Method for calculation of total production and trading cost of tap water in Vietnam

Tap water pricing principles in Vietnam

Pursuant to Article 2 of Circular 44/2021/TT-BTC, tap water pricing principles are as follows:

- Tap water prices should be calculated accurately and fully take into account all reasonable and legitimate production cost factors arising in the process of abstraction, production, distribution and consumption, and in a profitable manner; should vary according to water quality, economic - technical norms, tap water supply and demand relationship, natural conditions, local and regional socio-economic development conditions, income of local people likely to change over time; should balance lawful rights and interests of tap water suppliers with those of water consumers; should allow for consumers’ economical use of water; should encourage water suppliers to improve their consumer service quality, reduce costs, reduce loss and wastage of tap water, and meet customer needs; should help attract investments in the production and distribution of tap water.

- The average retail prices of tap water decided by the People's Committees of provinces or centrally-affiliated city (hereinafter referred to as provincial People's Committees) must be aligned with the tap water price range specified in Article 3 of Circular 44/2021/TT-BTC. At peculiar areas (e.g., saltwater flooded areas, coasts zones, those areas facing difficulty in water production), in case where, due to the high costs incurred from production, trading and supply of tap water in these areas, the average retail prices of water suppliers whose tap water price plans are reviewed by Departments of Finance are higher than the maximum prices in the price range shown in Article 3 of Circular 44/2021/TT-BTC, the provincial People's Committees shall, based on the actual situation, demand for tap water and local people's income, decide the tap water selling prices accordingly.

Method for calculation of total production and trading cost of tap water in Vietnam (Internet image) 

Method for calculation of total production and trading cost of tap water in Vietnam

Pursuant to Article 5 of Circular 44/2021/TT-BTC, methods for calculation of total production and trading cost of tap water in Vietnamas are as follows:

(1) The estimated total production and trading cost specified in a tap water price plan is calculated on a pro rata basis, according to the planned total production of commercial tap water per annum at a water supplier and the following formula:

CT + CVt + CNc + CSxc + CQl + CBh + CTc + CAt

Where:

CT: Total production and trading cost of tap water (VND);

CVt: Direct material costs (VND);

CNc: Direct labor costs (VND);

CSxc: General production costs (VND);

CQl: General and administrative costs (VND);

CBh: Selling costs (VND);

CTc: Financial costs (VND);

CAt: Water supply safety costs (VND);

- Direct material costs are inclusive of raw materials, fuels, other input materials, engine power, tools and accessories used for directly producing tap water, such as treated water, raw water (applicable to enterprises in need of treated water and/or raw water), electricity, chemicals, other input materials, tools or instruments used for water treatment purposes. Direct material costs are calculated by the product (x) of total amount of input materials consumed and their respective unit prices plus (+) costs of direct input materials purchased (if any), where:

+ The amount of each input material consumed for production of tap water follows regulations and standards for economic - technical norms for production of tap water.

+ The unit price is the purchase price of each input material shown in the invoice or price offer (quotation) that is commensurate with the market price thereof existing at the time of formulation of the tap water price plan. If an input material is listed as the one subject to the state price regulation or control, the cost thereof is the purchase price regulated by the State or the price that an enterprise registers with the state regulatory authority at the time of formulation of the tap water price plan.

+ Costs of direct input materials refer to fair and legitimate expenses paid for carrying input materials to storage facilities of a water supplier (if any).

- Direct labour costs are expenses that a water supplier has to pay to factory workers or workers directly involved in tap water production activities, including wages, salaries, payroll expenses and other expenses (if any) as per applicable law of the State:

+ Labour wages and salaries vary among water suppliers according to amounts of wages, salaries, fringe benefits and other complementary benefits actually paid to factory/direct workers under the provisions of the Labor Code and relevant legal normative documents.

+ Payroll expenses, such as social insurance, health insurance, unemployment insurance contributions, union dues and others (if any), of factory/direct workers are determined according to applicable legislation of the State.

+ Regarding water supply facilities that the State authorizes cooperatives, residential communities or individuals to run or operate, or water supply facilities that cooperatives, residential communities or individuals invest in at their own expense for the purpose of commercial use of tap water, direct labor costs incurred from these facilities are determined on the basis of the agreements reached in the General Meetings of cooperative members, or the agreements between residential communities using water and water suppliers, provided that these costs are aligned with amounts of wages or salaries paid to workers performing production and business activities managed and controlled by local cooperatives, residential communities and individuals, and conform to State law in force.

- General production costs are expenses paid for general production and business activities, in addition to direct material costs and direct labor costs incurred at water suppliers, such as depreciation and repair of fixed assets, materials, tools and instruments intended for workshops, testing, trial and experimentation activities in line with tap water standards, outsourced services, labor costs paid to workshop staff and other monetary expenses as prescribed in current legislation of the State pertaining to tap water production and trading activities.

