This presentation by Ramakrishna Nallathiga, an Associate Professor at National Institute of Construction Management Research (NICMAR), Pune, gives an approach to costing of urban services and the methodology for user pricing/ user charge levy to recover these costs.

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Costing and Cost recovery ofCosting and Cost recovery of
Urban Services through UserUrban Services through User
charge levycharge levy
Ramakrishna NallathigaRamakrishna Nallathiga
Associate ProfessorAssociate Professor
National Institute of ConstructionNational Institute of Construction
Management Research (NICMAR)Management Research (NICMAR)
25/1, Balewadi25/1, Balewadi
Pune – 411 045Pune – 411 045

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BackgroundBackground
► India is increasingly becoming urbanized (28% ofIndia is increasingly becoming urbanized (28% of
total population as per Census 2001)total population as per Census 2001)
► The number of towns and cities increased more thanThe number of towns and cities increased more than
double - from 2462 in 1961 to 5161 in 2001.double - from 2462 in 1961 to 5161 in 2001.
► Cities/ towns are administered by Urban Local BodiesCities/ towns are administered by Urban Local Bodies
(ULBs) of varied size and jurisdiction(ULBs) of varied size and jurisdiction
► ULBs have to provide basic urban services and otherULBs have to provide basic urban services and other
civic amenities as laid down under State/ respectivecivic amenities as laid down under State/ respective
municipal legislationmunicipal legislation
► The 74The 74thth
CAA 1992 added further to the list ofCAA 1992 added further to the list of
functions of ULBs to make them responsible for allfunctions of ULBs to make them responsible for all
local serviceslocal services

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IntroductionIntroduction
► The provision of services and the recovery of costsThe provision of services and the recovery of costs
are both laid down in the form of general taxes andare both laid down in the form of general taxes and
user charges levied by ULBsuser charges levied by ULBs
► While the service costs are met through budgetaryWhile the service costs are met through budgetary
sources, their recovery is not fully achieved becausesources, their recovery is not fully achieved because
of the issues of cost measurement and pricingof the issues of cost measurement and pricing
► The recovery of costs tends to be very low andThe recovery of costs tends to be very low and
remains far behind the incurrence of costs to renderremains far behind the incurrence of costs to render
services (almost on a perpetuity!)services (almost on a perpetuity!)
► The poor cost recovery casts an impact on theThe poor cost recovery casts an impact on the
service delivery performance of ULBs and evenservice delivery performance of ULBs and even
results in the decline of assetresults in the decline of asset
► This leads to situation what is known as ‘lower levelThis leads to situation what is known as ‘lower level
equilibrium trap’ for most ULBsequilibrium trap’ for most ULBs

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Lower level Equilibrium TrapLower level Equilibrium Trap

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User charge pricing - RationaleUser charge pricing - Rationale
► Urban infrastructure services are a form of public goodsUrban infrastructure services are a form of public goods
with following characteristics:with following characteristics:
 Non-excludabilityNon-excludability
 Non-measurabilityNon-measurability
 Natural monopoliesNatural monopolies
 ExternalitiesExternalities
 Lumpiness of InvestmentsLumpiness of Investments
► These characteristics prompt that their provision is betterThese characteristics prompt that their provision is better
(in terms of both efficiency and equity) when it is done by(in terms of both efficiency and equity) when it is done by
public/government agenciespublic/government agencies
► Moreover, the pricing of public goods like basic urbanMoreover, the pricing of public goods like basic urban
services is different from that of private goods on accountservices is different from that of private goods on account
of these characteristicsof these characteristics

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Revenue assignment: Bahl & LinnRevenue assignment: Bahl & Linn
PrinciplesPrinciples
Benefits Identifiable - User
Beneficiaries Identifiable Charges
Benefits broadly Identifiable - Benefit
Identification of Beneficiaries Taxes
Costly or Difficult
Neither Benefits nor Generic
Beneficiaries Identifiable Taxes
Administrative Expenses Fees & Charges
Long-gestation Capital Borrowings/
Projects and Works Bonds

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User charge pricing - RationaleUser charge pricing - Rationale
► User charge pricing of civic urban services is aUser charge pricing of civic urban services is a
mechanism for the recovery of costs associatedmechanism for the recovery of costs associated
with services rendered by ULBs which may servewith services rendered by ULBs which may serve
the objectives of:the objectives of:
 Resource efficiencyResource efficiency
 RedistributionRedistribution
 Allocative efficiencyAllocative efficiency
► It is aimed at recovering both direct and indirectIt is aimed at recovering both direct and indirect
costs associated with services, but the feasibilitycosts associated with services, but the feasibility
of recovery may vary with respect to serviceof recovery may vary with respect to service

