Cost of Municipal Services : ‘Best practice’ benchmarking of operating costs

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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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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


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


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)




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


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

-

-

-

-

-

-


94

1,034

265

333

-

-

-


329

618

505

412

240

510

-

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Electricity indicators


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)




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


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

-

-

-

-

-

-

-


797

1,782

563

56

191

-

186


2,761

3,113

2,682

4,236

2,008

-

2,818

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Roads and stormwater indicators


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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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


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


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

Cost of Municipal Services : ‘Best practice’ benchmarking of operating costs

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