FINANCIAL MANAGEMENT

OF PIPED DRINKING
WATER SERVICE
DELIVERY ORGANIZATION
GOPAL NAIK
JJM Chair Professor
PRERONA SENGUPTA
Senior Research Associate JJM
 OBJECTIVES
Objective 1 Objective 2 Objective 3

The primary objective To provide a conceptual To develop a practical

of this session is to understanding of the pricing understanding of
understand the need and costing methods conducting the
for pricing piped financial analysis for
water systems MVS, IVDS and SVS
 Need for Community
Management
Mission • Government can run the system, but it may be
expensive and inefficient.
• JJM advocates for communities/local
governments to be involved in the process of
implementation and take over the operational and
maintenance function

• E n v i sag es co mmu n it y in v o l v emen t fro m th e b eg in n in g , Vision

co n t ri b u t i n g 1 0 p er cen t o f t h e in v estmen t co st o f th e
p ro j ect an d p ro v id in g in p u t o n in frastru ctu re an d
co n st ru ct i o n .
• T h i s ap p ro ach wo u l d ad d ress co n cern s ab o u t th e
fu n ct i o n al ity o f th e sy stem an d mak e i t wo rk effici en tly
t o meet t h e essen tial d rin k in g water n eed s
Role of Community in
managing piped
drinking water supply
• JJM mandates to involve the community
members to manage the O&M of the piped
water supply system where financial
management plays a key role
 JJM
Process of involving community

ENVIS AGESIf the community Once the community

Community
management will
ensure a smooth
contributes 10% of ownership is functioning of the
the total cost, then a developed, the water delivery
feeling of ownership community is willing system
develops among the to take care of the
community members infrastructure and
open to manage the Sustainabili
O&M by paying user
charges ty
Ownership

Participation
C O M M U N I T Y M A N A G E M E N T O F P I P E D D R I N K I N G WAT E R S Y S T E M I N V O LV E S

Formation of Management Creating awareness in the

Committee (VWSC) community about
Establishment importance of PWS

Organizing training on Participate in the planning

operations and management and implementation

Collecting contribution for Setting up grievance Recruitment of water person

infrastructure development redressal mechanism
C O M M U N I T Y M A N A G E M E N T O F P I P E D D R I N K I N G WAT E R S Y S T E M I N V O LV E S

Water Budgeting and

Financial Budgeting User charge determination
Operations

Actual operations of the

Billing and collection
system

Maintenance and repairs, if

any Conducting meetings Managing finance
Raising resources to meet costs

Central/State Community
government funding contributes partially
Infra development towards the set-up
cost

User charges
Central/State Govt
collection from each
support for O&M
households
User Charge
determination
• Determination of the optimal user
charge is critical for financial
sustainability.
• Regular collection of user charges
can ensure efficiency in water
delivery system
 USER
CHARGE
Public infrastructure projects like JJM
require cost recovery to ensure timely
repair and maintenance and operate
effectively .
 USER
CHARGE
• Cost recovery through user charges can
improve water allocation and encourage
conservation

• Water pricing can influence water use

efficiency at both individual and
community levels
PRICING
Determination of water charges is akin to
deciding prices for goods and services in the
marketplace.
Three major pricing principles used by
enterprises are
Cost-based
Competition based, and
Value based pricing
Broadly these indicate whether pricing is done
based on supply, demand and or market
competition.
WHY SHOULD WE
USE COST-BASED
PRICING
STRATEGY?
 C O S T B A S E D P R I C I N G S T R AT E G Y I N V O LV E S

Welfare maximization Meeting the Cost

Profit maximization
Demand for Piped
Drinking Water
• Demand for pi ped wat er syst ems depends on
availability of al ternat i ve sources of water and
seasonality and percept ion about quality, quantity,
regularity and pri ces of piped water.

• JJM prescribes a regul ar mi ni mum supply of 55

liters per capi ta per day of standard quality.
LOW DEMAND AND CORRECTION

Change of taste Information about quality of

and preferences water and health impacts

Information about
how communities Information about
can manage to community
reduce water management
charges
I M P O RTA N C E O F U N D E R S TA N D I N G
• It is important to understand the full cost of servicing water delivery to examine the
COSTS
component of costs and how to recover them. For this purpose, the capital cost needs to
be computed of each year to combine it with the operations and maintenance cost to
arrive at the full cost.

• While depreciation and amortization are two methods of arriving annualized fixed cost,
for our purpose the appropriate method is amortization. Depreciation alone cannot take
care of full fixed cost as it only accounts for the book value of the capital cost.

