The influence of operational efficiency and water tariffs on cost recovery in the water sector

The majority of Governments in emerging economies contend with scarce financial resources needed for the expansion of strategic infrastructure which is vital for the improvement of the social and economic wellbeing of societies. This is due to high budgetary shortfalls and inadequate domestic capital financing alternatives. Although the debate on the best way forward is not conclusive, commercialisation of the water industry rather than full privatisation seems to be the most favoured in the developing nations. This was the premise on which the Zambian water sector was restructured. Commercialisation for the water industry in Zambia was established on seven tenets as specified in the National Water Policy(NWP) (Schwartz, 2008). The third (3rd) NRW principle devolved authority to Water Utilities to function on commercial principles. The expectation under this principle was gradual achievement of full cost recovery by the established water utilities (Republic of Zambia, 1994). Full cost recovery in this case denoted covering of operations and maintenance costs, finance costs, depreciation and any allowed provisions(NWASCO, 2016). However, achievement of this goal has not been easy for most of the utilities in Zambia. A case of Lukanga Water and Sewerage Company (LgWSC) was selected to establish the factors responsible for the failure to attain the expected target of cost recovery in most of the Zambian water utilities. The theoretical context for the study was anchored on two main theories; the water pricing theory and the modern management theory approach on the efficiency and effectiveness of organizations. The main concept of study ‘cost recovery’ is founded on the principle that service providers should recover cost related to the provision of the services. The study was mainly explanatory and took a qualitative approach. Two main data collection tools were employed to obtain the primary data for the study; semi-structured interviews and closed questionnaires. The main supposition of taking this type of inquiry was that the blend of interviews and questionnaires would offer a much more complete understanding of the study problem than either research tool could provide (Creswell, 2013). Secondary data from existing literature and legislation was used to augment the primary data collected. From the findings of the study, it can be conclusively said that operational inefficiencies and low water tariffs have significantly contributed to the failure of the water utility to attain the expected target of cost recovery. The study has shown that operational inefficiencies denoted as water losses, bill collections and staff productivity combined with the effects of the low water tariffs, explained the failure to recover costs. Operational inefficiencies both on the cost side and the revenue side of operations have been adversely influencing the utility’s ability to achieve the targeted cost recovery. Furthermore, the situation was exacerbated by the fact that LgWSC had the lowest tariff in the sector. A unit of water tariff per cubic meter was therefore not able to cover a unit O&M cost per cubic meter. Additionally, the high operational costs coupled with low collections further restricted business growth. Even though operational improvements were visible from the time the water utility was commercialised, the lack of investment in business growth threatened the sustained capacity of the operational improvements so far achieved in the water utility. This study supports the view that substantial revenue potential is possible for service providers by merely putting in place effective measures to increase operational efficiency without necessarily raising water tariff rates (Gupta 2011). Therefore, by having operational efficiency in management of water losses, in bill collections and labour productivity small ‘quick wins’, in revenue would be achieved. Focusing on the water pricing policy alone will not yield the desired outcomes for the sector. The study has recommended more applied research that quantifies in monetary terms the operational gains that would accrue to water utilities in the developing countries to aid utility managers and policy makers make more focused decisions for the sustained growth of the water sector in developing countries.