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Costing and Cost recovery of Costing and Cost recovery of Urban Services through User Urban Services through User

charge levycharge levy

Ramakrishna NallathigaRamakrishna NallathigaAssociate ProfessorAssociate Professor

National Institute of Construction National Institute of Construction Management Research (NICMAR)Management Research (NICMAR)

25/1, Balewadi25/1, BalewadiPune – 411 045Pune – 411 045

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BackgroundBackground

► India is increasingly becoming urbanized (28% India is increasingly becoming urbanized (28% of total population as per Census 2001) of total population as per Census 2001)

► The number of towns and cities increased The number of towns and cities increased more than double - from 2462 in 1961 to 5161 more than double - from 2462 in 1961 to 5161 in 2001.in 2001.

► Cities/ towns are administered by Urban Local Cities/ towns are administered by Urban Local Bodies (ULBs) of varied size and jurisdiction Bodies (ULBs) of varied size and jurisdiction

► ULBs have to provide basic urban services and ULBs have to provide basic urban services and other civic amenities as laid down under State/ other civic amenities as laid down under State/ respective municipal legislationrespective municipal legislation

► The 74The 74thth CAA 1992 added further to the list of CAA 1992 added further to the list of functions of ULBs to make them responsible functions of ULBs to make them responsible for all local servicesfor all local services

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IntroductionIntroduction

► The provision of services and the recovery of The provision of services and the recovery of costs are both laid down in the form of general costs are both laid down in the form of general taxes and user charges levied by ULBstaxes and user charges levied by ULBs

► While the service costs are met through While the service costs are met through budgetary sources, their recovery is not fully budgetary sources, their recovery is not fully achieved because of the issues of cost achieved because of the issues of cost measurement and pricing measurement and pricing

► The recovery of costs tends to be very low and The recovery of costs tends to be very low and remains far behind the incurrence of costs to remains far behind the incurrence of costs to render services (almost on a perpetuity!)render services (almost on a perpetuity!)

► The poor cost recovery casts an impact on the The poor cost recovery casts an impact on the service delivery performance of ULBs and even service delivery performance of ULBs and even results in the decline of assetresults in the decline of asset

► This leads to situation what is known as ‘lower This leads to situation what is known as ‘lower level equilibrium trap’ for most ULBslevel equilibrium trap’ for most ULBs

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Lower level Equilibrium TrapLower level Equilibrium Trap

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User charge pricing - RationaleUser charge pricing - Rationale

► Urban infrastructure services are a form of public Urban infrastructure services are a form of public goods with following characteristics:goods with following characteristics: Non-excludabilityNon-excludability Non-measurabilityNon-measurability Natural monopoliesNatural monopolies ExternalitiesExternalities Lumpiness of InvestmentsLumpiness of Investments

► These characteristics prompt that their provision is These characteristics prompt that their provision is better (in terms of both efficiency and equity) better (in terms of both efficiency and equity) when it is done by public/government agencieswhen it is done by public/government agencies

► Moreover, the pricing of public goods like basic Moreover, the pricing of public goods like basic urban services is different from that of private urban services is different from that of private goods on account of these characteristicsgoods on account of these characteristics

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Revenue assignment: Bahl & Linn Revenue assignment: Bahl & Linn PrinciplesPrinciples

Benefits Identifiable - User Beneficiaries Identifiable Charges

Benefits broadly Identifiable - BenefitIdentification of Beneficiaries TaxesCostly or Difficult

Neither Benefits nor Generic Beneficiaries Identifiable Taxes

Administrative Expenses Fees & Charges

Long-gestation Capital Borrowings/Projects and Works Bonds

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User charge pricing - RationaleUser charge pricing - Rationale

► User charge pricing of civic urban services is a User charge pricing of civic urban services is a mechanism for the recovery of costs associated mechanism for the recovery of costs associated with services rendered by ULBs which may with services rendered by ULBs which may serve the objectives of:serve the objectives of: Resource efficiencyResource efficiency RedistributionRedistribution Allocative efficiencyAllocative efficiency

► It is aimed at recovering both direct and It is aimed at recovering both direct and indirect costs associated with services, but the indirect costs associated with services, but the feasibility of recovery may vary with respect to feasibility of recovery may vary with respect to serviceservice

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Feasibility of Cost RecoveryFeasibility of Cost Recovery