• Along with the capital cost, there is opportunity cost, the return from a next best
alternative investment, that needs to be included, and hence amortized amount is taken
as the fixed cost. This approach also helps in taking care of inflation in prices of assets
at the time of their replacement.
 COSTING METHODS
CAPITAL COSTS OPERATING EXPENSES

Capital costs are incurred when Operating expenses are the

building or purchasing fixed assets regular, ongoing costs incurred
of a long-term nature such as to maintain its day-to-day
construction of tubewell/Jackwell, operations which includes the cost
pump, over-head tank, pipeline, of running the infrastructural set-
etc. These costs are recognized up. These expenses are recurring
over time via depreciation or and occur frequently such as
amortization. Capital costs aligns salaries and wages, electricity,
with the matching principle, etc. Operating expenses are
ensuring expenses match the essential for continuous
periods in which the asset functioning and are immediately
generates revenue. expensed.
.
 T I M E VA L U E O F M O N E Y

Value of money is not the Inflation is the general rise

same across time periods. of price levels over time.
Inflation can be
taken care of by
compounding or
discounting.

Compounding is the impact of the

Discounting focuses on the present
time value of money (e.g., interest
value of money by considering the
rate) over multiple periods into the
current worth of future cash flows
future, where the interest is added
to the original amount.
AMORTIZATION WHILE
CALCUL ATING COSTS
The annualized fixed cost is obtained by computing the annual amortization at a
risk-free interest rate. Formula for calculating amortized annual fixed cost is

·E is Average Annual Amortized Cost

·P is Capitalized Cost
·r is the rate of risk-free interest
·n is life tenure of the asset in years
 DIFFERENT APPROACHES TO RECOVER COST

Minimum threshold of
Full cost recovery from the
recovering the Operational
households
and Maintenance Cost

Profit maximization
 USER
• CHARGE
Though, the full cost recovery helps in ensuring
timely repair and maintenance as well as
replacement can be done when needed, at the very
least such projects envisage covering operations and
maintenance expenses

• Efficient pricing approach is necessary to achieve a

balance between water supply and demand
SOCIAL
COSTS
Social costs included both the private and the costs of
externalities. Private costs are the costs facing individual
decision-makers based on actual market prices (B. Metz,
2007).

It is important to take into consideration the social

costs of providing functional household tap
connections to every household. The social costs that
can be considered are:

• The cost of extracting water.

• Depletion of ground water level.
• Possibility of contamination of water.
 SOCIAL
BENEFITS
Social benefits refer to the returns that society gets for incurring
social costs. In this case the social benefits could accrue through:
• Grey water management and rainwater harvesting
• Providing good quality drinking water and functional household
tap connections to every household.
• Improving the general health of the public by providing adequate
water supply.
• Incorporating good practices to judiciously use water sources.

Social returns should be maximized while social costs should be

minimized in order to promote the well-being of all members of
society. Market outcomes can lead to underproduction or
overproduction in terms of a society's overall condition unless
all costs and benefits are internalized by households and firms
making purchasing and production decisions
COST BASED PRICING
• Unit cost of service delivery is an important metric in effective
management of any system. The unit costs and its components
need to be computed periodically as a performance measure as
well as to help in determining water charges.
• Cost computation helps in understanding the cost structure so
that comparisons can be made across schemes and overtime to
understand areas of strengths and weaknesses and help to take
appropriate measures.

• Full cost computation needs to be done even if the immediate

objective is to cover only operational costs through user charges
as it helps in understanding the total cost of service delivery and
plan for meeting replacement expenses well ahead of time so
that the burden of lumpsum expenses can be avoided.

• Though, the full cost recovery helps in ensuring timely repair

and maintenance as well as replacement, at the very least, in
Types of UNIT COSTS

We can use two different units for computing unit costs.

First, is per kilo litre of water supplied which helps to implement

charging water on volumetric basis.

Second, is the per household cost which is a flat rate pricing .