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Feasibility of Cost RecoveryFeasibility of Cost Recovery
Service High (Full) Medium Low None
Water Supply X
Sewerage X
Storm Water Drainage X
Solid Waste
Primary Removal X
Secondary Removal X
Disposal X
Roads X
Street Light X
Parks & Recreational Facilities X
Playgrounds X

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Process of User Charges LevyProcess of User Charges Levy

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Legal Authority for setting feeLegal Authority for setting fee
► Local/ State Municipal legislation to haveLocal/ State Municipal legislation to have
provision for levy/ else amend itprovision for levy/ else amend it
► The procedure for user charge levy needsThe procedure for user charge levy needs
to be established under municipal bye-lawsto be established under municipal bye-laws
► Tariff cards may be developed for variousTariff cards may be developed for various
services based on certain criteria andservices based on certain criteria and
included in bye-lawsincluded in bye-laws
► Tariff card and its revision may be subjectTariff card and its revision may be subject
to municipal/ elected council approvalto municipal/ elected council approval

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Identification of ServicesIdentification of Services
► The services to be brought under user charge levy need toThe services to be brought under user charge levy need to
be identified and distinguished; the user charge systembe identified and distinguished; the user charge system
may be designed based on the service differencesmay be designed based on the service differences
 the characteristicsthe characteristics
 feasibility of cost recoveryfeasibility of cost recovery
► User charge levy can be applied to following key services:User charge levy can be applied to following key services:
 Water supplyWater supply
 Sewerage/ drainageSewerage/ drainage
 Solid waste managementSolid waste management
 RoadsRoads
 Parks & playgroundsParks & playgrounds
 Health servicesHealth services
 Education servicesEducation services

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Defining service compositionDefining service composition
ServiceService Basic serviceBasic service Add-on serviceAdd-on service
Water supplyWater supply Individual water supplyIndividual water supply
connectionconnection
Metering of water supplyMetering of water supply
Billing & paymentBilling & payment
channelschannels
SewerageSewerage Individual Coverage ofIndividual Coverage of
sewerage trunk/ drainagesewerage trunk/ drainage
networknetwork
Billing linked to waterBilling linked to water
tarifftariff
Solid wasteSolid waste
managementmanagement
Door-to-door waste collectionDoor-to-door waste collection
& transport& transport
Waste treatment andWaste treatment and
reusereuse
RoadsRoads Black top connecting roadsBlack top connecting roads
without potholes/ Cementwithout potholes/ Cement
concrete roadsconcrete roads
Fly overs, FOBs, footFly overs, FOBs, foot
path and junction workspath and junction works
ParksParks Fenced and lawned parksFenced and lawned parks Horticulture, playHorticulture, play
facilities and recreationfacilities and recreation

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Estimation of current & future useEstimation of current & future use
► Current levels of use to be assessed, and the users ofCurrent levels of use to be assessed, and the users of
service need to be identified, based on theservice need to be identified, based on the
connection/access provided and distinguished in terms ofconnection/access provided and distinguished in terms of
 Types of usesTypes of uses
► Residential, commercial, institutional etcResidential, commercial, institutional etc
 Levels of use/consumptionLevels of use/consumption
► Very High/High/Medium/LowVery High/High/Medium/Low
► Service standards that define the amount and quality ofService standards that define the amount and quality of
service need to be definedservice need to be defined
► Future levels of service use may be assessed based on theFuture levels of service use may be assessed based on the
projections of current trends and a plan for service deficitprojections of current trends and a plan for service deficit
may be plannedmay be planned

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Differentiated Strategy for ServicesDifferentiated Strategy for Services
► Services are different by nature so the approach toServices are different by nature so the approach to
provision and cost recovery to be differentiatedprovision and cost recovery to be differentiated
 Water supplyWater supply – tariffs based on consumption levels and– tariffs based on consumption levels and
types of usestypes of uses
 Sewerage/sanitationSewerage/sanitation – tariffs linked to water supply and– tariffs linked to water supply and
as a surcharge on water supply billas a surcharge on water supply bill
 Solid waste managementSolid waste management – shared service provision– shared service provision
responsibilities (with community) and sharing of tariffresponsibilities (with community) and sharing of tariff
 ParksParks – Partnership led service provision and exploiting– Partnership led service provision and exploiting
the potential other usesthe potential other uses
 Education/health servicesEducation/health services – Shared provision (with– Shared provision (with
government/ community/ private sector) andgovernment/ community/ private sector) and
contributions from users as well as non-userscontributions from users as well as non-users

