Download Cost of Municipal Services: `Best practice`

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Cost of Municipal Services :
‘Best practice’ benchmarking of
operating costs
www.salga.org.za
Presentation outline
• Background and objectives
• Methodology
• Theoretical background to cost benchmarking
• Status report
• Preliminary findings
• Implications and points of discussion
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Objectives
• Establish a costing framework/methodology of
assessing costs for each of the selected services so
that local government may compare and benchmark
costs for each service and context
• Verify the accurateness of the available cost
estimates using data from a sample of
municipalities for each of the selected services from
a municipal perspective
• Produce a set of national benchmarks of the cost of
services in rural and urban context
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Methodology: sectors
Full analysis (well established functions)
• Water supply `
• Sanitation
• Solid waste management
• Roads and stormwater management
• Electricity distribution
Summary analysis (partial establishment)
• Municipal public transport
• Municipal environmental management responsibilities
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Methodology: process
Theoretical
framework for
assessment of
operational costs
Meeting with
municipal officials for
data collection
Collating national
data sets
Assessment of costs
Verification of cost information
Develop structure appropriate
for cost benchmarking
Derive preliminary benchmarks
SALGA
workshop
Cost Indicators
and
benchmarks for
monitoring
operational
costs
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Nature of ‘best practice’
benchmarking
• Most important criterion is that the function needs to be
properly established, with a track record, and the
municipalities must represent ‘best practice’ as far as
possible
• This needs to be contrasted with ‘zero based’ costing
where the emphasis is on developing a cost for providing
a service in situations where best practice does not exist.
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Case studies
Eastern Cape B3
0%
Free State B3
Mpumalanga B2
Gauteng B3
13%
15%
Case studies
21%
4%
40%
3%
60%
76%
80%
87%
1%
Limpopo B1
Metro
Western Cape
B1
Eastern
Cape B3
0%
10%
13%
19%
18%
42%
17%
53%
64%
4%
Urban formal
87%
Urban informal
72%
Rural
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Factors influencing costs
• Service provider responsibility: the extent to which the municipality
itself provides:
– Understand bulk water supply arrangement
– Role of Eskom as a service provider
• Consumer profile: mix of low income residential, high income
residential and non-residential consumers
• Levels of service
• Settlement pattern: urban/rural mix; single/multiple settlements
• Scale and topography
• Age of system and condition of assets (higher maintenance costs)
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Cost structure
Focus on operating account
Overheads
Finance charges
Portion of municipal governance,
administration and planning costs
Cost of capital (interest), bad debt,
depreciation, contribution to capital reserve
Customer management
Metering and billing
Bulk costs
Mainly payments to Eskom and water
boards
Maintenance cost
Operating costs
Material and plant running costs
for repairs and maintenance,
departmental employee costs
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Theoretical structure of
benchmarks
Cost benchmark
=
Cost of specific activity
Technical indicator of scale of activity
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Criteria for benchmarks
• Data needs to be readily available or easily accessible
• Data sets need to be uniform across municipalities
• Cost elements and technical elements need to be well
defined
• Technical elements need to have a direct and rational
relationship to the main cost driver of the cost incurred
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Data challenges
• Municipal engagement ranged from in-depth
engagement to assessment of public documents only
• Inconsistent accounting practices – costs not ‘ringfenced’ by activity
• Centralised costs not distributed to line departments
• Technical data not captured consistently or not
known
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Water indicators
Component
Calculation
Unit
Comment
(Cost of bulk purchases + cost of bulk
treatment) / Volume of water sold
R / kl sold
Factors in water losses
All other direct water costs / km of
pipeline, OR
R / km
Pipeline length often
unknown
Distribution
cost
All other direct water costs /
(households with house connections
and yard taps + α*households with
standpipes +β*non-residential
consumers)
R/
equivalent
connections
Equivalent factors up for
debate
Metering
and billing
Cost of metering and billing / number
of connections
R/
connection
Not often separated out, or
accounted for under finance
departments
Finance cost
(Interest + depreciation + bad debt) /
number of connections
R/
connection
Overheads
Municipal governance, planning and
administration costs / number of
connections
R/
connection
Bulk cost
Distributed to each service
by proportion of operating
expenditure
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Water results
A
B1
Western
Cape
B3
B2
Gauteng
5.64
4.84
101,529
WATER
B1
B3
Mpumalanga
B3
Eastern
Cape
Limpopo
Free State
6.58
1.06
-
-
-
57,908
81,843
251,751
-
-
Bulk cost
R/kl sold
Distribution cost
R/km
Distribution cost
R/equivalent
connections
1,609
1,275
1,383
261
1,618
2,265
1,276
Metering and
billing
R/connection
793
61
-
36
-
-
924
Finance cost
R/connection
940
699
1,177
481
114
-
-
Overheads
R/connection
1,459
640
975
565
420
433
170
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Sanitation indicators
Component
Bulk cost
Collection
cost
Metering
and billing
Calculation
Unit
Comment
(Effluent charges+ cost of bulk
treatment) / Volume of water treated
R / kl treated
All other direct sanitation costs / km
of pipeline, OR
R / km
Pipeline length often
unknown
