# 1 The conflicting goals of tariff design

Water systems in developing countries must (1) provide services that are safe, desirable, and affordable to consumers; and (2) ensure an institutional and commercial system capable of actually recovering costs (Stalker and Komives, 2001). These often conflicting goals have significant political and economic implications. The effort to balance them is particularly challenging in developing countries and can lead to the implementation of price structures that do not help meet either goal and, in fact, have an adverse impact on poor consumers (Whittington, Boland, and Foster, 2002).

Like any business, utilities must recover their costs if they are to sustain their operations. Tariffs are the most common way of doing so. But tariffs serve other goals beyond raising revenues to cover all or part of costs. They also are used to ensure access across socioeconomic groups, to send price signals to users about the relationship between water use and water scarcity, and to ensure fairness in water service delivery (Cardone and Fonseca, 2003).

In developing countries, tariffs are controversial for many reasons. For policy makers, one objective can be more important than another, which can lead to the adoption of different tariff structures. The impact of such structures on consumers is ambiguous. Despite recent advances,<sup>1</sup> policy makers are not sufficiently informed of the effects on consumer behavior. A lack of competition in the water market implies that policy makers do not have a market test of whether a tariff structure is functioning effectively, with consumers unable to reject a tariff structure that is negatively impacting them (Whittington, Boland, and Foster, 2002).

In most developing countries, prices are usually set below full cost recovery for historical and political reasons, and there are implicit and explicit subsidies associated with the tariff structure. That is the conventional wisdom, but there has been insufficient focus on Africa to evaluate whether its water tariffs are meeting the desired goals. This paper looks at water and sanitation<sup>2</sup> tariffs in Africa, along with their relationship to cost recovery, cross-subsidies, and financial sustainability. Water tariff structures are measured against the criteria of cost recovery, efficiency, and equity. Questions include: do tariffs recover costs? are customers metered? are there cross subsidies between large and small consumers, public standposts, and private residential consumers? are water usage charges equitable, and are water connection charges fair?

The data presented in this paper represent tariffs for 45 water utilities from 23 countries in Africa, collected during 2006–07. Four of those countries (Cape Verde, Lesotho, Namibia, and South Africa) are considered middle-income countries (MICs); the rest are low-income countries (LICs). The tariffs are those that are currently enforced by the utilities (those approved but not yet enforced are not included), from which detailed descriptions of technical, financial, and governance performance were elicited. These data were collected in the context of the Africa Infrastructure Country Diagnostic (AICD) study,<sup>3</sup> which

> 1 For instance, the poverty and social impact analysis (PSIA) has been undertaken in many developing countries to understand the _ex ante_ and _ex post_ impact of tariff changes on consumer behavior.

> 2 For utilities that provide wastewater services.

> 3 For more information on AICD, please go to the project website, www.infrastructureafrica.org.