+ Costs of testing, trial and experimentation of the quality of tap water are determined on the basis of the frequency of testing, trial or experimentation decided by competent state agencies.

+ Fixed asset depreciation expenses conform to the Ministry of Finance's regulations on management, use, and depreciation of fixed assets and other relevant legal normative documents. If a project licensed to supply tap water by a competent state authority has not yet finalized total investment costs, fixed asset depreciation expenses included in the tap water price plan shall not exceed those specified in the approved and adjusted cost estimate as part of total tap water production and trading cost of the following pricing period (if there is any difference).

+ Material costs and labor costs included in general production costs shall be subject to the regulations laid down in point a and b of this clause.

- Administrative costs are general or overhead expenses of an enterprise such as office supplies, labor tools, depreciation, repair of fixed assets used for business management, taxes, fees and charges, provision for doubtful debts, outsourced services, labor costs and other monetary expenses such as receptionists, transactions, scientific researches, technological innovation researches, initiatives, innovation, education, training, health care for staff members, expenses for female employees and other administrative expenses in accordance with the State’s legislation currently in force.

Material, labor and depreciation expenses included in general and administrative costs shall be subject to the regulations laid down in point a, b and c of this clause.

- Selling costs are expenses incurred in the process of selling products, goods and providing services such as investment in synchronous infrastructure stretching from water meters and other ancillary equipment in the water supply network of water suppliers to connection points with water consumers, unless otherwise agreed upon by the parties; advertising, outsourced services, connection maintenance, provisions for obsolete inventories, labor and other expenses in accordance with the State’s legislation currently in force.

The number of water meters expected to increase in the pricing period is determined by the average number of consumers actually increased in three years immediately preceding the year of formulation of the tap water price plan.

With respect to a water supply project recently put into operation, the number of water meters installed at connection points in the pricing period is determined on the basis of the number of water supply service contracts already in effect and the number of consumers expected to increase in proportion to the increased average number of connections of water suppliers in the same area (i.e. a city or a rural area; or the average number of connections at multiple areas if the water supplier operates in both cities and rural areas) according to the latest approved tap water price plan.

Connection maintenance costs are expenses paid for operation and maintenance of connectors already in place in order to assure the quality of water supply services to meet consumers' demands. These costs shall be charged to tap water production and trading costs upon receipt of all invoices and evidencing documents under legislation on taxes.

Material, labor and fixed asset depreciation expenses included in selling costs shall be subject to the regulations laid down in point a, b and c of this clause.

- Financial costs are expenses paid for interest on loans or losses incurred due to exchange rate differences (if any) that are directly associated with tap water production and business activities, and are determined on the basis of the loan repayment plan.

The amount of interest cost on construction loans calculated as part of the tap water price plan must correspond to the actual loan amount and not exceed 65% of total investment cost approved by the competent regulatory authority.

- Water supply safety costs are expenses paid for activities aimed at mitigating, eliminating and preventing any risk likely to threaten the safety of supply of water from source water at all stages of water abstraction, treatment, storage and distribution to consumers.

Material, labor and fixed asset depreciation expenses (if any) included in water supply safety costs shall be subject to the regulations laid down in point a, b and c of this clause. Costs and expenses on which limits have not yet been set shall be calculated as the average of the realized costs incurred in 03 years immediately preceding the year of formulation of the tap water price plan.

(2) Principles for determination of the aggregate cost

- The aggregate cost of production and trading of tap water is determined on the basis of fair and legitimate expenses and conforms to economic - technical norms that the Ministry of Construction, the Ministry of Agriculture and Rural Development, and provincial People’s Committees, issues and enforces under their respective authority (applicable to costs or expenses on which limits are already set).

- Fair and legitimate cost factors which are cost factors related to tap water production and trading activities must be qualified as deductible expenses used as a basis to calculate taxable income in accordance with corporate income tax law; must assure production and business efficiency; and must be exclusive of expenditures guaranteed by the state budget. Expenses unrelated to tap water production and trading activities shall not be included in the aggregate cost.

- General or overhead costs and expenses incurred from various business lines of a water supplier shall be divided in proportion to the average of sales or revenues generated in 03 years immediately preceding the year of formulation of the tap water price plan. A newly-run water supplier that does not have previous-year sales or revenue data shall divide general or overhead costs and expenses paid for its various business activities according to the planned sales or revenue ratio.

- If unlimited costs and expenses that are already taken into account when calculating the tap water price specified in the tap water price plan as a basis to set the current tap water price are not increased; or the realized value thereof is lower than expected, during the period when the planned price is in effect, deductions from the aggregate cost of tap water production and trading shall be granted in the subsequent pricing period.

Mai Thanh Loi

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