PPP Development Stage – Financing (Cost Recovery)
13.1 What are the objectives of cost recovery?
A primary objective of the municipality is to provide a sustainable
service delivery. Ability to ensure a stream of revenue, coming
either from user fees or subsidies, will sustain the service
delivery so is of the utmost importance.
When municipalities decide to attract private investment capital
in their efforts to improve urban services, an effective
cost recovery strategy becomes a cornerstone of the successful
The common objectives for cost recovery policy include to:
- attract private capital into the sector to increase payment
collection, capacity and to rehabilitate the system;
- enhance cost recovery and promote investment;
- promote cost effectiveness and ensure economic sustainability;
- expand service coverage into poor, peri-urban and rural
- make service affordable for vulnerable groups;
- provide incentives to the operator for improved service and
- make tariff calculation and regulation simple and easy to
- raise effectiveness and quality of the improved service.
The cost recovery strategy should balance three critical
and interrelated aspects of sustainable service
delivery: quality of service, investment costs and the tariffs that customers
are willing and able to pay [Tool 13-1]. Achieving sustainable partnerships
between the public sector and the private
sector provides a means to assist local governments in financing and operating
In a public-private partnership the ramifications
of not achieving cost recovery goals affect not only
the project, but also the partners themselves. The private
sector loses both its investment and its credibility.
The public sector loses the confidence of the public
and still has the burden of providing water services.
The NGO sector can lose its standing with the communities
it works with, which can affect its ability to continue
or initiate other programs in poor communities.
How are cost recovered?
The costs associated with service delivery are often disaggregated
into three cost centres:
Capital (infrastructure) costs
- include building assets used for service and products (goods)
production and in some cases costs for buildings and grounds.
Operational and maintenance (O&M) costs
- the cost of actually operating and maintaining the system
in order to produce and distribute services.
- the cost of connecting an individual household to the system.
Throughout this Tool the word “fee” is used for both
infrastructure and connection charges. The word “tariff” is
used for O&M charges.
All three cost types can be recovered from two sources: consumer
fees (tariffs) and/or subsidies. Tariff levels and subsidies
are parts of a broad decision-making process and closely
related to livelihood strategies – demand, affordability, willingness
to pay and income levels. The primary step for a municipality considering
tariff levels and subsidies is to determine what the fundamental
objective of the tariff and subsidy is, and how that objective
informs, supports or conflicts with the overall objectives for
reforming the delivery mechanism through a partnership approach.