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UNIVERSITY OF ZIMBABWE

DEPARTMENT OF CIVIL ENGINEERING

CE406: COSTING AND WATER PRICING

Dr. Eng. M. J. TUMBARE

March 2020
REFERENCES/RECOMMENDED READING

1. Moncur J. E. T. & Pollock R. C., 1988, Scarcity Rents for Water: A


valuation and Pricing Model, Land Economics Vol. 64 No. 1
2. Civil Engineering : Estimating and Costing
http://www.indiabix.com/civil-engineering/estimating-and-costing/
3. Estimator™ 2.0 http://www.estimator.in/
4. Dutta B. N. And Dutta S., 2012, Estimating and Costing in Civil
Engineering ,  UBS Publishers, New Delhi
5. Garg S. K., 2014, Irrigation Engineering and Hydraulic Structures,
Khanna Publishers

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COURSE OBJECTIVES
1. UNDERSTAND THE DIFFERENCE BETWEEN COST
AND PRICE
2. UNDERSTAND WHY WE HAVE TO ASSESS THE
COST OF WATER FOR A PROJECT
3. CALCULATE UNIT COSTS OF WATER

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COSTING & WATER PRICING

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COST vs. PRICE
If you ask most people about cost and price they believe they
understand exactly what is meant.
• Cost is what you pay for an item
• Price is what the seller demands
• Cost and Price are different to different players in a transaction
• There is the cost of creating, developing, producing,
marketing, supporting, distributing, storing, and selling an
item.
• There is the retail or list, wholesale, sale, or discounted price
at which the item is sold and which the purchaser finally pays.

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WATER COSTING
Water Costing
• The major determining factor in the choice of type of hydraulic
structure to be constructed for a particular purpose is the cost
of the Project. For the storage and conveyance structures
(dams and pipelines) it is possible to measure the cost of the
Project against the yield of the Project.
• The Financial Cost is the cost of making the water available to
the consumer. It is the sum total of capital and operational
costs.
• The price of water should be such that at least the financial
costs of the Project are recovered. If water is priced below the
financial costs then someone must subsidize the Project
otherwise the Project will fail.
Costing & Water Pricing - Dr. Tumbare March 2020 6
WATER COSTING (CONT…)
• Water, wastewater and storm water infrastructure has
been traditionally costed from either a capital or
operating cost point of view.
• Life cycle costing involves combining the estimated
capital, maintenance, operating and replacement
costs over the whole life of an infrastructure facility
into a single value, which takes into account
expenditure occurring at different stages in the life of
the infrastructure.

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WATER COSTING (CONT….)
• The Economic Costs include other costs
indirectly associated with the Project and
Opportunity Costs in addition to the Financial
Costs.
• Opportunity cost is the value of the
alternatives or other opportunities which have
to be forgone in order to achieve a particular
objective. Opportunity costs reflect the scarcity
of the resource.  
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WATER PRICING

Water Pricing
In costing water, consideration must be made of the sustainability
of the pricing policy. The price of water should reflect financial
costs, economic costs, the economic value of water and the
consumer’s willingness to pay.
• Some users will be willing to pay quite large sums of money
above the economic costs of water as long as they are
guaranteed a reliable supply. The extra amount of money that
they are willing to pay is what is termed the consumer’s
willingness to pay. It is measured through considering the price
elasticity of demand.

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WATER PRICING (CONT…)
• Water utilities are under significant financial
pressure as a result of;
– increasing urbanisation
– Deteriorating infrastructure
– Increasingly stringent drinking water quality
regulations
– Recurring droughts
– Difficulty of developing new sources of supply
– Poorly designed water tariffs resulting in
insufficient revenues to cover costs
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WATER PRICING SYSTEM PRINCIPLES
PRINCIPLES:
• Water consumers are often undercharged for the water they
use, which leads to wasteful water use.
• The capital and maintenance costs of the water system should
be passed on to consumers in proportion to water usage,
hence charged as a per-unit fee, not charged as an access fee
regardless of water usage.
• If consumers pay a large, fixed access fee, and minimal
ongoing per-unit fees, then water will be used excessively.
Meanwhile, many consumers, who would use water
minimally but efficiently, may not be able to afford the access
fee, which at low consumption rates drives up the cost per
unit.
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WATER PRICING SYSTEM PRINCIPLES (CONT…)
The main objectives to be reached on the pricing system are the
following :
• balance the budget in order to maintain a good quality of
service and to ensure the sustainability of hydraulic
infrastructures,
• provide users with information about water scarcity through
its price and avoid wastage,
• support the agricultural sector through local subsidies and the
consent of the farmers. The normal way for reaching this is to
negotiate and obtain public support from national or local
authorities, for the investments linked to large infrastructures
(dams, canals, pumping stations).

