Water

Raising Revenues
Quick Solutions for Better Services
May 2008

By KyongAe Choe
Principal Urban Development Specialist, ADB

Tell consumers that increasing water tariffs is in their best interest and you’ll get scorn and skepticism. But the truth is low tariffs leave utilities with revenues too meager to cover their operation costs, resulting in leaky pipes, low water pressure, poor water quality, and intermittent supply. Consumers are reluctant to pay for such service, revenue collections get difficult and the cycle of poor service continues. How can utilities step out of this vicious cycle?

It is a sad but inescapable fact that urban water supply systems in Asia’s developing countries share numerous undesirable traits—many are closely regulated, with the regulation on tariff focusing more on meeting social ends than on economic/cost recovery considerations; house connections aren’t metered or, if they are, meters aren’t regularly calibrated; water losses are high; supplies are interrupted due to electricity shortages or climatic factors; and revenue collection is barely enough to cover operation and maintenance (O&M) costs.

With such low revenues, water utilities have no choice but to cut costs elsewhere. Often, they turn off pumps to reduce electricity bills, a simple act that brings not-so-simple results. With the electricity off, water stops flowing, the pressure of the inner pipelines suddenly drops, and sewage seeps in through cracks in the distribution pipes. The end result—poor water quality and people taking their own measures to make their water potable

In some cases, the water system is operated at a low pressure to reduce water leakage through cracked pipes. Low pressure, cracked and leaking distribution lines, and open sewerage bring in serious public health hazards such as waterborne diseases.

In combination, these characteristics tend to increase service interruptions and reduce water supply to merely a few hours per day.¹

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Obviously, such situations are unsatisfactory and consumers can’t be blamed for not wanting to pay their water bills.

Water engineers and public officials often misinterpret poor revenue collection to mean that prices are too high or that consumers’ willingness to pay is too low. They fail to see it for what it often is— the consumers’ direct response to the unsatisfactory service they’re getting.

Complicating things further is the politicians’ reluctance to increase water charges, believing that water is a basic social good. While the intention may be good, free but poorly serviced water supply costs consumers almost the full-price of improved water supply,² taking into consideration the opportunity costs of long hours of walking or queuing to get water and coping costs such as paying for storage tanks, installing individual water filters or pumps, or buying potentially unsafe water from vendors at exorbitant prices.

Likewise, when households are serviced with water connections at nominal price, with ineffective metering, and intermittent supply, they would waste water by repeatedly refilling storage containers or leaving the taps open all the time, leading to more water losses and foregone revenues.

This situation puts utilities in a bind—meeting consumers’ demand for better services requires higher revenues. But consumers rarely believe that such improvements are forthcoming, hence they refuse to pay higher tariffs.

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Studies³ have shown that if service is reliable, consumers will pay substantially for it. But the reality on the ground is very complex— from the technical and structural to the political and social—that stakeholders cannot afford to treat issues independently of each other.

To break the vicious cycles surrounding low revenue and its effects, stakeholders should consider the following long-term and integrated perspectives:

• One cannot expect an immediate solution at once; rather, one must plan for persistent and strategic actions on a coherent and continuing basis.
• One must deal with entire water supply system in an integrated manner (addressing both software and hardware) under a longer time frame, rather than on an ad hoc, piecemeal basis.
• One must demonstrate improvement first to gain consumers’ confidence, rather than charging increased tariffs prior to improved services.

When asked to find solutions to their revenue problems, many utilities grab at ad-hoc solutions, propose grandiose plans, or stand at a loss as to how to proceed. The following are 5 doable steps to help utilities improve their revenues.

Action 1: Prioritize actions; start with easy ones that will result in tangible quick revenue increases with the least cost

It’s common to fixate on reducing water leakages to increase revenues, but this takes time and higher costs. A relatively simpler solution is for the utility to survey and update its customer registry, registering all existing, non-registered, and potential customers in its service area. Next is to improving billing and revenue collection mechanisms to reach all registered customers. Utilities can also inspect and identify non-registered/non-metered consumers and legalize their connections, or repair faulty meters to ensure that accurate consumption volumes are registered and billed.

Action 2: Establish small-scale pilot projects demonstrating that consumers will pay for full price if improved water service is delivered at satisfactory level

These demonstrations will build up the confidence not only of consumers but also of policy makers and politicians whose support to tariff adjustment is crucial. A zonal approach for demonstrating the reduction of physical water leakages could be effectively carried out with a medium term action plan, gradually adding zones into the program to block physical leakages zone-by-zone. Replacing old dilapidated distribution lines and blocking leakages require capital investments for civil works and procurement, and thus takes longer and is costlier than improving billing-revenue collection mechanisms. Without metering, one can hardly measure increased revenues when leaking pipes are fixed.⁴

Action 3: Develop an alternative, small-scale power source to run a local water supply system

Electricity accounts for a major portion of O&M costs. Despite its unreliability and high costs, however, it is hardly credited as significantly contributing to intermittent water supply. Considering recent technological advancements, alternative power sources can be developed for the local water supply system. Utilities should consider tapping into funding facilities such as Clean Air Development Mechanism and using renewable energy to develop an alternative power source at a small scale.⁵

Action 4: Conduct public information campaigns

Consumers need to understand that water may be free, but it costs a lot to deliver it at their doorsteps. Utilities can appeal to its consumers through public media campaigns or educational programs highlighting the negative effects of providing water free of charge, or below full-price, to consumers.

Action 5: Secure upfront seed investment and recover cost investments afterwards

Utilities must provide reliable and continuous water supply services before it can charge higher tariffs. This means the public sector should provide seed investment until such time that the utility’s improved services are functional and start generating revenues. The private sector will also need to share the burden of investments if the capital intensive programs are to be implemented in a timely way and if efficiency gains on management are to be realized.

These are just among the many relatively simple steps that utilities can take to improve its finances. The trick is to balance short-term specific remedies with planning for longer-term comprehensive solutions.