Sheet-1.

a: Determination of Affordability Level as a Function of Income and Willingness to Pay

General Information about the example-town
A town with the following Income data per household is given for the base year(Year-2007=Year Zero Y0). Ten years planning horison is
chosen. (Year 10 is 2017, 2012 is Year 5.)
The town is a small town with 2500 housholds; Household avg size is 6.
The town has few public and commercial institutions and no industries at all.
The town has an existing borehole based water supply system that needed some improvement/rehabilitation works and expansion for some
network components.Exisisting BH yield at source is 2.5l/s.
a) Constructing the Income Curve
Table a-1: Income bracket data
Income bracket (Birr/month) (0-200] (200-400] (400-600] (600-800] (800-1000] (1000-1200] (1200-1400] >1400
Nr. of Households 875 500 375 250 125 125 125 125
b) Constructing the Income Curve
Table a-2: Income curve data for Cumulative Nr. Of Households earning above giben boundaries.
Income per month (Birr)/HH above 1400 1200 1000 800 600 400 200 0
Nr. Of HHs earning above 125 250 375 500 750 1125 1625 2500

Cumulative %-age of HHS earning above 5% 10% 15% 20% 30% 45% 65% 100%

Income Curve
120%
Cumulative %-age of HHs

100%
80%
60% Cumulative %-age of HHS earning
above
40%
20%
0%
0 200 400 600 800 1000 1200 1400 1600
Income Birr/month
Sheet-1.i: Determination of Affordability Level as a Function of Income and Willingness to Pay
E: Converting Flat tariffs to Progressive Tariffs on a 4-band system. (contd. From sheet 1.h)

E4.4: Analyze/Interprete %-age of Cumulative HHs and Cumulative %-age of affordable revenue from table E4.2 to judiciously/prudently form 4
Consumer Groups based on %-age of Nr. Of HHs in the group and %-age of affordable revenue contribution.
For the Example town, for the first 5 years tariff, Wt-aff was computed in Sheet 1.f table D.10 to be = Birr 4.83/m 3 At the UAP target the Band
Thus the tariff band would ba as shown in thable E.4.4.4 below Blocks and Band Tariff seem
to agree very much with the
affordability at 3% of Income.

Table E4.4.4.Progressive Tariff band for the 1st 5yrs of the Example
town; assume avg. consumption @20 lpcd (to be obtained from real data
if possible)
Band At
Block 20lpcd/Hh Band Block Band
factors in equivalent Income (m3)..Upper Block
Band facto Band Tariff (b.b.f) m3/month llpcd Bill for avg class boundary (m3)
Band-4 0.5 2.41 43% 1.54 8.57 3.73 124.17 1.54 (0-1.54] This figure is 22.35/.03; It
Band-3 1.5 7.24 29% 1.03 14.29 7.45 372.52 2.57 (1.54-2.57] shows that for the target
Band-2 2 9.66 21% 0.77 18.57 7.45 620.87 3.34 (2.57-3.34] consumption by year 2012,
Band-1 3 14.49 7% 0.26 20.00 3.73 745.04 >3.34 >3.34 income class below Birr
Wt-aff-1 4.83 745 would have to use the
public taps to get target
Sum of consumption.
Band
Factors 7 100% 3.60 22.35 745.0432

4.6: Further revenue data need be analyzed from water sales source documents/bills for assigning the incremental tariffs to incremental consumption
quantities.
Lowest tariff Wt4 is for zero m3 to next incremental step. In the above example it is Zero to 1.54m 3.
The steps should be set in such a way that total affordable revenue is raised using the progressive tariff.
4.7: It should be noted that public tap users would need to be at flat rate at the lowest rate ideally but this might be increased based on revenue analyses
from different mode of connections including the public tap. For the example case the public tap rate would be Birr 2.41/m 3.
4.8: Note that The tariffs in the lowest band should be checked for covering the Operation and Maintenance Cost. This requirement is stpulated
in the Water Policy. O& M costs could be obtained from the financial analyses component of the Business plan.
arget the Band
Band Tariff seem
much with the
t 3% of Income.

