Water Prices in CEE and CIS Countries. Volume I: Main Text
Appendix
2
Proposed Components to Include in the TOR for a Water Services Project: Analysis of
Acceptability of Water Prices
Introduction
The purpose of this annex is to provide generic input to Terms of Reference for studies that include assessments of willingness to pay, affordability, water demand, and political acceptability only.
These proposed standard components are sector specific for the water supply and wastewater sector. The annex is not intended to be a full draft set of terms of references. The components are intended to be included in a feasibility study for a traditional investment project or in the set of studies made in preparation for a public-private partnership as appropriate.
The reader will find three typographies: "Text in Frutiger 45 Light 8.5 points". Text in Frutiger 45 Light 8.5 points, may be copied directly to the (pre-)feasibility TOR being prepared.
{Text in brackets} Within "Text in Frutiger 45 Light 8.5 points" you may find text in brackets for example: {Enter name of "municipality" here}. This is intended to be replaced as explained in the bracket.
Text in capitals is intended as explanatory text. The text suggests issues that need to be covered by the study. This text may be deleted after verification by the author of the specific TOR.
The generic input provided relates to the following paragraphs typically found in TOR for water and wastewater project preparation studies:
 | Introduction and background |
| Objectives |
| Scope of work |
| Time schedule, manning and outputs |
TOR can also include a number of other sections. However, the above listed sections are the typical core sections of TOR for project preparation studies.
Issues to include in the TOR section "Introduction and background"
Explain the link between the environmental problem identified and the national regulation and international agreements and explain how the project idea may improve the situation.
Identify relevant national investment programmes and provide an overview of their size. Explain their key implementation modalities (if deemed to be relevant to the investment project).
Identify and list key national monopoly control, tariff and other pertinent financial regulation. Determine which authorities have the discretionary powers.
Describe the organisational set up for collecting water quality data (raw water, potable water and wastewater) and approval of applications for water supply, wastewater discharge and sludge handling .
Describe the organisational set up of the municipal water and wastewater enterprise (including ownership structure, reporting requirements, organisational links, subcontractors).
List the key national authorities including for example ministry of environment and / or state committee of housing and construction and / or ministry of local government. Describe the roles of these authorities in relation to the water and wastewater sector.
Identify key stakeholders at project level, in addition to those mentioned above. The responsible financing (see above) and executing institutions must be included.
Identify key constraints to financial and operational autonomy to be reviewed in the feasibility study.
Generic input to TOR section on "Objectives"
The overall objective of the public acceptability analyses included in the present study is to assess an appropriate and feasible level of service and tariffs taking into account the need to comply with national and international regulations.
The specific objectives of the public acceptability analyses are:
| To determine the affordability and willingness to pay amongst households for specified service changes or for maintaining the present service avoiding deteriorating of service; |
| To determine the political acceptability of tariff increases; |
| To determine the demand impact of changed service level and tariffs; |
| To determine future tariffs best balancing the need to recover costs and the customers' preferences for service taking into account the need to comply with national and international regulations. |
Generic input to TOR section on "Scope of work"
Task {Fill-in number}: Brief overview of the existing services
In order to provide information for the "with project" and the "without project" scenarios a technical and financial baseline shall be established. This may have been undertaken already in the prefeasibility phase. In this case it should only be studied and reported as appropriate.
To prepare the technical and financial baseline the consultant should:
| Assess the current service level, conditions and operations; |
| collect existing reports; |
| collect data on the technical characteristics possibly using questionnaires and interviews; and |
| one or more selected visit(s) to key facilities (to confirm conditions). |
The state-of-affairs comprising the following infrastructure elements and operation characteristics must be studied and reported:
| The existing system for water extraction (groundwater or surface water intake), bulk water transport, water treatment, distribution network, wastewater collection, storm water collection, wastewater treatment and sludge disposal; |
| the existing water and wastewater tariff structure; and |
| existing subsidy schemes (if any). |
Task {Fill-in number}: Future service levels and costs
In order to provide information for an analysis of the demand for current and planned future services, the consultant should undertake the following.
Specify targets for the future service level by doing the following:
| Establish a "without project" scenario; |
| establish one or more initial realistic "with project" scenario(s) specifying future service levels; |
| discuss targets for future service levels with relevant people such as water utility officials, city officials etc; and |
| outline technical options resulting from each scenario. |
Assess costs of alternative future service levels by doing the following:
| Review existing studies for assessed costs of operating and maintaining the existing system; and/or |
| review international cost experience for similar systems and assess country specific corrections necessary to transfer international experience; |
| estimate O&M costs of the existing system; |
| assess existing investment plans / proposals; |
| guesstimate necessary investment costs to meet alternative service levels based on discussions with relevant persons such as water company officials, engineers, etc; and |
| guessstimate financing terms based on discussions with key people in the water company, consultants, etc. |
And finally, the Consultant shall preliminarily assess the full cost recovery tariff based on existing demand:
| Calculate rough tariffs resulting from the O&M costs, the investment costs (including financing) and assumptions about the institutional setup. |
Task {Fill-in number}: Affordability
For households, the Consultant shall assess the following issues. The assessment will be based on an expenditure survey comprising at least 300 interviews - To be adjusted to scope of study. The survey will be supplemented with available statistics, reports and data from the service provider. When analysing the data, the sample will be stratified, and it will be expanded by using available demographic statistics as appropriate.