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Cost Components/ StructureCost Components/ Structure
Method ofMethod of
DistinctionDistinction
Criteria of costsCriteria of costs Components/ examplesComponents/ examples
In situ & exIn situ & ex
situ costssitu costs
Based on whether theBased on whether the
costs incurred are atcosts incurred are at
site and far-offsite and far-off
Cost of works of services (in situ)Cost of works of services (in situ)
Costs of trunk infrastructure,Costs of trunk infrastructure,
Community servicing & administrationCommunity servicing & administration
(ex situ)(ex situ)
Direct &Direct &
IndirectIndirect
costscosts
Based on whether theBased on whether the
costs are directly relatedcosts are directly related
to product or notto product or not
Costs of labour, material (direct)Costs of labour, material (direct)
Administration, depreciation andAdministration, depreciation and
external costs (indirect)external costs (indirect)
Fixed &Fixed &
VariableVariable
costscosts
Based on whether theBased on whether the
inputs are fixed orinputs are fixed or
variablevariable
Capital, Labour & materialCapital, Labour & material
Power/ energy, maintenance costsPower/ energy, maintenance costs
Capital &Capital &
O&M costsO&M costs
Based on the revenueBased on the revenue
and capital distinctionand capital distinction
Costs of physical capitalCosts of physical capital
Costs of operation and maintenanceCosts of operation and maintenance
viz., labour, equipment, vehicles andviz., labour, equipment, vehicles and
maintenancemaintenance

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Costing of the ServiceCosting of the Service
► Identify the various costs associated with serviceIdentify the various costs associated with service
provisionprovision
► Distinguish them as capital and O&M costs or anotherDistinguish them as capital and O&M costs or another
methodmethod
► The composition of capital and O&M costs may be laidThe composition of capital and O&M costs may be laid
down in the accounting codedown in the accounting code
► Capital costs may not be included in the calculus if theCapital costs may not be included in the calculus if the
capital expenditure is made from grantscapital expenditure is made from grants
► Assess the unit costs of each service as distinguishedAssess the unit costs of each service as distinguished
► Identify the total costs, incremental costs and averageIdentify the total costs, incremental costs and average
costs of servicecosts of service

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Summarizing O&M costsSummarizing O&M costs
ItemItem WaterWater
supsup
plyply
RoadsRoads DrainsDrains SolidSolid
waswas
tete
StreetStreet
lighligh
tsts
SanitaSanita
tiotio
nn
TotaTota
ll
Operating costsOperating costs
A. SalariesA. Salaries
B. Power and fuelB. Power and fuel
C. ConsumablesC. Consumables
D. Equipment hireD. Equipment hire
Maintenance costsMaintenance costs
E. MaintenanceE. Maintenance
Total annual O&MTotal annual O&M
costscosts

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Tariff Setting ProcessTariff Setting Process
Service
Provided
Desired
Levels of
Service
O&M
Cost
Cost of
Capital
(debt
servicing)
Annual
Costs of
Service
Current Tariff
Structure
Recoverable
Tariffs
Total
Costs
Tariff
Basket
Analysis
Tariff Setting
Process
Total
Revenue

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Choice of appropriate tariff systemsChoice of appropriate tariff systems
► Tariff system needs to be chosen before working out levels ofTariff system needs to be chosen before working out levels of
tariff based on:tariff based on:
 AdequacyAdequacy
 FairnessFairness
 SimplicitySimplicity
 Service ConservationService Conservation
 Service QualityService Quality
 TransparencyTransparency
► Some of the tariff systems include:Some of the tariff systems include:
 Flat rate tariffFlat rate tariff
 Unit rate tariffUnit rate tariff
 Variable block tariffVariable block tariff
 Seasonal rate scheduleSeasonal rate schedule
 Marginal cost pricingMarginal cost pricing
 Average cost pricingAverage cost pricing
 Average incremental cost pricingAverage incremental cost pricing
 Multi-part/ two-part tariffMulti-part/ two-part tariff

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Establish procedures for reporting,Establish procedures for reporting,
transparency and revisiontransparency and revision
► The extent of recovery of costs and the reasonsThe extent of recovery of costs and the reasons
for revision of tariffs need to be well documentedfor revision of tariffs need to be well documented
and put up before (a) elected council (b) generaland put up before (a) elected council (b) general
public so that there is debate on itpublic so that there is debate on it
► The user charge/ tariff revision period, method andThe user charge/ tariff revision period, method and
procedure may also be laid down so that itprocedure may also be laid down so that it
becomes a periodical exercisebecomes a periodical exercise
► Reporting under finances and accounts may beReporting under finances and accounts may be
laid down and the means adopted for costlaid down and the means adopted for cost
reduction may be reported in annual reportreduction may be reported in annual report

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Thank YOUThank YOU