Service High (Full) Medium Low None Water Supply X Sewerage X Storm Water Drainage X Solid Waste Primary Removal X Secondary Removal X Disposal X Roads X Street Light X Parks & Recreational Facilities X Playgrounds X

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Process of User Charges LevyProcess of User Charges Levy

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Legal Authority for setting feeLegal Authority for setting fee

► Local/ State Municipal legislation to Local/ State Municipal legislation to have provision for levy/ else amend ithave provision for levy/ else amend it

► The procedure for user charge levy The procedure for user charge levy needs to be established under needs to be established under municipal bye-lawsmunicipal bye-laws

► Tariff cards may be developed for Tariff cards may be developed for various services based on certain various services based on certain criteria and included in bye-lawscriteria and included in bye-laws

► Tariff card and its revision may be Tariff card and its revision may be subject to municipal/ elected council subject to municipal/ elected council approvalapproval

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Identification of ServicesIdentification of Services

► The services to be brought under user charge levy need The services to be brought under user charge levy need to be identified and distinguished; the user charge to be identified and distinguished; the user charge system may be designed based on the service system may be designed based on the service differencesdifferences the characteristics the characteristics feasibility of cost recoveryfeasibility of cost recovery

► User charge levy can be applied to following key services:User charge levy can be applied to following key services: Water supplyWater supply Sewerage/ drainageSewerage/ drainage Solid waste managementSolid waste management RoadsRoads Parks & playgroundsParks & playgrounds Health servicesHealth services Education servicesEducation services

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Defining service compositionDefining service composition

ServiceService Basic serviceBasic service Add-on serviceAdd-on service

Water Water supplysupply

Individual water supply Individual water supply connectionconnection

Metering of water supplyMetering of water supply

Billing & payment Billing & payment channelschannels

SewerageSewerage Individual Coverage of Individual Coverage of sewerage trunk/ drainage sewerage trunk/ drainage networknetwork

Billing linked to water Billing linked to water tarifftariff

Solid waste Solid waste managememanagementnt

Door-to-door waste Door-to-door waste collection & transportcollection & transport

Waste treatment and Waste treatment and reusereuse

RoadsRoads Black top connecting roads Black top connecting roads without potholes/ Cement without potholes/ Cement concrete roadsconcrete roads

Fly overs, FOBs, foot Fly overs, FOBs, foot path and junction path and junction worksworks

ParksParks Fenced and lawned parksFenced and lawned parks Horticulture, play Horticulture, play facilities and facilities and recreationrecreation

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Estimation of current & future useEstimation of current & future use

► Current levels of use to be assessed, and the users Current levels of use to be assessed, and the users of service need to be identified, based on the of service need to be identified, based on the connection/access provided and distinguished in connection/access provided and distinguished in terms ofterms of Types of uses Types of uses

► Residential, commercial, institutional etcResidential, commercial, institutional etc Levels of use/consumptionLevels of use/consumption

► Very High/High/Medium/LowVery High/High/Medium/Low

► Service standards that define the amount and Service standards that define the amount and quality of service need to be definedquality of service need to be defined

► Future levels of service use may be assessed based Future levels of service use may be assessed based on the projections of current trends and a plan for on the projections of current trends and a plan for service deficit may be plannedservice deficit may be planned

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Differentiated Strategy for ServicesDifferentiated Strategy for Services

► Services are different by nature so the approach Services are different by nature so the approach to provision and cost recovery to be to provision and cost recovery to be differentiateddifferentiated Water supply Water supply – tariffs based on consumption levels – tariffs based on consumption levels

and types of usesand types of uses Sewerage/sanitationSewerage/sanitation – tariffs linked to water supply – tariffs linked to water supply

and as a surcharge on water supply billand as a surcharge on water supply bill Solid waste management Solid waste management – shared service provision – shared service provision

responsibilities (with community) and sharing of tariffresponsibilities (with community) and sharing of tariff ParksParks – Partnership led service provision and – Partnership led service provision and

exploiting the potential other usesexploiting the potential other uses Education/health services Education/health services – Shared provision (with – Shared provision (with

government/ community/ private sector) and government/ community/ private sector) and contributions from users as well as non-userscontributions from users as well as non-users

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Cost Components/ StructureCost Components/ Structure

