The Cost Of Water

Water in Namibia is free, but it also has a cost. This cost is the cost to supply water from its source to the tap of the user and does not include any cost for the water itself. The cost to supply water under the prevailing arid conditions in Namibia is very high and the therefore water is expensive. The trick is to understand why water is considered to be a free commodity, why water has a cost, why this cost is high and how this unavoidably high cost can be adjusted to make water more affordable for the consumer. The bottom line is that water has a cost and someone must pay for the supply of water otherwise a water service provider will go bankrupt and the service will have to be terminated, unless a “bailout” is provided.

Why do people think that water is and should be free? All sources of water originate from rainfall and therefore many people believe that water is not only a gift from God, but that it is free and should be free. This belief is of special significance in Namibia where the mean annual rainfall is less than 260 millimetres per annum, unreliable, unpredictable, limited to a relatively short rainy season and exacerbated by climate change. Often the rainfall is very low or stays away completely due to a period of drought conditions and it is especially at such times that God is approached to bring relief to the parched landscape, dying animals and thirsty people by sending rains.

The longer term access to water after a rainy season has ended, forced the early indigenous settlers in the interior of the country to settle at places where perennial open water, such as springs or fountains or seeps or pools of water in the ephemeral rivers was available or where they managed to nd water by digging shallow wells in or next to watercourses or at other places with shallow underground water. This water never cost anything to collect and use, but when these sources became unreliable or dried up due to a lack of rainfall, the communities had to move elsewhere. Another complication was that this free water was often contaminated and not safe for human consumption. Access to those scarce water sources also gave rise to conflict in times of drought.

One can therefore argue that when people have access to naturally occurring water sources which are inherently unreliable and unsafe for use, the water can be regarded as free, but this argument does not hold when it comes to formal or permanent water supply schemes required for an industrialized society.

Over the years the formal supply of water became a necessity in Namibia due to an increase in the demand for water as a result of an increase in the population, economic development and an improvement in the quality of life. Namibia has a huge surface area (about 825 000 square kilometres), a very small population (about 2,1 million people) and a very low average population density (less than 2,6 persons per square kilometre). Communities are small, isolated and remotely located from water sources, but there are also areas where the population density is much higher, such as in the central area, the coastal towns and in the north. This means that the local water sources are inadequate and long-term sustainable water supply schemes must be the established. Huge capital investments in infrastructure are therefore required to store water in reservoirs during the rainy season and to convey water over long distances by pipeline from source to consumer. Due to the high capital cost and the relatively low quantity of water used, the unit cost of the water is high. This makes the water supply even more expensive. The intervention of an elected Government is therefore necessary to facilitate investment in water resources development and the recovery of the cost.

The main actors responsible for water supply in Namibia are the Namibia Water Corporation (NamWater) for bulk water supply; Government institutions such as the Department of Water Affairs and Forestry (in the Ministry of Agriculture, Water and Forestry – MAWF) for rural water supply; local and regional authorities for water supply, water reticulation and effluent treatment and the private sector, or self-suppliers, such as the mining sector and commercial farmers.

In order to explain how the financial cost of supplied water is calculated, the basic elements of a water supply scheme must be understood. These are normally:

• A water source (which may be a perennial river, a dam in an ephemeral river or a borehole) that yields water which has an acceptable chemical quality and an adequate long term sustainable safe yield;
• A facility to treat the water to make it aesthetically acceptable and bacteriologically safe for potable use;
• A water transfer system, comprising one or more pump stations and pipelines to convey the water from the source to a treatment plant and from there to a water distribution point such as a terminal reservoir and;
• A water reticulation system to convey the water from the terminal reservoir to the water consumer.

The construction of these facilities requires capital investment and one component of the total water cost is the cost to repay the capital and interest. The money must be borrowed from a financial institution and must be repaid with interest. This payment or redemption of the capital and interest over time, is normally calculated over the economic lifetime of the water scheme and is a fixed annual cost that will remain the same during the lifetime of the water scheme. This cost must be recovered from the water consumer and is normally calculated as a unit cost in terms of the supply capacity of the water scheme or the number of cubic metres of water that will be supplied by the water scheme over its lifetime. This capital cost is called the fixed component of the total water cost and is expressed as Namibian Dollar per cubic metre (also referred to as “per kilolitre”).

The other component of the total water cost is the variable cost component because it depends on the quantity of water that will actually be supplied to the consumers. The water demand that must be satisfied by a water scheme usually increases over time and therefore each year more water than the previous year must be pumped and treated. This means that the cost of the energy will increase to pump the additional water and the chemicals required to treat the water. On top of this increase, there will also be an additional cost due to the effect of the annual inflation in the cost of energy and chemicals. These costs must be accounted for and recovered from the consumer. The unit cost of the variable cost component is therefore the sum of all the variable costs or “expenses” divided by the actual quantity of water supplied during the year. The full economic unit cost of the water is therefore the sum of the annual fixed unit capital cost and the annual variable unit cost. Based on this full economic cost, a water supply entity normally levies a water tariff.

When the water is distributed from the terminal reservoir to the consumers, it is usually done by another entity, such as a local authority. This authority must also make a capital investment to construct a water reticulation network and must recover that fixed cost, as well as the variable cost to employ staff to operate and maintain the reticulation system. This means that the local authority will take the water tariff of the water supply entity and add the reticulation cost. This cost is the so-called “price” of the water that the consumer must pay. This price per kilolitre must be multiplied with the number of kilolitres used by the consumer to get the cost of the water consumed.

So far we have explained the reality of cost recovery measures, but the national water policy of Namibia makes provision to make water more affordable to the poor by introducing subsidies. According to the policy, water is an economic good and it is essential to recover the full financial cost to supply water in order to enable the water supply and sanitation sector to become self sufficient and sustainable over time. It is therefore clearly recognized that without the necessary revenue, service providers will be unable to continue providing the expected level of water supply and sanitation services, especially if Namibia wants to achieve Vision 2030.

However, there is also a social responsibility to make water available to the poor and, in the case of low-income rural and urban areas, at least the operational and maintenance cost must be recovered with support from government subsidies or cross-subsidies amongst consumers. There are various ways to achieve the latter, for example to introduce a “block tariff system” where the low water consuming “poor” is charged less than the high water consuming “rich”.

In the case of NamWater, which is a Government owned enterprise, the water tariffs are subject to approval by the Minister and it may happen that the tariffs are adjusted. However, if the tariffs are reduced to make the water less expensive, it means that the water supply entity will be forced to make a nancial loss because it cannot recover the actual costs as calculated when the water tariff was determined. This is therefore not the way to go if a water supply entity is expected to remain solvent.

As stated above, the water policy provides for the recovery of at least the operating and maintenance cost when water is supplied to the poor, but recovery of capital is not addressed. Namwater must therefore be innovative to find money to invest in the creation of new infrastructure, or to increase the capacity of existing infrastructure (called “upgrading”) or to replace old infrastructure and these costs can, for example, be added to the water tariff, which means that the company may theoretically make a “profit”. This will not be a profit in the true sense of a profit, because the money will not be used to enrich anybody, but to develop water supply infrastructure. These concepts are often not well understood by the public or politicians.

About the author: Mr Piet Heyns is a well known professional in the water sector in Namibia, Southern Africa (the SADC Region), Africa and elsewhere in the world. He has more than 42 years experience in the water sector and serves as an Associate of the Desert Research Foundation of Namibia (DRFN). 

BY PIET HEYNS – DESERT RESEARCH FOUNDATION OF NAMIBIA (DRFN)