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WATER PRICING SYSTEM PRINCIPLES (CONT…)
• As a result, the agricultural price of water is discussed
between 3 main actors : the state (including the basin
agency/regulatory authority), the public water utility and
representatives of the farmers.
• The outcome of this negotiation process, that is frequently
bilateral, is a design from the demand side or the supply side;
i.e. what the users are willing to pay.
• Low water prices encourage excessive water consumption.
• Higher prices for catchment water favour water re-cycling.
• Subsidies for catchment water discourage water re-cycling.
• If water re-cycling is implemented widely, this would do much
to conserve often limited catchment water supplies.
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WATER PRICING SYSTEM PRINCIPLES (CONT…)
• In Zimbabwe, it has been possible to keep water prices low
because neither the costs of taking the water from the
environment nor of protecting the catchments from which it is
collected are required to be included in the current "full cost
recovery" pricing regimes.
• Similarly, the costs of storm water runoff are not attributed. A
block of land covered with impervious surfaces such as roofs
and car parks is charged no more in drainage fees than a
similar sized block with a large garden and minimal runoff.
• In many situations the first objective of the Public water utility
is to balance its budget through water pricing. This is
particularly true when there are large hydraulic works that
induce high fixed costs as they have been designed to meet
long term water demands.
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WATER PRICING SYSTEM PRINCIPLES (CONT…)
Supply
• The price of water is derived normally from the cost , namely for
Projects that are managed by water user associations.
• Using an average cost, a blend price is the usual way to establish the
rate of subsidy for an investment for public and /or local authorities.
• From the total financial cost and the life duration of the
infrastructure, an annual average cost per hectare is derived and
compared to the willingness to pay from farmers, taking into account
cropping patterns and some market conditions.
• Secondly, the water user association keeps this rationale of average
cost and defines a blend water price in light of the different
situations, age and location of projects. This type of pricing is really
easy to understand and to present to the members.

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WATER PRICING SYSTEM PRINCIPLES (CONT…)
Demand
Price sensitivity and the demand for agricultural water
• Water pricing will not always be a sufficient incentive for users to enhance
water use efficiency.
• This is the case when price elasticity for water demand is close to nil,
– e.g. when the water bill accounts for only a small proportion of the farmers’ total
production costs or income;
– when alternative ways of growing crops or water resources are not available, due to
technical, social or economic constraints;
– when the bulk of the total water charge consists of fixed costs.
• Beyond these factors influencing the sensitivity of demand for water which
have been well documented in the literature, we come back to the trade-
off position where farmers are faced with the decision to irrigate or not.

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WATER PRICING SYSTEM PRINCIPLES (CONT…)

• For all uses except irrigation, pricing is trinomial


with;
– (i) a fixed part depending on the maximum subscribed
flow,
– (ii) a volumetric part depending both on the consumption
in the peak period (4 months in the summer period)
– (iii) a volumetric part outside the peak period.
• For irrigation, because of the varying seasonal
rainfall, the water pricing is, as a consequence,
binomial

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WATER PRICING SYSTEM PRINCIPLES (CONT…)
• For the implementation of these water pricing principles, the
“development cost” is defined as follows. It is the sum of :
– The fixed costs related to building new infrastructure (dams,
canals and main distribution works) to satisfy an additional
unit of water demand when works are beyond capacity,
– The variable costs including operational costs (energy,
wages ...). 
– Finally, the total cost depends on the discounting rate used
for the investments and on estimation of the date when
demand will meet the available water resources.
• This means that this approach is not only based on supply
analysis but also takes into consideration the demand side.

