COST RECOVERY, EQUITY, AND EFFICIENCY IN WATER TARIFFS IN AFRICA estimates for African utilities being $0.34/m<sup>3</sup> . Rehabilitation and renewal costs, in addition to the average O&M cost, would amount to $0.35/m<sup>3</sup> . Second, the AICD WSS Survey Database (2007) collected information on operational expenses per unit of water produced and sold for about 53 water utilities in Africa. This survey contains information on reported annual O&M costs, and annual production and consumption, which is used to arrive at the O&M cost/m<sup>3</sup> from 2002 to 2005. The operational expense per unit of water produced and sold is estimated to be $0.41/m<sup>3</sup> and $0.62/m<sup>3</sup> respectively in 2005, and has continually increased in nominal terms since 2002. Two-thirds of utilities operate within the operating cost band of $0.4/ m3–$0.8/m<sup>3</sup> (annex G).

# **Figure 5A. O&M cost/m**<sup>**3**</sup> **, 2002–05**

<!-- Start of picture text --> Nominal US dollars<br><!-- End of picture text -->

# **Figure 5B. O&M cost/m**<sup>**3**</sup> **of consumption, 2005**

<!-- Start of picture text --> US dollars<br><!-- End of picture text --> <!-- Start of picture text --> 0.7<br>0.6 0.61 0.61 20<br>0.55<br>0.5 0.49<br>0.44 15<br>0.4 0.38 0.38 0.41<br>0.3 0.29 0.32<br>10<br>0.2<br>0.1<br>5<br>0<br>2001 2002 2003 2004 2005 0<br>O & M Cost/m3 of Production<br>O & M Cost/m3 of Consumption <0.2 >0.2 & <0.4 >0.4 & <0.6 >0.6 & <0.8 >0.8<br><!-- End of picture text --> _Source:_ AICD WSS Survey Database, 2007.

The average O&M cost/m<sup>3</sup> is driven by the high cost (more than $1) of providing services in MICs, including South Africa and Namibia. In fact, in Windhoek, the operating cost of each unit of water is more than $2. The average O&M cost/m<sup>3</sup> for utilities in MICs is $1.16/m<sup>3</sup> , and in LICs it is $0.48m<sup>3</sup> . The internationally acceptable threshold of $0.4/ m3 for cost recovery of O&M using Global Water Intelligence (GWI) reports is a rather conservative estimate for Africa (Foster and Yepes, 2006). In summary, two levels of operating cost-recovery thresholds are used in the rest of this paper: the GWI O&M cost threshold of $0.4/m<sup>3</sup> , and the AICD actual O&M cost/m<sup>3</sup> for each utility.

Arriving at capital cost estimates is more complicated. Kingdom and others (2004) estimate that capital costs in addition to O&M and rehabilitation costs would be $0.91/m<sup>3</sup> . This is based on an average consumption of 60 liters per capita/day, an average capital cost of $120 per capita, and a lifetime asset use of 20 years. The per capita cost of $12.22 is arrived at using the above assumptions, at an 8 percent discount rate. Foster and Yepes (2006) use a similar figure of $0.8/m<sup>3</sup> from GWI as an internationally acceptable benchmark for partial capital-cost recovery to evaluate cost recovery in Latin America.

Meeting the actual O&M cost is achieved in many utilities in Africa. Of the 38 utilities for which detailed O&M cost information is available from the AICD WSS Survey Database, about 22 meet the cost with an average consumption of 10 m<sup>3</sup> . Similarly, a high proportion of African water utilities meet their O&M cost at the GWI cost-recovery threshold.<sup>4</sup> Out of the 45 African utilities under consideration, 4 The scope of this paper is limited to analyzing the possibility of tariffs to cover costs, and not whether the utilities are actually raising the revenues to meet the costs. That is, the collection ratio and enforcement mechanisms are not explored in this study.

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