STEPS IN COMPUTING UNIT
Step 1: Classify the costs into capital expenditure and operating expenditure. The annual operating costs is
COSTS
sum of all operating and maintenance cost incurred in a year.
Step 2: Calculating the annualized fixed cost. The annualized fixed cost is obtained by computing the annual
amortization at a risk-free interest rate.
Step 3: Calculating the annual total cost.
Annual Total Cost = Annual Fixed Cost + Annual Operating Cost.
Step 4: Calculating the annual total cost per kl.
Annual Total Cost per kl = Annual Total Cost/ Estimated Annual Supply of Water in kl
Step 5: Calculating the annual total operating cost per kl
Annual Operating Cost per kl = Annual Operating Cost/ Estimated Annual Supply of Water in kl
Step 6: Calculating the annual total cost per household.
Annual Total Cost per HH = Annual Total Cost/ Total number of HH served
Step 7: Calculating the annual operating cost per household.
Annual Operating Cost per HH = Annual Operating Cost/ Total number of HH served
Step 8: Fixed cost per kl and per household can be obtained by subtracting operating cost from total cost.
Monthly average total, fixed and operating costs can be calculated by dividing the annual total cost, annual fixed
cost and annual operating costs, respectively, by 12.
TARIFF
MECHANISMS
The true cost of producing, treating, and distributing
water can be the basis for setting the tariff.
The cost-based tariff mechanism can be broadly
classified as

Flat Pricing and

Volumetric Pricing

Suitable approach to water pricing depends on

various factors such as the geography, socio-
demographic background, existing water sources etc
or simply administrative ease.
FL AT PRICING
• In a flat price approach, the

APPROACH
service provider charges the

Cost/Price
2.5
same amount tariff for a Flat pricing

particular product or service, 2

usually in competition with a

volume-based pricing strategy. 1.5

• In the case of piped water supply,

a fixed monthly charge per 1

household is a flat pricing

strategy. While this approach is 0.5

simpler to implement, it may not

0
be a fair pricing system where Quantity 1 Quantity 2
Flat pricing
Quantity 3 Quantity 4

there are large variations in the

Quantity
sizes of the households and
where what is scarce.
VOLUMETRIC TARIFFS
Under volumetric tariffs, water charges are directly proportional to the
water consumption. Hence, higher consumption will result in higher
water charges. Increasing block tariff, uniform water tariff and two-
part tariffs are volumetric tariffs.

Volumetric tariff
6

5
Cost

0
Quantity 1 Quantity 2 Volumetric tariff Quantity 3 Quantity 4

Quantity
REVENUE: SURPLUS/DEFICIT
• Annual total cost is deducted from the amount of
total water charges levied per year for the total
number of households to obtain surplus or deficit
over the total cost
• Similarly, the total annual operating cost is deducted
from the amount of total water charges levied per
year for total number of households which reflects
whether there is a surplus or deficit over total annual
operating cost.
ILLUSTRATION OF
UNIT COST
COMPUTATION
MVS, SVS AND IVDS
• Jal Jeevan Mission has been implemented through two types of
schemes: Multi-village Scheme (MVS) with In-Village Distribution
System (IVDS) and Single Village Scheme (SVS).

• In the case of MVS-IVDS system, the unit cost is computed at MVS level
as well at individual IVDS level. While MVS costs are directly relevant to
concerned IVDS, the extent of burden depends on the State
Government Policy.

• For example, State Government may have a policy to subsidize full or

partial fixed cost component of MVS from the state budget and not
imposed on the beneficiary households to reduce the tariff burden on
the households.
Gokarna MVS and IVDS
Gokarna MVS and IVDS
COS T COM PUTATION FOR M VS AND IVDS : CAPI TAL
E XPE NDI TURE
COST COMPUTATION FOR MVS: O&M
The operations and maintenance cost for MVS
includes - establishment charges, electricity
charges, maintenance cost of civil works,
maintenance cost of electro-mechanical
components, expenses on consumables,
transportation and communication charges,
office accommodation charges, cost of water
quality testing, water generation and stationery
charges.
COST COMPUTATION FOR MVS: O&M
COST COMPUTATION FOR MVS: PER KL AND PER
HOUSEHOLD
COST COMPUTATION FOR IVDS:
O&M
The operations and maintenance cost for IVDS includes- temporary and
permanent waterman salaries and repair and maintenance costs, power
charges (if any). Currently the operations cost of IVDS is mainly salary of
water person in Gokarn MVS. The water from MVS flows to OHT in the
villages through gravitational force and therefore no additional power is
required. As the system is new there is no repair and maintenance cost as
of now. The salary paid for water persons in the 3 Gram Panchayats is
presented below.
COST COMPU TATION FOR IVDS: PER KL AND PER
HOU SEHOLD
SVS
COST COMPUTATION FOR SVS
• Here we take an example of SVS in Odisha, Kamapalli habitation in Ganjam District.