Method of Method of DistinctionDistinction

Criteria of costsCriteria of costs Components/ examplesComponents/ examples

In situ & In situ & ex situ ex situ costscosts

Based on whether Based on whether the costs incurred the costs incurred are at site and far-offare at site and far-off

Cost of works of services (in situ)Cost of works of services (in situ)

Costs of trunk infrastructure, Costs of trunk infrastructure, Community servicing & Community servicing & administration (ex situ)administration (ex situ)

Direct & Direct & Indirect Indirect costscosts

Based on whether Based on whether the costs are directly the costs are directly related to product or related to product or notnot

Costs of labour, material (direct)Costs of labour, material (direct)

Administration, depreciation and Administration, depreciation and external costs (indirect)external costs (indirect)

Fixed & Fixed & Variable Variable costscosts

Based on whether Based on whether the inputs are fixed the inputs are fixed or variableor variable

Capital, Labour & materialCapital, Labour & material

Power/ energy, maintenance Power/ energy, maintenance costs costs

Capital & Capital & O&M costsO&M costs

Based on the Based on the revenue and capital revenue and capital distinctiondistinction

Costs of physical capitalCosts of physical capital

Costs of operation and Costs of operation and maintenance viz., labour, maintenance viz., labour, equipment, vehicles and equipment, vehicles and maintenancemaintenance

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Costing of the ServiceCosting of the Service

► Identify the various costs associated with service Identify the various costs associated with service provision provision

► Distinguish them as capital and O&M costs or Distinguish them as capital and O&M costs or another methodanother method

► The composition of capital and O&M costs may The composition of capital and O&M costs may be laid down in the accounting codebe laid down in the accounting code

► Capital costs may not be included in the calculus Capital costs may not be included in the calculus if the capital expenditure is made from grants if the capital expenditure is made from grants

► Assess the unit costs of each service as Assess the unit costs of each service as distinguisheddistinguished

► Identify the total costs, incremental costs and Identify the total costs, incremental costs and average costs of service average costs of service

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Summarizing O&M costsSummarizing O&M costs

ItemItem Water Water supsupplyply

RoadsRoads DrainDrainss

Solid Solid wawasteste

Street Street liglightshts

SanitSanitatiationon

TotTotaall

Operating costsOperating costs

A. SalariesA. Salaries

B. Power and fuelB. Power and fuel

C. ConsumablesC. Consumables

D. Equipment hireD. Equipment hire

Maintenance costsMaintenance costs

E. MaintenanceE. Maintenance

Total annual O&M Total annual O&M costscosts

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Tariff Setting ProcessTariff Setting Process

Service Provided

Desired Levels of Service

O&M Cost

Cost of Capital (debt servicing)

Annual Costs of Service

Current Tariff Structure

Recoverable Tariffs

Total Costs

Tariff Basket Analysis

Tariff Setting Process

Total Revenue

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Choice of appropriate tariff systemsChoice of appropriate tariff systems

► Tariff system needs to be chosen before working out Tariff system needs to be chosen before working out levels of tariff based on:levels of tariff based on: AdequacyAdequacy FairnessFairness SimplicitySimplicity Service ConservationService Conservation Service QualityService Quality TransparencyTransparency

► Some of the tariff systems include:Some of the tariff systems include: Flat rate tariffFlat rate tariff Unit rate tariffUnit rate tariff Variable block tariffVariable block tariff Seasonal rate scheduleSeasonal rate schedule Marginal cost pricingMarginal cost pricing Average cost pricingAverage cost pricing Average incremental cost pricingAverage incremental cost pricing Multi-part/ two-part tariffMulti-part/ two-part tariff

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Establish procedures for reporting, Establish procedures for reporting, transparency and revisiontransparency and revision

► The extent of recovery of costs and the The extent of recovery of costs and the reasons for revision of tariffs need to be well reasons for revision of tariffs need to be well documented and put up before (a) elected documented and put up before (a) elected council (b) general public so that there is council (b) general public so that there is debate on itdebate on it

► The user charge/ tariff revision period, The user charge/ tariff revision period, method and procedure may also be laid down method and procedure may also be laid down so that it becomes a periodical exerciseso that it becomes a periodical exercise

► Reporting under finances and accounts may Reporting under finances and accounts may be laid down and the means adopted for cost be laid down and the means adopted for cost reduction may be reported in annual reportreduction may be reported in annual report

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Thank YOUThank YOU