned that:

  1. Water tariffs are needed to recover the costs associated with the treatment and distribution of drinking water.
  2. There are four main types of water tariff: uniform flat rate; single-block rate; two-part tariff; and the rising block tariff.
  3. In Ethiopia the rising block tariff is used for private taps and taps in industrial and commercial establishments. In this tariff, the cost of water increases with the volume used but consumption is measured in blocks, which are defined quantities of water use.
  4. In Ethiopia, a single-rate social tariff is used for public taps and hand pumps. This tariff is the same as the tariff for the lowest block in the rising block tariff.
  5. Water meters can be simple devices that require a person to read them (either manually or using a handheld computer) and generate a water bill. Alternatively, they can be smart meters that send data to the water utility automatically using wireless technology for preparation of a water bill by computer. Smart meters allow water usage to be monitored, making discovery of a leak easy.
  6. Microloans can be a way for low-income households to obtain their own private taps. Over time, this will reduce the proportion of their income spent on water, leaving more money for other needs of the household.

Self-Assessment Questions (SAQs) for Study Session 13

Now that you have completed this study session, you can assess how well you have achieved its Learning Outcomes by answering these questions.

SAQ 13.1 (tests Learning Outcome 13.1)

Match the following words to their correct definitions.

Using the following two lists, match each numbered item with the correct letter.

  1. social tariff

  2. microloan

  3. vulnerable people

  4. smart meter

  5. block

  6. water tariff

  7. full cost recovery

  • a.a small amount of money lent at a low interest rate to a person on a low income

  • b.the price that is set for water

  • c.a water tariff for those who are poor, which aims to recover only O&M costs

  • d.where capital and O&M costs are all recouped

  • e.people who can be harmed through not having money to buy the water they need

  • f.a given amount of water for which there is a certain water tariff

  • g.a meter that sends water consumption data electronically to the water utility

The correct answers are:
  • 1 = c
  • 2 = a
  • 3 = e
  • 4 = g
  • 5 = f
  • 6 = b
  • 7 = d

SAQ 13.2 (tests Learning Outcome 13.2)

Worku and Samson, two friends, visited their village over the Easter holiday and were in conversation with some of the elders there. The elders were discussing the new pipeline bringing drinking water to their houses, and asking why they had to pay for it when water was a basic need that the government should provide free. What do you think Worku and Samson told them?

Answer

They would probably have said that for water to be safe, it has to be treated. The treatment process is quite complicated, with many steps, and requires equipment, energy and chemicals. Money is needed for this, and also for the pipelines and pumps to take the water to their village. The fairest way of recouping the money is to charge people for the amount of water they use.

SAQ 13.3 (tests Learning Outcomes 13.2 and 13.3)

  • a.In setting water tariffs, the aim is to recover the cost of water supply. What are the different components that make up O&M costs and capital costs?
  • b.How is it possible to recover the cost of water supply when the water tariff for domestic use is less than the actual cost of the water?

Answer

  • a.O&M costs include the salaries and benefits of the staff; administrative and office costs; and the costs associated with water production and distribution (such as the cost of chemicals, energy, repair and maintenance, and water analysis).

    Capital costs refer to the cost of new equipment; money needed for expansion of the existing system to cope with increased demand for water; and money required for external professional and technical support.

  • b.The lower water tariff for domestic use is balanced by the higher water tariff charged to industrial and commercial establishments.

SAQ 13.4 (tests Learning Outcome 13.4)

Think about different types of water meters and methods of billing, and fill in the following table.

Simple meterSmart meter
Advantages

 

 

 

 

 

                                                                                

                                                                                     

Disadvantages

 

 

 

 

 

 

 

 

Answer

Here are some points you may have thought of.

Simple meterSmart meter
Advantages

Low cost

Simple

Robust

Gives employment for people as meter readers are needed

Does not require a meter reader to visit to take a reading

A water bill can be generated quickly and automatically

Can give a warning if there is a leak

The user can see the hourly rate of water consumption

Disadvantages

Requires a person to physically collect data

Generating a water bill takes time

Will not warn of a leak

Does not inform user of hourly water usage

Costly

Relies on sophisticated technology that requires technical expertise

Needs to be handled carefully

Reduces the opportunities for employment

SAQ 13.5 (tests Learning Outcome 13.5)

Beheilu is a construction worker who lives with his wife and six children in a poor neighbourhood in Addis Ababa. He spends about 20% of his income on water bought for his family at the water kiosk in his area. He would like to have a private water tap in his yard but is unable to pay the high price for the connection, and cannot approach a bank because he does not earn very much. Having studied the material in this study session, what advice would you give him?

Answer

He should be advised to obtain a microloan if he can. This type of loan is designed for people in his situation, and charges a low interest rate.