• The Kamapalli habitation’s total cost of water supply infrastructure was INR 14,76,136
that catered water to 103 households, indicating that the average investment per
household is INR 14,331.

• The designed life span of this infrastructure being 25 years. Considering an

opportunity cost at @6% on the investment, the total annualized cost is INR 1,14,696.
In this system, a major operational cost is electricity charges, as one of the pumps is
an electric pump operated daily.

• A solar pump is also installed at the second tube well, but it hasn’t incurred any
maintenance cost till date. Assuming the maintenance cost will be 0.5% of the fixed
cost, the annual maintenance cost works out to be INR 7,380.

• Currently, the water charges collected is INR 5.50 per kl, volumetric pricing, for
consumption of <5 kl, which has been decided unanimously by the community.
COST COMPUTATION FOR SVS
COST
•
COMPUTATION FOR SVS
Based on the total fixed cost, operational cost, and annual water demand
for an estimated future population of 857, the actual cost per kl of water
works out to be INR 7.18 (Table 6), which is more than the current water
charge of INR 5.50 per kl.

• If we consider the current actual population of 496, the fixed cost works out
to be INR 9.05 per kl, while the operational expense is INR 3.36 per kl.

• The total cost then amounts to INR 12.41 per kl (Table 7). If the VWSC
decides to have ownership of the infrastructure and its upgradation during
the end of the current design period, then the revision of monthly charges
needs to consider recovery of the total cost of INR 12.41 per kl.

• For an average household of this habitation consuming about 7.7kl of water

per month will have to pay INR 95. While it may not be feasible to suddenly
increase the water charges to full cost basis, it can be done gradually,
starting with say INR 7.5 per kl and so on.
 CAVEATS OF COST BASED METHOD
• In cost-based approach the costs can rise due to various factors such
as wastage of water, large amount of non-revenue water, lack of
proper operations and maintenance, inefficiency in management of the
water supply system, high power cost etc. Under JJM, it has been
suggested that water meters should be involved for tracking the
consumption pattern of the individuals at the household level. This will
help to limit the usage of non-revenue water.
• The infrastructure is designed to sustain for the future population
growth also leads to higher present operation and maintenance cost. It
is important to emphasize on this matter to figure out how to retrieve
this cost without compromising on welfare maximization.
ACCOUNTING OTHER REVENUE
WHILE COMPUTING TARRIF
• While determining tariff for households, other possible
revenues sources need to be taken into account.

• These sources could be interest on corpus fund created by the

VWSC, Government Grant, etc.

• These annual sources of funds if available to the VWSC needs

to be ascertained and deducted from total cost before arriving
at unit cost on either a flat rate or volumetric basis. This
needs specific Government policy to be in place.
 Billing and Collection
• Water charge determination
– Volumetric
– Flat rate
• Periodicity of billing
– Monthly
– Seasonal
– Annual
• Due dates and rewards (5 star credit score)
• Reminder and Penalty
• Dispute settlement
• Bill collection
– Online – app
– Personal visit – water person
 Financial Planning
• Preparation of Financial Budgeting
– Timing
• Inputs required
– Estimate of the water supplied
• Number of households
• Average amount of water supplied
• Total quantity of water to be supplied
– Total cost
• Salary
• Power
• Materials
• Labour
• Others
– Estimate of water charges to be levied
– Estimate of the recovery
– Estimate of the other sources of funding
– Budget surplus or deficit
POLICY DIRECTIONS
Efficient financial management at the VWSC level requires policy direction on
the following:
1.Policy should be clear that except for 10% contribution, no other contribution
to be made towards investment cost of developing the infrastructure.
2.Whether states budget support is available operations and maintenance cost
of MVS?
3.Whether state budget support is available for repair and replacement of
assets either at MVS level or SVS level.
4.What is the nature of funding support available to SVS on technical help
needed, training, skill development and capacity building?
5. Whether State budget will be available for replacement of assets at the end
of the life span of those assets. If so, what is the extent of support?
6.Whether state budget support will be available for water testing expenses
incurred by VWSC?
7.Whether state budget support is available to meet the electricity charges of
SVS?
 Key Takeaway
• Community ownership in operations and maintenance is
important for sustainability
• Financial Management is an important determinant of efficient
management of the system
• User charge determination is an important component of
financial management
• Cost based pricing is appropriate for determining user charges
• We use the competitive market pricing principles to determine
the user charges
PRACTICAL
ASSIGNMENT