s figure is 22.35/.03; It
ows that for the target
nsumption by year 2012,
ome class below Birr
5 would have to use the
blic taps to get target
nsumption.
Sheet-1.i: Determination of Affordability Level as a Function of Income and Willingness to Pay
E: Converting Flat tariffs to Progressive Tariffs on a 4-band system. (contd. From sheet 1.h)

E4.4: Analyze/Interprete %-age of Cumulative HHs and Cumulative %-age of affordable revenue from table E4.2 to judiciously/prudently form 4 Consumer Groups
based on %-age of Nr. Of HHs in the group and %-age of affordable revenue contribution.
E4.4.1: The top 10% (100-90) of the population contribute nearly 30% (100-72) of the affordable revenue. CONSIDER this Band-1

E4.4.2: The next to top 10% (90-80) of the population contribute nearly 20% (72-51) of the affordable revenue. CONSIDER this Band-2

E4.4.3: The 3rd from top 10% (80-70) of the population contribute nearly 15% (51-36) of the affordable revenue. CONSIDER this Band-3

E4.4.4: The last 70% (70-0) of the population contribute nearly 35% (35-0) of the affordable revenue. CONSIDER this Band-4

E4.5: The progressive tariff structure would then be worked out using the following formula: ………… Wti=[(%-age
contribution of affordable revenue)/(%-age of the contributing population)]*Wt-aff……………………… Note: Wt-aff are the flat tariff fixed in sheet 1.f.(Table
D.10)........................................................................................... For the example town: Tariff fo Band-1, Wt-1= (0.3/0.1)*Wt-aff i.e, Wt-1=3 times Wt-aff; For Tariff
Band-2: Wt-2= (0.2/0.1)*Wt-aff i.e. Wt-2=Twice the Wt-aff; For Band-3, Wt-3=(0.15/0.1)*Wt-aff; i.e Wt-3= 1.5 times Wt-aff and likewise Wt-4= (0.35/0.7)*Wt-aff; i.e Wt-
4=Half the Wt-aff. Note that band tariff factors (b.t.f) progressively increase from the lowest band: i.e Lowest band (Band-4) has a b.t.f of .5, Band-3---a b.t.f of 1.5,
Band-2 ..a b.t.f of 2 and Band-a a b.t.f of 3. : Note: Band tarif factors (b.t.f are ratio of Band tariffs to the Flat Tariff.
Band Block Factors: These are %-ages of average consumption to be used to determine volumes of water in each band;
the calculation is shown in table E4.4: The ratio between the Band Tariff factors (b.b.f) is applied in a reverse way to get the Band Block Factors (b.b.f).
Sheet-1.h: Determination of Affordability Level as a Function of Income and Willingness to Pay
Table E4.2: Working out progressive tariff (example town bsed on the 3% wt-aff %-age)

Income bracket (0-200] (200-400] (400-600] (600-800] (800-1000] (1000-1200(1200-1400>1400

HH Nr. 875 500 375 250 125 125 125 125
Cumulative HH 875 1375 1750 2000 2125 2250 2375 2500

%-age of
Cumulative HH 35% 55% 70% 80% 85% 90% 95% 100%
affordable
revenue per
income
bracket/yr 31500 54000 67500 63000 40500 49500 58500 63000

Cumulative aff-
revenue under
and within
income bracket
per year 31500 85500 153000 216000 256500 306000 364500 427500

Cumulative %-
age of aff-
revenue under
and within
income
bracket per
year 7% 20% 36% 51% 60% 72% 85% 100%

Go to Sheet 1.I
Sheet-1.g: Determination of Affordability Level as a Function of Income and Willingness to Pay
E: Converting Flat tariffs to Progressive Tariffs on a 4-band system.
E.1: In table D.10 of Sheet 1.f note that the Wt-affs are flat through all levels of consumption and types of connections.
E.2: A Social tariff based on equity would serve the social objective of making sure that low income population have access to clean water. A
cross-subsidy across various consumer groups can be devised to serve the purpose.