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UNIT COST OF WATER: EXAMPLE 1 (CONT…)

The Capital (Project Cost) Recovery Factor (CRF)


can be calculated from the equation;
CFR = r(1 + r)n
(1+r)n – 1
Where
r = Interest rate per annum
n = Number of years to pay back the Capital
(Project Cost)

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Break-even Chart

Sales

o fit
Break-even Pr
Sales Break-even Point
$
Total Cost
Variable Costs

s
Los
Fixed Costs

Break-even Output

% of Capacity Output

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UNIT COST OF WATER: EXAMPLE 1
Given the following for a proposed new dam, calculate the unit
cost of the water;
• Project Cost from BOQ is $4 500 000.00
• Interest rate is 6% per annum
• Operation costs for the dam are 0.5% of the Project Cost per
annum
• Maintenance costs for the dam are 1.5% of the Project Cost
per annum
• Dam yield at 4% risk level is 1 000 000 m3 per annum
• Project Cost repayment period is 40 years

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EXAMPLE 1 (Cont...)
Operation Costs = $(0.5/100 x 4 500 000) per annum = $22 500/annum = A
Maintenance  Costs = $(1.5/100 x 4 500 000) per annum = $67 500/annum = B
Capital Recovery Costs = ${0.06 x 1.0640}/[(1.0640 - 1)] x 4500000 per annum
= $299 077/annum = C
Total annual costs = A + B + C = $[22500 + 67500 + 299077] = $389 077/annum
 
Dam’s 4% Water Risk Yield = 1 000 000m3/annum
 
Unit cost of water at 4% Risk Yield Level = $389077/1000000 = 39c/m3

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UNIT COST OF WATER: EXAMPLE 2

A proposed 40 ha citrus irrigation scheme costing a


total of $30 000.00, of which the pumping unit
accounted for $3 000.00, is to be powered by a 37kW
electric motor which delivers 120m3/h. The
application rate is 1460mm per annum. The cost of
1000 units of electricity is $16 and labour is $3.50 per
103m3. Given the above and the following, calculate
the cost of water (inclusive of electricity, labour and
maintenance costs) in dollars per thousand cubic
meters and in cents per cubic meter;
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UNIT COST OF WATER: EXAMPLE 2 (CONT…)

• Volume of water used (103m3) = Depth of water applied (mm)


x Area (ha)
• Electricity cost ($) = {(Average cost of 1000 units (kWh) of
electricity) x Size of Motor (kW)}/ {0.85 x Pump size (m3/h)}
• Maintenance Costs: Take 10% of the pumping unit costs and
add this to 2% of the balance of the Capital Cost of all the
irrigation equipment. Divide this total by a figure obtained
from multiplying the area under irrigation (ha) by a factor “A”.
• Diesel Costs ($) = { 3 x (Average on-farm cost of diesel in cents
per litre) x Size of engine (kW)}/ {Pump size (m3/h)}

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UNIT COST OF WATER: EXAMPLE 2 (CONT…)

• The factor “A” units per 103m3 = 4 for summer irrigation, 6 for
winter irrigation and 10 for all year round irrigation
• The figure 0.85 represents an estimate of the average
efficiency of farm sized electric motors.
• Maintenance Costs cover maintenance and depreciation and
are arbitrary but should be fair.

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UNIT COST OF WATER: EXAMPLE 2 (CONT…)

Electricity Costs = $(16×37)÷(0.85×120) = $5.80/103m3 = A


Maintenance Costs = $[(10%×3000) + (2%×27000)] ÷ (40×10)
= $2.10/103m3 = B
Labour Costs = $3.50/103m3 = C
Total Unit cost of water = A + B + C = $(5.80+2.10+3.50) /103m3
=$11.40/103m3
= 11.40×100 ÷1000 c/m3 = 1.14c/m3

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END OF COSTING AND PRICE OF WATER
LECTURE

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