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Cost recovery in Urban Local Bodies_Ramakrishna Nallathiga,NICMAR_May 2014
Cost recovery in Urban Local Bodies_Ramakrishna Nallathiga,NICMAR_May 2014
Cost recovery in Urban Local Bodies_Ramakrishna Nallathiga,NICMAR_May 2014
Cost recovery in Urban Local Bodies_Ramakrishna Nallathiga,NICMAR_May 2014
Cost recovery in Urban Local Bodies_Ramakrishna Nallathiga,NICMAR_May 2014
Cost recovery in Urban Local Bodies_Ramakrishna Nallathiga,NICMAR_May 2014
Cost recovery in Urban Local Bodies_Ramakrishna Nallathiga,NICMAR_May 2014
Cost recovery in Urban Local Bodies_Ramakrishna Nallathiga,NICMAR_May 2014
Cost recovery in Urban Local Bodies_Ramakrishna Nallathiga,NICMAR_May 2014
Cost recovery in Urban Local Bodies_Ramakrishna Nallathiga,NICMAR_May 2014
Cost recovery in Urban Local Bodies_Ramakrishna Nallathiga,NICMAR_May 2014
Cost recovery in Urban Local Bodies_Ramakrishna Nallathiga,NICMAR_May 2014
Cost recovery in Urban Local Bodies_Ramakrishna Nallathiga,NICMAR_May 2014
Cost recovery in Urban Local Bodies_Ramakrishna Nallathiga,NICMAR_May 2014
Cost recovery in Urban Local Bodies_Ramakrishna Nallathiga,NICMAR_May 2014
Cost recovery in Urban Local Bodies_Ramakrishna Nallathiga,NICMAR_May 2014
Cost recovery in Urban Local Bodies_Ramakrishna Nallathiga,NICMAR_May 2014
Cost recovery in Urban Local Bodies_Ramakrishna Nallathiga,NICMAR_May 2014
Cost recovery in Urban Local Bodies_Ramakrishna Nallathiga,NICMAR_May 2014
Cost recovery in Urban Local Bodies_Ramakrishna Nallathiga,NICMAR_May 2014
Cost recovery in Urban Local Bodies_Ramakrishna Nallathiga,NICMAR_May 2014
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Cost recovery in Urban Local Bodies_Ramakrishna Nallathiga,NICMAR_May 2014

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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 …

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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  1. 26/06/201226/06/2012 11 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
  2. 05/23/14 2 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
  3. 05/23/14 3 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
  4. 05/23/14 4 Lower level Equilibrium TrapLower level Equilibrium Trap
  5. 05/23/14 5 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
  6. 05/23/14 6 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
  7. 05/23/14 7 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
  8. 05/23/14 8 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
  9. 05/23/14 9 Process of User Charges LevyProcess of User Charges Levy
  10. 05/23/14 10 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
  11. 05/23/14 11 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
  12. 05/23/14 12 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
  13. 05/23/14 13 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
  14. 05/23/14 14 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
  15. 05/23/14 15 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
  16. 05/23/14 16 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
  17. 05/23/14 17 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
  18. 05/23/14 18 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
  19. 05/23/14 19 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
  20. 05/23/14 20 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
  21. 05/23/14 21 Thank YOUThank YOU

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