Water pricing in the real world

Published August 25th, 2016

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Insight from Christopher Gasson, GWI publisher

How much do people pay for water when they don’t have a utility service? It is an important question because it is only when you can see what people are already paying that the economics of extending utility services become obvious.

In this month’s Global Water Intelligence David Lloyd Owen has collected some data on the price of water from informal vendors from around the world. Translated into dollars per cubic metre these range from $11.46/m3 in Cape Verde to $48.21/m3 in Port Moresby in Papua New Guinea. It should look like a fantastic market opportunity for the utilities in those places. The official water tariff in Cape Verde is $5.78/m3, while the price of utility water in Port Moresby is $0.45/m3.

The comparison is not quite straightforward. Informal vendors sell water of a wide range of qualities in different volumes. At one end you might have vendors selling 500ml drinking water sachets and at the other end you might have tankers delivering 5,000 litres of non-potable water to fill domestic water tanks.

The sachet business is quite interesting. In Nigeria it seems to be a big business opportunity for entrepreneurs. According to a 2013 report, 500ml sachets sell on the street for NGN5 ($0.03 or the equivalent of $62.80/m3 at 2013 exchange rates), although retailers would pay NGN75 ($0.46 = $4.64/m3 at the same exchange). The actual cost of sourcing the water, treating it, putting it in sachets and delivering the bags of sachets retailers was NGN51 ($0.32/bag=$3.16/m3). As you can see the last mile distribution is where all the value is: the retailers charge a 14x mark up on the cost of the water they sell, although if it takes 5 minutes to sell each sachet, their net income is closer to $0.33/hour.

By contrast the Lagos Water Corporation sells non-potable water at an average price of $0.31/m3 with average operating costs of $0.44/m3. It has 145,000 water connections in a city of 21 million. Typically customers buy around 25 litres of water per day at a cost to the utility of $0.01/day. After subsidies, the actual cost to Lagos residents works out at $0.0078/day. That sounds like a bargain in comparison to the cost of the sachets, but you also have to factor into account the fact that utility supply is not potable.

Once you include the cost of home filtration the numbers are not so good. A relatively cheap system might cost $30 up front in Nigeria, and require some on-going costs. My best estimate is that treating the water at home would add around $0.03 to the cost of water per day. Home treatment costs more than three times the cost of home distribution.

The data draws into focus the dramatic economies in running an efficient centralised water system. Pipes are dramatically cheaper than retailers selling 500ml sachets for $0.33/hour, and centralised treatment is dramatically cheaper than home filtration.

This kind of study of the real cost of water, and its usage is revealing in terms of utility strategy. It should make utilities feel more bold about pricing their water more aggressively, and reinforce the message that a 24/7 potable water network is much cheaper than the alternatives. The trouble is that this kind of research is not done enough. Too many policy makers take the view that water tariffs have to be priced in comparison to the free water given by God rather than the rather expensive real world alternatives.

Next month we will be running our annual water tariff survey in Global Water Intelligence. I will be on the look-out for any moves closer to reality.