Post on 09-Feb-2016
description
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Cost of Municipal Services : ‘Best practice’ benchmarking of
operating costs
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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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Meeting with municipal officials for data collection
Cost Indicators and benchmarks for monitoring operational costs
Assessment of costsVerification of cost information Develop structure appropriate for cost benchmarkingDerive preliminary benchmarks
Theoretical framework for assessment of operational costs
SALGA workshop
Collating national data sets
Methodology: process
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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
87%
0% 13%
Eastern Cape B3
40%
1%
60%
Free State B3
80%
4%15%
Gauteng B3
76%
3%
21%
Mpumalanga B2
42%
4%
53%
Limpopo B1
64%17%
19%
Western Cape B1
72%
18%
10%
Metro
87%
0%13%
Eastern Cape B3
Urban formal Urban informal Rural
Case studies
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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
Operating costs
Maintenance cost
Focus on operating account
Customer management
Finance charges
Material and plant running costs for repairs and maintenance, departmental employee costs
Portion of municipal governance, administration and planning costs Cost of capital (interest), bad debt, depreciation, contribution to capital reserve
Bulk costs Mainly payments to Eskom and water boards
Overheads
Metering and billing
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Theoretical structure of benchmarks
Cost of specific activity
Technical indicator of scale of activity
Cost benchmark =
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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 ‘ring-fenced’ 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
Bulk cost (Cost of bulk purchases + cost of bulk treatment) / Volume of water sold R / kl sold Factors in water losses
Distribution cost
All other direct water costs / km of pipeline, OR R / km Pipeline length often
unknownAll 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
OverheadsMunicipal governance, planning and administration costs / number of connections
R / connection
Distributed to each service by proportion of operating expenditure
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Water results
A B1 B3 B2 B3 B1 B3
WATERWestern
Cape Gauteng MpumalangaEastern Cape Limpopo Free State
Bulk cost R/kl sold 5.64
4.84
6.58
1.06
-
-
-
Distribution cost R/km
101,529
57,908
81,843
251,751
-
-
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 Calculation Unit Comment
Bulk cost (Effluent charges+ cost of bulk treatment) / Volume of water treated R / kl treated
Collection cost
All other direct sanitation costs / km of pipeline, OR R / km Pipeline length often
unknownAll other direct water costs / (households with waterborne sanitation + α*households with on-site sanitation +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 separated out, or included in water bill, or accounted for under finance departments
Finance cost AS FOR WATER
Overheads AS FOR WATER
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Sanitation results
A B1 B3 B2 B3 B1 B3
SANITATIONWestern
Cape Gauteng MpumalangaEastern Cape Limpopo Free State
Bulk cost R/kl treated
1.54
3.10
1.90
2.80
-
-
-
Collection cost R/km
45,583
-
-
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
-
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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 B1 B3 B2 B3 B1 B3
ELECTRICITYWestern
Cape Gauteng MpumalangaEastern 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
OverheadsMunicipal governance, planning and administration costs / total length of road network)
R / kmDistributed to each service by proportion of operating expenditure
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Roads and stormwater results
A B1 B3 B2 B3 B1 B3
ROADS & STORMWATER
Western Cape Gauteng Mpumalanga
Eastern Cape Limpopo Free State
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
-
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Component Calculation Unit Comment
Transfer and disposal
Cost of transfer stations and landfills / Mass of waste landfilled
R / ton landfilled
Data for transfer stations not readily available
Collection
Collection costs / mass of waste collected, OR
R / ton collected
Collected mass not often recorded
Collection costs / (households with kerbside collection+ α*households with communal collection+β*non-residential consumers)
R / equivalent households
Equivalent factors up for debate
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
OverheadsMunicipal governance, planning and administration costs / number of res + non-res consumers)
R / consumerDistributed to each service by proportion of operating expenditure
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Solid waste results
A B1 B3 B2 B3 B1 B3
WATERWestern
Cape Gauteng MpumalangaEastern Cape Limpopo Free State
Collection cost R/ton collected
276
137
461
-
-
-
-
Collection costR/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
-
-
Overheads R/hh and non-res customers served
192
198
123
605
282
-
690
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Environmental management
Case study Annual expenditure (R/hh)
Metro 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 Annual expenditure (R/hh)
Metro 473
Western Cape B1
Gauteng B3 136
Mpumalanga B2
Eastern Cape B3
Limpopo B1
Free State B3
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Cost recovery through tariffs
A B1 B3 B2 B3 B1 B3
Ratio of revenue from service charges to total operating cost
Western Cape Gauteng Mpumalanga
Eastern Cape Limpopo Free State
Water
0.65
0.71
0.44
0.60
0.75
0.62
0.18
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