Cost Recovery

Cost Recovery

Cost recovery in water supply and sanitation services means that the total revenue to the service provider equals (or exceeds) the cost of supply.  A stable revenue stream allows water utilities to adequately operate and maintain their systems and prevents problems with cash flow and financing.

In the water and sanitation sector, a distinction is often made between three types of cost recovery:

• operational cost recovery meaning that revenues at least equal the operating expenses of providing the service
• full cost recovery meaning that capital maintenance expenditure and the costs of capital are also recovered, and
• full economic cost recovery, meaning that also the external costs of a service such as the environmental costs are recovered.

In countries with higher levels of income, full cost recovery for WSS services often is the norm. In these countries, most households are connected to WSS systems. WSS tariffs are well affordable and allow water utilities to operate in an efficient manner and provide high levels of service. Water utilities in these countries are institutionally separated from governments and given substantial autonomy within a well-defined regulatory framework.

In developing countries, the situation is quite different. Incomes are low and the costs of WSS often are a significant part of household expenditure. Not all households are connected to the system, meaning that utility costs must be borne by fewer people. In many countries water is considered a free good or provided for by God and people are reluctant to pay for it.  For all the above reasons, political interference in setting tariffs for WSS services is common.

Also, in many developing countries, governments, often with the help of development partners, have financed the capital costs of WSS infrastructure. Therefore, initially the term cost recovery in these countries referred to covering operating expenses. Increasingly, awareness grew that also the costs of routine maintenance, replacement and expansion needed to be covered by the users of the service by charging tariffs or taxes or by subsidizing WSS services.