The first task to address in the survey is to assess existing and future income and expenditure patterns:
| Assess current and future average household incomes and expenditure for water and wastewater services; |
| assess the income distribution and - if possible - income specific expenditure for water and wastewater services; and |
| assess the share of food expenditure in total household expenditure by income distribution deciles. This gives a good indication of the affluence of the population, which is not so sensitive to poor estimates of income and informal economy. |
The existing tariff structure, metering etc are important determinants of household affordability. The Consultant shall:
| Describe existing tariff design and financial transfers; |
| assess share of household consumption that is metered; |
| describe existing tariff structure; and |
| describe existing subsidy schemes (if any). |
The Consultant will also identify whether future major utility price increases (for example for heat, power, rent) are expected.
For enterprises and public institutions, the Consultant shall look into matters being linked to affordability and payments related to households. This includes:
| Assess and quantify the cross-subsidisation between these consumers and household consumers; |
| assess the likely future level of cross-subsidisation and explain any change anticipated; |
| assess the alternatives to public water and wastewater provision available to these largescale consumers. In this light assess how they will react to an increase in tariffs; and |
| what the implications for the future revenues of the service provider are. |
Task {Fill-in number}: Customer perceptions and willingness to pay
In order to analyse customer perceptions and willingness to pay, the Consultant will carry out a Stated Preference based survey comprising at least 150 interviews - To be adjusted to scope of study.
The interviews will cover a range of districts and types of households. When analysing the data, the sample will be stratified, and it will be expanded by using available demographic statistics as appropriate.
The Consultant shall undertake the following duties:
| Provide a qualitative description of following issues: history of price and service level, price and service level in nearby municipalities, public health, environmental amenity, trust in the water utility, and perception of fairness; |
| determine the issues which are key to willingness to pay. The range of issues to consider shall at least include: Environmental issues, health issues, service delivery quality (regularity, water quality, service coverage); |
| provide a quantitative assessment of willingness to pay for the key service level parameters using stated preference survey techniques; and |
| provide suggestions for how to enhance willingness to pay, for example through information campaigns etc. |
Task {Fill-in number}: Demand analyses and price elasticity
This task is only relevant when current or expected future payment is related to actual metered consumption and not eg fixed by norms.
The price sensitivity for the demand is important for understanding the possible changes in water consumption habits caused by tariff changes. The Consultant shall assess the price elasticity based on:
| Available historical data on water consumption, service level and tariffs; |
| data collected during either the affordability survey or the willingness to pay survey on consumers historical pattern of usage and tariffs and the historical pattern of service level; |
| data collected during the willingness to pay survey on consumers' stated reaction to tariff and service level changes. |
The derived price elasticity will be used for assessing the impact of new tariffs and changed service level on consumption.
Task {Fill-in number}: Political acceptability
In order to analyse the political acceptability of tariff increases and/or service level changes, the Consultant shall:
| Describe relevant background factors such as the degree of democracy in the policy process, the relative importance of water charges as a political issue, the level of organisation of consumers and other interest groups, the stability of the current political situation; |
| assess institutional factors, such as the procedure for water tariff setting, the historical pattern of water tariffs, the ownership of the water service provider and how this may influence the ability to increase tariffs in the future; |
| where relevant assess the public awareness of environmental and public health issues, international guidelines etc. and how these issues may affect political acceptability of increased water prices; |
| assess the attitudes of political parties; |
| assess the assumptions made by political parties in reaching these attitudes. Are the assumptions, which are the basis for the attitudes, well founded? Is this basis (and thus the assumptions) stable? |
Task {Fill-in number}: Assessment and recommendations related to tariff increases and service level changes
Based on a combination of the analyses of future service level and costs, and the customers willingness to pay, affordability and political acceptability, there shall be an iterative determination of future service level, required technical standard (and thus required investments and operational characteristics), appropriate tariff level and structure.
This shall lead to a conclusion on the key service level issues:
| Compare the quantitative assessment of willingness to pay (extra) for specific service improvements with the cost of providing this service. Take into account household and enterprise affordability as well as the assessment of political acceptability; and |
| in the light hereof provide a simultaneous recommendation on a future service level and average tariffs and the phasing of service improvements and tariff increases over time. |
5: Generic input to TOR section on "Time schedule, manning and outputs"
Time schedule and outputs
The timing of the public acceptability activities and the main outputs are summarised below:
| Working note on existing situation, 1 month after mobilisation; |
| Working note on future service levels and costs, 1 month after mobilisation |
| Working note on affordability, 3 months after mobilisation; |
| Working note on political acceptability, 3 months after mobilisation; |
| Working note on willingness to pay and price elasticity, 4.5 months after mobilisation; and |
| Interim report (final report) on recommendations on service level and tariffs, 5.5 months after mobilisation. |
Manning
For the purposes of the public acceptability analyses, the team will need to include:
| An economist with experience from the sector and with experience in affordability analyses; |
| a consultant familiar with market research and stated preference techniques; |
| a political scientist or legal specialist, preferably with experience from the region; |
| local consultant (most likely an engineer, preferably one with a good overview of the sector); and |
| local consultant(s) to organise and implement the market research. |