www.salga.org.za 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 www.salga.org.za 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 www.salga.org.za 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 www.salga.org.za 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 www.salga.org.za 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. www.salga.org.za 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 www.salga.org.za 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) www.salga.org.za 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 www.salga.org.za Theoretical structure of benchmarks Cost benchmark = Cost of specific activity Technical indicator of scale of activity www.salga.org.za 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 www.salga.org.za 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 www.salga.org.za 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 www.salga.org.za 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 www.salga.org.za 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 www.salga.org.za 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 www.salga.org.za 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 www.salga.org.za 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 www.salga.org.za 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 www.salga.org.za 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 www.salga.org.za 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 www.salga.org.za 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 www.salga.org.za 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 www.salga.org.za 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 www.salga.org.za 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 www.salga.org.za 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 www.salga.org.za 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