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The water pricing and tariff in question

January 1, 2014

Much debate has been ignited by the recent decision of the Aam Aadmi Party in Delhi to give 20,000 litres of water per month per connection free. Here is how water pricing can be seen and choice of water prices determined

First some beliefs

1. We all have to pay for good quality piped water. Directly as a consumer, indirectly as a tax payer or even more indirectly as inflation. It is best to pay as a consumer and keep the utility supplying water fiscally buoyant so as to be able to extend services and keep up the quality of the infrastructure.

2. Eventually both environmental externalities and social externalities will need to be factored in. On the environmental side the continuous availability of good quality water will demand investment in catchments and rivers and groundwater and rainwater. Negative externalities will need to be costed and the treatment cost of waste-water included in the price of water.  On the social front , water is a community property resource and its increased availability upto a point improves health and economic outcomes of communities . This will result in increased productivity , less expenses on medicines and especially a better future for children . However a combination of good water supply , access to safe sanitation and good hygiene behaviour should be encouraged altogether.

Now to the idea of pricing …

Let us assume 100 kilo-litres of water coming in to a city. The cost of the water will include the Capital cost amortized over the life of the project , the Operations and Maintenance cost for running the entire system and a sinking fund to replace the equipment at the end of its life.  For a moment let us assume that this cost of water production is Rs 10 per kilo-litre ( a 1000 litres) Now if a utility is to run as a no profit no loss entity it has to recover the cost from its consumer. However unfortunately there is a lot of loss in the system. Some water leaks out of pipes. Some water gets to consumers who do not pay or are not required to pay. Figures can reach 50 % but let us assume an efficient institution and a figure of 20 %.

Now let us do the Maths

Cost incurred to get and distribute water to the city 100 KL x Rs 10 per KL = Rs 1000

Cost to be recovered from 80 KL (since 20 KL is lost )  = Rs 1000 /80 = Rs 12.50 Kl

Typically consumers in a city are divided into three broad categories of users

Domestic      Non domestic (commercial)  and  Industrial. Typically the later two categories can afford to pay more for water. Let us assume an ideal distribution of the remaining 80 KL of water as follows

Domestic     Non domestic   Industrial               Loss               Total

KL                         KL                    KL                         KL                    KL

52                      16                           12                  20                     100

Now if we charge double the tariff for non domestic consumers (such as hotels ,restaurants, pvt establishments etc) i.e Rs 25 a kilo-litre and four times for Industrial consumers i.e. Rs 50 a kilo-litre we will have the following tariff

Total cost to be recovered  –     1000 Rs

From Non-domestic –   16 x 25 = 400

From industrial =            12 x 50 = 600

Total cost recovered                  Rs  1000

Free water is then possible for the domestic sector without   the institution incurring any loss.

Of course there are caveats.

  1. The 52 Kl coming in to the city should be enough for all the population of the city. At a standard of 140 lpcd , this 52 KL can service a population of 52000/ 140 = 371 people.  For 20 million people like Delhi to have water at 140 lpcd the city will need 20 million x 140 x 100/52 = 5385 million litres a day. It is better to drive consumption down to an efficient 100 lpcd , in which case the requirement would be 20 million x 100 x 100 / 52 = 3847 million litres per day.
  2. Source substitution will occur if prices go up. Both the non-domestic and especially the industrial sector will go for groundwater or private water tanker if that is cheaper than the tariff imposed by the cross subsidization. Hence groundwater and tanker water will need to be regulated and charged at the same price as piped water.
  3. Metering both bulk and retail will be a must. All connections must be individual and all connections must be metered.
  4. If water is free for the domestic sector there will be no incentive to conserve it. Pricing is a must for this sector too. People are not hindered by the price of piped water but by the absence of connections and the initial connection cost. This must be universalized and made free.
  5. It is better to make the WHO guideline of 50 litres per capita per day which is the basic minimum for health and hygiene, free..i.e.50 x 5x 30= 7500 litres per month free. Anything above must be charged at a minimum price of say Rs 4 a KL . Anything above 135 lpcd should be charged at non-domestic tariff.
  6. Special teams will need to be created and dialogues will be necessary to increase the connections and consumption for non-domestic and industrial use.
  7. To get to a 20 % leakage figure will be no easy task but all new pipelines and connections must be designed for 24/7 water.
  8. Wastewater will need to be collected and reused/recycled as non potable water or as ecological flows through wetlands into rivers.

So here then is the final tariff structure

Domestic                 Non domestic                Industrial

Litres                    Rs                               Rs                                    Rs

Slab   0 -7500            Free                      25                             50

7500- 15000         4                                  25                              50

>15000                25                                25                                50

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