Financing Urban Services Through Cost Recoveries from Semi-Public goods – The Case of Drinking Water Supply

Non-tax revenues in the form of cost recoveries of public services provided by governments are the most important source of revenue for urban local governments in India. However, most governments lack rational pricing policy for these services and generally charge token prices, which may hardly relate to their supply and distribution costs. The financial sustainability of the drinking water supply system involves ‘cost recovery’ principle, and the tariff rate structures should be designed in such a way that revenue yield should compensate the operation and maintenance cost. However, the current water pricing practices are deficient in the sense that often the price of urban water supply is lower than the costs incurred for its provision. In this paper it is attempted to design an objective tariff system that is efficient, adequate, equitable and is suitable for recovery of the costs involved in the drinking water sector. The model basically aims at linking the water tariff rates to the volumetric consumption of water, with adequate progressivity.