However, the reluctance to pay for services is further enhanced by equity
considerations. It is not very easy to determine what to charge consumers, though
it is important. For services that can be accurately measured in volumetric terms
(e.g. water, electricity, water-borne sewerage), cost recovery is achieved by charging
end-users the (full) short-run marginal cost of production plus a portion of long-term
operating and maintenance costs (McDonald and Pape 2002).
To illustrate, if a person wanted to have electricity provided to his home, he
would be expected to pay the cost of connecting the household to the electricity grid,
a portion of the amortised operating and maintenance cost of the bulk infrastructure
required to generate and distribute electricity, and a volumetric rate for the marginal
cost of every kilowatt hour of electricity consumed.
There are several different ways of calculating these costs (Dinar 2000), but most
models incorporate a downward-sloping marginal cost curve where, because of
economies of scale, those who consume more of a service are charged less per
unit of consumption than those who consume less. In practice, this has meant that
poor households are in effect penalised on a per-unit basis because they consume
less than wealthy households and industry.
In response to these equity concerns, progressive block tariffs have been introduced in many countries, including Mauritius, since a very long time, in an effort to
make the initial levels of consumption (or “blocks”) more affordable, or even free,
while charging increasingly higher prices as consumption levels rise. This rising
tariff has the added potential benefit of curbing consumption at the top end, thereby
introducing conservation incentives. (Some people, in Mauritius, might still remember the flat rates for a “prise” in water supply by the Ministry of Works or the
degressive electricity CEB tariff in the 1960s!).
Block tariffs are not inconsistent with cost recovery, however. The difference
with more orthodox pricing models is that block tariffs charge higher than marginal
cost prices at upper levels of consumption in order to make up for lower-thanmarginal cost prices at lower levels, effectively cross-subsidising the poor. Most
importantly, they also provide individual consumers with a certain level of
subsidised consumption.
Unfortunately, not all services can be measured and priced on a volumetric basis.
With services such as refuse collection and dry sewerage (as well as non-metered
water or electricity), there is no way of accurately and easily measuring what an
individual household has consumed. In such cases, cost-recovery models follow a
flat rate that covers the average fixed and variable cost of the service. This can be
done through a separate flat-rate charge or it can be included in a general rates
account. Equity concerns can be dealt with through the application of differential
rates, either along household-income lines (i.e. means testing), or through some form
of property valuation. (i.e. the higher the value of your home, the more you pay,
regardless of your level of consumption).
Whether volumetric or flat, all cost-recovery models depend on “ringfencing” –
i.e. the isolation of cost and revenue associated with a given service and the removal
of subsidies in or out of that sector. Ringfencing means that resources – be they
human or capital – cannot be shared between different service sectors unless they are
21.11 Cost Recovery as a Method to Improve Customer Service
617
considerations. It is not very easy to determine what to charge consumers, though
it is important. For services that can be accurately measured in volumetric terms
(e.g. water, electricity, water-borne sewerage), cost recovery is achieved by charging
end-users the (full) short-run marginal cost of production plus a portion of long-term
operating and maintenance costs (McDonald and Pape 2002).
To illustrate, if a person wanted to have electricity provided to his home, he
would be expected to pay the cost of connecting the household to the electricity grid,
a portion of the amortised operating and maintenance cost of the bulk infrastructure
required to generate and distribute electricity, and a volumetric rate for the marginal
cost of every kilowatt hour of electricity consumed.
There are several different ways of calculating these costs (Dinar 2000), but most
models incorporate a downward-sloping marginal cost curve where, because of
economies of scale, those who consume more of a service are charged less per
unit of consumption than those who consume less. In practice, this has meant that
poor households are in effect penalised on a per-unit basis because they consume
less than wealthy households and industry.
In response to these equity concerns, progressive block tariffs have been introduced in many countries, including Mauritius, since a very long time, in an effort to
make the initial levels of consumption (or “blocks”) more affordable, or even free,
while charging increasingly higher prices as consumption levels rise. This rising
tariff has the added potential benefit of curbing consumption at the top end, thereby
introducing conservation incentives. (Some people, in Mauritius, might still remember the flat rates for a “prise” in water supply by the Ministry of Works or the
degressive electricity CEB tariff in the 1960s!).
Block tariffs are not inconsistent with cost recovery, however. The difference
with more orthodox pricing models is that block tariffs charge higher than marginal
cost prices at upper levels of consumption in order to make up for lower-thanmarginal cost prices at lower levels, effectively cross-subsidising the poor. Most
importantly, they also provide individual consumers with a certain level of
subsidised consumption.
Unfortunately, not all services can be measured and priced on a volumetric basis.
With services such as refuse collection and dry sewerage (as well as non-metered
water or electricity), there is no way of accurately and easily measuring what an
individual household has consumed. In such cases, cost-recovery models follow a
flat rate that covers the average fixed and variable cost of the service. This can be
done through a separate flat-rate charge or it can be included in a general rates
account. Equity concerns can be dealt with through the application of differential
rates, either along household-income lines (i.e. means testing), or through some form
of property valuation. (i.e. the higher the value of your home, the more you pay,
regardless of your level of consumption).
Whether volumetric or flat, all cost-recovery models depend on “ringfencing” –
i.e. the isolation of cost and revenue associated with a given service and the removal
of subsidies in or out of that sector. Ringfencing means that resources – be they
human or capital – cannot be shared between different service sectors unless they are
21.11 Cost Recovery as a Method to Improve Customer Service
617