E.3: An incremental band structure (Stepped-tariff or Progressive tariff) with low tariff for the bottom band (lower quantity consumption) and
progressively increasing tariff with higher consumption can be set following the methods given in E.4 below:

E.4: One method of fixing progressive tariff blocks (Eskinder's);

E4.1 Assumptions: 1. Tariff Increase every 5-year B-plan for the example town; For a 10 year design period this would mean one tariff block for
the first 5 years and another for the second 5-years. ................................................................................................................ 2. Mobility
across income brackets is assumed neutralized by population increase. Therefore, proportion of population within income brackets do not change
although the population in total and in each bracket keep increasing ................................................................... 3. Planned water
demand for the example town is reduced to Planned Revenue water for simplicity. Otherwise the planned water demand should comprise all the
demand components including Non Revenue Water(NRW) as indicated in Sheet-2 Logical and Computation Steps for Cost Effectve Design part
c) water demand forecasting. .................................................................................................................... 4. Cross subsidies are more effective
if in addition to consumption quantity, mode of connection is also considered. Public water points should have the lowest tariffs. ..........
E 4.2: Workout cumulative %-age of HHs within or below each income bracket in ascending order. See table E4.2 on Sheet 1.h for the exmple
town
E 4.3: Workout cumulative %-age of affordable revenue for each cumulative %-age of HH within or below each income bracket in ascending
order. See table E4.2 on Sheet 1.h for the exmple town
Sheet-1.f: Determination of Affordability Level as a Function of Income and Willingness to Pay
D.10: Spread sheet Showing how to calculate Wt-aff-1 and W-t-aff-2 is given in Table D.10 below

Table D.10: Spread sheet Showing how to calculate Wt-aff-1 and W-t-aff-2 (town example for Wt-aff %-age of 3%)
Y0 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10
Population 15000 15600 16224 16873 17548 18250 18980 19739 20529 21350 22204
Planned percapita
water consumption
(lpcd) 5 6.6 8.7 11.5 15.2 20.0 21.0 22.1 23.2 24.3 25.5
aff-rev 427500 466830 509778 556678 607892 663818 724890 791580 864405 943930 1030772

Wc-planned (m3/yr) 27375 37566 51552 70744 97081 133223 145480 158864 173480 189440 206868

SUM of Wc-
planned(1-5) (m3/yr) 390167
SUM of Wc-
planned(6-10)
(m3/yr) 874132
SUM of aff-rev (1-
10) 7160573
Computing constant growth rate (r) of percapita demand to achieve the UAP target

Constant
growth rate
Base year percapita Projection required ( r Wt-aff-1 Wt-aff-2
demand(lpcd) years(yr) Target lpcd ) (Birr/m3) (Birr/m3)
5.00 5.00 20.00 0.32 4.83 6.04
Table D.11: Forecasting required yield at source and partial Investment planning
Reqd. yield at
Source (l/s) 1.43 1.97 2.70 3.70 5.08 6.97 7.61 8.31 9.08 9.91 10.82
Existing supply
capacity at
source(BH) (l/s) 2.50
Planned source
augumentation 2.00 6.50
Source type BH (Spring-ISI) New BH
Sheet-1.e: Determination of Affordability Level as a Function of Income and Willingness to Pay
D: Setting tariff which is affordable and checked for Willingness to Pay (Wt-aff checked for Wtp)

Note: First flat rate Wt-affs are worked out. (D in Sheet 1.e and 1.f deal with this). Then progressive tariff structure can be computed to serve
equity. (See E on Sheet 1-g). Finally the progressive tariff structure can be checked for Social Tariff policy (coverage of atl east O&M expense)
D.1: Get stream of annual affordable revenue (aff-rev) at the affordability-levels of 3%,4% and 5% (see table c7.1,c.7.2, c.7.3)
D.2: For the example town assume tariff is adjusted upwards every B-Plan years of say, 5 years. A design period of 10 years would then see two
affordable tariffs (Wt-affs); say Wt-aff-1 and Wt-aff-2. The adjustment in here is by 25% upwards. I.e. Wt-aff-2=Wt-aff-1*1.25