All other direct water costs /
(households with waterborne
sanitation + α*households with onsite sanitation +β*non-residential
consumers)
R/
equivalent
connections
Equivalent factors up for
debate
R/
connection
Not separated out, or
included in water bill, or
accounted for under finance
departments
Cost of metering and billing / number
of connections
Finance cost
AS FOR WATER
Overheads
AS FOR WATER
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Sanitation results
A
SANITATION
B1
Western
Cape
B3
B2
B1
B3
Mpumalanga
B3
Eastern
Cape
Gauteng
Limpopo
Free State
3.10
1.90
2.80
-
-
-
-
-
Bulk cost
R/kl treated
Collection cost
R/km
Collection cost
R/hh w/b
542
590
751
101
758
431
-
Billing
R/connection
51
-
-
-
-
-
-
Finance cost
R/connection
94
1,034
265
333
-
-
-
Overheads
R/connection
329
618
505
412
240
510
-
1.54
45,583
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Electricity indicators
Component
Calculation
Unit
Comment
Bulk
purchases
(Amount paid to Eskom) / Amount of
electricity sold
R / kWh sold
Factors in distribution losses
Distribution
cost
All other direct electricity costs /
(households served by municipality +
αnon-residential consumers)
R/
equivalent
connections
Equivalent factors up for
debate
Metering and
billing
AS FOR WATER
Finance cost
AS FOR WATER
Overheads
AS FOR WATER
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Electricity results
A
ELECTRICITY
B1
B3
B2
B3
B1
B3
Western
Cape
Gauteng
Mpumalanga
Eastern
Cape
Limpopo
Free State
Bulk cost
R/kWh sold
0.60
0.67
-
1.42
1.30
-
0.93
Distribution cost
R/equivalent
connections
2,444
2,836
1,712
3,393
1,546
-
276
Metering and
billing
R/connection
-
-
-
-
-
-
-
Finance cost
R/connection
797
1,782
563
56
191
-
186
Overheads
R/connection
2,761
3,113
2,682
4,236
2,008
-
2,818
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Roads and stormwater
indicators
Component
Calculation
Unit
Comment
Roads
operations
Roads direct costs / total length of road
network
R / km
Often includes transport
expenditure and
stormwater
Stormwater
operations
Stormwater direct costs / total number of
households
R / hh
Will be highly variable
Finance cost
(Interest + depreciation + bad debt) / total
length of road network)
R / km
Overheads
Municipal governance, planning and
administration costs / total length of road
network)
R / km
Distributed to each
service by proportion of
operating expenditure
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Roads and stormwater
results
A
ROADS &
STORMWATER
B1
B3
B2
B3
B1
B3
Limpopo
Free State
Western
Cape
Gauteng
Mpumalanga
Eastern
Cape
Roads operation
cost
R/km
68,734
48,717
26,775
-
41,945
27,826
-
Stormwater
operations cost
R/hh
-
197
-
-
42
-
-
Finance cost
R/km
65,595
90,866
16,236
-
-
-
-
Overheads
R/km
51,352
37,997
12,838
-
14,088
8,786
-
Solid waste indicators
Component
Transfer
and
disposal
Collection
Calculation
Unit
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Comment
Cost of transfer stations and landfills / R / ton
Mass of waste landfilled
landfilled
Data for transfer stations not
readily available
Collection costs / mass of waste
collected, OR
R / ton
collected
Collected mass not often
recorded
R / equivalent
households
Equivalent factors up for
debate
Collection costs / (households with
kerbside collection+ α*households
with communal collection+β*nonresidential consumers)
Recycling
Recycling cost / mass of waste
recycled
R / ton
recycled
Public
cleansing
Public cleansing cost / Length of
paved road network
R / km
Finance
cost
(Interest + depreciation + bad debt) /
number of res + non-res consumers)
R / consumer
Overheads
Municipal governance, planning and
administration costs / number of res + R / consumer
non-res consumers)
Distributed to each service
by proportion of operating
expenditure
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Solid waste results
A
WATER
B1
Western
Cape
B3
B2
B1
B3
Mpumalanga
B3
Eastern
Cape
Gauteng
Limpopo
Free State
Collection cost
R/ton collected
276
137
461
-
-
-
-
Collection cost
R/equivalent
service point
61
47
-
-
-
-
-
Transfer and
disposal cost
R/ton landfilled
558
596
341
418
336
-
901
Recycling cost
R/ton recycled
699
181
-
-
-
-
-
Public cleansing
cost
R/km paved road
23,605
1,382
-
-
-
-
-
Finance cost
R/hh and non-res
customers served
17
229
-
409
224
-
-
R/hh and non-res
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Environmental management
Case study
Metro
Annual expenditure (R/hh)
165
Western Cape B1
58
Gauteng B3
158
Mpumalanga B2
Eastern Cape B3
735
Limpopo B1
116
Free State B3
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Public Transport
Case study
Metro
Annual expenditure (R/hh)
473
Western Cape B1
Gauteng B3
Mpumalanga B2
Eastern Cape B3
Limpopo B1
Free State B3
136
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Cost recovery through tariffs
A
Ratio of revenue
from service
charges to total
operating cost
B1
B3
B2
B3
B1
B3
Limpopo
Free State
0.18
Western
Cape
Gauteng
Mpumalanga
Eastern
Cape
Water
0.65
0.71
0.44
0.60
0.75
0.62
Sanitation
0.73
0.56
0.43
0.41
1.20
0.75
Electricity
1.00
0.88
0.66
0.33
0.83
0.77
0.57
Solid waste
0.47
0.75
0.90
0.32
0.61
0.80
0.30
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Preliminary Findings
• Cost accounting practice is too inconsistent at present
to cost benchmark properly
• While some patterns emerge, insufficient data is
available on a consistent basis to be able to benchmark
operating costs accurately
• Significant data cleaning and follow up is required
• Existing benchmarks should be interrogated thoroughly
• Cost benchmarks are highly variable between
municipalities, even of similar type
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Preliminary recommendations
• Use indicators to feed into the Standard Chart of
Accounts project being undertaken by National Treasury
• Use existing technical forums to agree on technical
indicators and definitions thereof
• Increase data set to improve accuracy of the
benchmarks
• Cost benchmarks need to be analysed with an
understanding of the context in which they were
developed, which can explain a lot of the variability