COST RECOVERY, EQUITY, AND EFFICIENCY IN WATER TARIFFS IN AFRICA which information is available, seven expect all O&M to be recouped, and three require only partial O&M costs to be met (table 4).

**Table 4. Cost-recovery policy for WSS**

|Sector|Countries (%)|Sector|Countries<br>(%)|
|---|---|---|---|
|Urban Water||Urban Wastewater||
|Existence of cost-recovery policy<br>Cost-recovery policy<br>All O&M and some investment<br>All O&M and no investment<br>Partial O&M and no investment<br>Cost shortfall met by<br>Central government<br>Regional government<br>Local government<br>Donors<br>Others|91 (21)<br>83 (19)<br>8 (2)<br>52 (12)<br>13 (3)<br>4 (1)<br>13 (3)<br>22 (5)|Existence of cost-recovery policy<br>Cost-recovery policy<br>All O&M and some investment<br>All O&M and no investment<br>Partial O&M and no investment|55 (10)<br>0 (0)<br>39 (7)<br>16 (3)|

_Source:_ AICD WSS Survey Database, 2007.

The burden of covering operating shortfalls is shared among government levels and donors, sometimes with more than one contributing stakeholder. Twelve countries reported that the central government is responsible, while four (Ethiopia, Malawi, Nigeria, and Sudan) saw a responsibility at the regional and local government level. Kenya, Lesotho, and Zambia responded that donors have a shared responsibility. Interestingly, only 12 of 24 countries stated that costs and revenues related to the provision of water services were ring-fenced. It is not clear whether this is because ring-fencing is not being effectively implemented, or whether institutional arrangements make it impossible to isolate and track the costs and revenues related to water services. The ring-fencing of costs is even more difficult for wastewater—only nine utilities reported that revenues and costs are specifically related to the provision of wastewater systems.

# Structure of O&M costs

To measure whether tariffs reflect market conditions, it is important to understand the nature of service-provision costs. While piped-water and wastewater systems bring productivity, health, and environmental benefits, these cannot be quantified; this section only focuses on the financial recovery of the capital and O&M cost. The tariffs imposed on consumers can be compared against the average cost of production to arrive at the exact degree of cost recovery. Therefore, an operational cost-recovery target for African utilities should ideally emerge from financial and technical performance data.

There have been two recent sources of utility performance data in Africa. First, the International Benchmarking Initiative (IBNET) collected operational cost data for water and wastewater systems in Africa. The unit cost of water sold by African utilities ranges between $0.30/m<sup>3</sup> in 2001 to $1.10/m<sup>3</sup> in 2005 (IBNET, 2007). The number of utilities reporting this information is, however, different each year, and the 2005 cost is representative of only South African utilities. The IBNET data were also used by Kingdom and others (2006), who used the cost of 41 Asian, East European, and African utilities to arrive at acceptable cost-recovery thresholds. The average O&M cost/m<sup>3</sup> was reported as 0.30/m<sup>3</sup> , with the 10