D.3: Get a stream of planned annual water consumption (Wc-planned) based on the minimum standards & UAP target by 2012. Baseline survey
has revealed for the exmple town that the base year service level of the example town does not meet minimum standards &/or UAP targets. The
percapita water consumption is to be raised to 20 lpcd by 2012. i.e. 5 years away from the base year of 2007. A constant rate of increase in lpcd
is presumed. From year 2013 onwards percapita water consumption is assumed to increase equal to the assumed income growth rate of 5% per
annum until year 10. (i.e the year 2017).
D.4: Minimum quality standards need be met from the beginning but quantity and accessibility standards may beed to be met as per UAP.

D.5: Wt-aff-1 and Wt-aff-2 can be determined as follows: Let Wc-planned(1-5) be the sum of the first 5 years consumption stream and Wc-
planned(6-10) be the next 5 years consumption stream. _____________________________________________________________________
Wt-aff-1*Wc-planned(1-5)+Wt-aff-2*Wc-planned(6-10)= SUM of aff-rev.over the 10years>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Wt-
aff-1*Wc-planned(1-5)+1.25*Wt-aff-1*Wc-planned(6-10)= SUM of aff-rev.over the 10years>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Wt-aff-
1*(Wc-planned(1-5)+1.25*Wc-planned(6-10))= SUM of aff-rev.over the 10years>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>> Wt-
aff-1=( SUM of aff-rev.over the 10years)/(Wc-planned(1-5)+1.25*Wc-planned(6-10) ...........................Eq. D.5
D.6: Get the SUM of aff-rev.over the 10years from table c.7.1, c.7.2 and c.7.3 for the various Wt-aff %-ages.
D.7: Get the first 5 years stream of planned consumption from D.3 and sum it up to obtain (Wc-planned(1-5).
D.8: Get the second 5 years stream of planned consumption from D.3 and sum it up to obtain (Wc-planned(6-10).
D.9: Insert the values in D.7 and D.8 in E.q. D.5 to obtain Wt-aff-1. (Go to Sheet 1.f D.10)
Sheet-1.d: Determination of Affordability Level as a Function of Income and Willingness to Pay
c.9: Willingness To Pay (Wtp) might also be captured through thematic survey by direct questions regarding the users willingness to pay for clean
water supply at a level satisfying minimum standards for quality and accessibility for the example town. try to get the Wtp in %-ages of Income for
comparison purposes.
c.10: Minimum standards for quantity need be achieved by 2012 according to the UAP. The current demand could be below or above the minimum
quantity.

c.11: Compare the Wtp obtained In C.9(by Wtp survey), with the values in c.7.1, c.7.2 and c.7.3 by computing likewise for the Wtp %-age. Willingness
to Pay has more to do with KAP (Knowledge-Atitude-Practice) level of the User Community.
c.12: KAP-level of the User Community need be studied and mechanisms/interventions to raise the KAP-level need be planned to increase Wtp in a
case where it is less than the Wtp-affs.
c.13: Note that Willingness to pay and affordability can show different figures. Where Wtp is less than Wt-aff KAP level improvement-interventions
need be designed and implemented. On the otherhand if Wtp> Wt-affs then Wtp should be taken as the Water Tariff (Wt) basis.
c.14: Note that potentially collectable revenues are indicated by the sum of the affordable revenues (aff-rev as computed in c.7.1, c.7.2 & c.7.3

c.15: Projecting affordable revenues for each year of the 10 year planning horizon and the base year. Table c.15 presents a stream of affordable
revenue (aff-rev) based on the Wt-aff-%-age of 3%. (trainees may try the same for 4 and 5%). The following assumptions are used: 1: Population
growth rate of 4% per annum. 2: Income growth rate of 5% per annum distributed evenly. 3. Proportions of income distribution remain the same
although population in income brackets increase. 4. Family size remains 6 on the average.

