(levels C1 and C3). This analysis is then complemented by an analysis of cost recovery from a financial perspective (A1, A2 and A3).

**Table 1: Cost Recovery Ladder from Financial, Fiscal and Economic Perspective**

||**A. Financial perspective**|**B. Fiscal perspective**|**C. Economic perspective**|
|---|---|---|---|
|**Level 1**:<br>Operating<br>cost recovery|**Level A1**: Only those operating<br>costs that are covered by the<br>utility/sector (excluding various<br>reserves, such as depreciation,<br>bad debt allowance, and<br>revaluation of assets).|**B1:**Operating costs that are<br>covered on behalf of the<br>utility/sector by the government<br>through budgetary transfers and<br>provision of subsidized goods and<br>services.|**C1:**Operating costs (excluding<br>various reserves, such as<br>depreciation, bad debt allowance,<br>and revaluation of assets)<br>irrespective of who bears them<br>required to adequately run the<br>utility.|
|**Level 2**:<br>Operating<br>and limited<br>capital cost<br>recovery|**A2:**A1 plus any financing costs<br>(to the utility) for existing capital<br>expenditure, such as debt service<br>(interest and principal), required<br>equity payments, and internally<br>funded investments.|**B2:**B1 plus the financing costs<br>(assessed at the cost of existing<br>capital incurred by the<br>government) for the capital<br>expenditure covered through<br>sovereign funding/guarantee.|**C2:**C1 plus existing capital<br>expenditure (incorporated based<br>on the weighted average cost of<br>commercial capital assessed at<br>the opportunity cost of debt and<br>equity).|
|**Level 3:**<br>Full cost<br>recovery of<br>current and<br>future costs|**A3:**A2 plus financing costs (to the<br>utility) and the associated O&M<br>costs for new capital investments<br>(based on an adequate<br>investment prioritization<br>framework) required to meet<br>future demand.|**B3**: B2 plus financing costs (to the<br>government) for new capital<br>investments (based on an<br>adequate investment<br>prioritization framework)<br>required to meet future demand.|**C3:**C2 plus new capital<br>investments required to meet<br>future demand (incorporated<br>based on weighted average cost<br>of commercial capital assessed at<br>the opportunity cost of debt and<br>equity capital) and the associated<br>externalities.|

# _Source:_ World Bank staff.

14. Financial viability is an attribute of utility companies<sup>**5**</sup> and is fulfilled when tariff revenues and other sources of income cover the cost of service. Cost recovery of tariffs is obviously a key determinant, but financial viability also depends on accessible government transfers, ready cash inflows (taking into account collection losses and timely allocation of government transfers), and proper spending priorities (for example, debts and payables are settled in a timely manner, or utilities pay out large dividends or lend to other SOEs). Therefore, while the two mutually reinforce each other and the literature sometimes uses them interchangeably, a utility can be financially viable even when cost recovery is below 100 percent—for example, if tariffs are set below cost-recovery level but reliable fiscal transfers are made to compensate for the shortfall. Similarly, a utility may not be financially viable when tariffs are at costrecovery level, for example, when the utility uses its cash flows to finance new investments while accumulating arrears to its suppliers and financiers. Further, analyses of financial viability usually do not differentiate between revenues from electricity sales and revenue not related to the sale of electricity (for

> 5 Financial viability is also an attribute of investment projects and in fact early World Bank studies of financial viability in the power sector were primarily interested in the ability of individual investments to make adequate returns. But this view has evolved (see Huenteler and others 2017) and now the primary unit of analysis in the literature is the utility. This is reflected in the term’s usage in this paper given the focus on leveraging private solutions and improving utility performance.

5