Table c.15: Affordable revenue stream projected over the planning horizon @aff-level of 3%
(Y0) Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10
Nr. Of HH 2500 2600 2704 2812 2925 3042 3163 3290 3421 3558 3701
Aff-Rev (3%) 427500 466830 509778 556678 607892 663818 724890 791580 864405 943930 1030772
Pop. growth
rate 4%
Income
growth rate 5%
Aff-Rev (4%) 570000 622440 679704 742237 810523 885091 966520 1055439 1152540 1258574 1374362
Aff-rev (5%) 712500 778050 849631 927797 1013154 1106364 1208150 1319299 1440675 1573217 1717953
Sheet-1.c: Determination of Affordability Level as a Function of Income and Willingness to Pay
Table c.7.2: Base year monthly and yearly affordable revenue (Aff-rev) in birr by the town and
its user community; @ Wt-aff %-ages of 4%
Income
(Birr/mont
h) (0-200] (200-400] (400-600] (600-800] (800-1000] (1000-1200(1200-1400>1400
Income
median 100 300 500 700 900 1100 1300 1400
HH Nr. 875 500 375 250 125 125 125 125
Aff-rev Town's affordable
(monthly) 3500 6000 7500 7000 4500 5500 6500 7000 47500 monthly revenue
Aff-rev Town's affordable
(annual) 42000 72000 90000 84000 54000 66000 78000 84000 570000 annual revenue
Wt-aff %-
age 4%

Table c.7.3: Base year monthly and yearly affordable revenue (Aff-rev) in birr by the town and
its user community; @ Wt-aff %-ages of 5%
Income
(Birr/mont
h) (0-200] (200-400] (400-600] (600-800] (800-1000] (1000-1200(1200-1400>1400
Income
median 100 300 500 700 900 1100 1300 1400
HH Nr. 875 500 375 250 125 125 125 125
Aff-rev Town's affordable
(monthly) 4375 7500 9375 8750 5625 6875 8125 8750 59375 monthly revenue
Aff-rev Town's affordable
(annual) 52500 90000 112500 105000 67500 82500 97500 105000 712500 annual revenue
Wt-aff %-
age 5%
Sheet-1.b: Determination of Affordability Level as a Function of Income and Willingness to Pay
c) Affordability (Wt-aff) & Willingness To Pay
Some notes:
c.1: Affordability (Wt-aff) can be taken as %-age of income.
c.2: Experience indicates a range of 3 to 5% of income (Wt-aff %-ages)as affordable household expense for clean water.
c.3: Where alternate traditional drinking water sources other than piped water do not exist people buy water from vendors at quite high rate. This
does not tell affordability. For the example town there is an unprotected spring with yield=2.0l/s.
c.4: Where alternate traditional drinking water sources other than piped water exist, people not having connections to piped water might pay s to
vendors of piped water higher ratess than tariffs set by utilities. This may indicate Willingness To Pay (Wtp)

c.5: Get the rates in c.4 (Wtp) as %-ages of Income of the non-piped water users. Compare this with the %-ages in c.2 (Wt-aff %-ages); If the Wtp
%-ages exceed 5% of income, high level of affordability is indicated.
c.6: For our example town of 2500 HHs let's calculate base year (Year Zero, Y0) revenue from water sales at the 3 affordability %-ages. See table
c.7.1, c.7.2 and c.7.3. For the 3%, 4% and 5% Wt-aff %-ages respectively.
Table c.7.1: Base year monthly and yearly affordable revenue (Aff-rev) in birr by the town and
its user community; @ Wt-aff %-ages of 3%
Income
bracket
(Birr/mont
h) (0-200] (200-400] (400-600] (600-800] (800-1000] (1000-1200(1200-1400>1400
Income
bracket
median okey to
value 100 300 500 700 900 1100 1300 1400 take 1400
Nr. of
Househol
ds 875 500 375 250 125 125 125 125
Aff-rev Town's affordable
(monthly) 2625 4500 5625 5250 3375 4125 4875 5250 35625 monthly revenue
Aff-rev Town's affordable
(annual) 31500 54000 67500 63000 40500 49500 58500 63000 427500 annual revenue
Wt-aff %-
age 3%