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Www.salga.org.za Cost of Municipal Services : ‘Best practice’ benchmarking of operating costs.

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Presentation on theme: "Www.salga.org.za Cost of Municipal Services : ‘Best practice’ benchmarking of operating costs."— Presentation transcript:

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

2 Presentation outline Background and objectives Methodology Theoretical background to cost benchmarking Status report Preliminary findings Implications and points of discussion

3 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

4 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

5 Meeting with municipal officials for data collection Cost Indicators and benchmarks for monitoring operational costs Assessment of costs Verification of cost information Develop structure appropriate for cost benchmarking Derive preliminary benchmarks Assessment of costs Verification of cost information Develop structure appropriate for cost benchmarking Derive preliminary benchmarks Theoretical framework for assessment of operational costs SALGA workshop Collating national data sets Methodology: process

6 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.

7 Case studies

8 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)

9 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

10 Theoretical structure of benchmarks Cost of specific activity Technical indicator of scale of activity Cost benchmark =

11 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

12 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

13 Water indicators ComponentCalculationUnitComment Bulk cost (Cost of bulk purchases + cost of bulk treatment) / Volume of water sold R / kl soldFactors in water losses Distribution cost All other direct water costs / km of pipeline, OR R / km Pipeline length often unknown 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 Distributed to each service by proportion of operating expenditure

14 Water results AB1B3B2B3B1B3 WATER Western CapeGautengMpumalanga Eastern CapeLimpopoFree State Bulk costR/kl sold Distribution cost R/km 101,529 57,908 81, , Distribution cost R/equivalent connections 1,609 1,275 1, ,618 2,265 1,276 Metering and billing R/connection Finance cost R/connection , Overheads R/connection 1,

15 Sanitation indicators ComponentCalculationUnitComment 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 unknown All 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

16 Sanitation results AB1B3B2B3B1B3 SANITATION Western CapeGautengMpumalanga Eastern CapeLimpopoFree State Bulk costR/kl treated Collection cost R/km 45, Collection cost R/hh w/b Billing R/connection Finance cost R/connection 94 1, Overheads R/connection

17 Electricity indicators ComponentCalculationUnitComment 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

18 Electricity results AB1B3B2B3B1B3 ELECTRICITY Western CapeGautengMpumalanga Eastern CapeLimpopoFree State Bulk costR/kWh sold Distribution cost R/equivalent connections 2,444 2,836 1,712 3,393 1, Metering and billing R/connection Finance cost R/connection 797 1, Overheads R/connection 2,761 3,113 2,682 4,236 2, ,818

19 Roads and stormwater indicators ComponentCalculationUnitComment 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 / hhWill 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

20 Roads and stormwater results AB1B3B2B3B1B3 ROADS & STORMWATER Western CapeGautengMpumalanga Eastern CapeLimpopoFree State Roads operation cost R/km 68,734 48,717 26, ,945 27,826 - Stormwater operations cost R/hh Finance cost R/km 65,595 90,866 16, Overheads R/km 51,352 37,997 12, ,088 8,786 -

21 Solid waste indicators ComponentCalculationUnitComment 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 Overheads Municipal governance, planning and administration costs / number of res + non-res consumers) R / consumer Distributed to each service by proportion of operating expenditure

22 Solid waste results AB1B3B2B3B1B3 WATER Western CapeGautengMpumalanga Eastern CapeLimpopoFree State Collection cost R/ton collected Collection cost R/equivalent service point Transfer and disposal cost R/ton landfilled Recycling cost R/ton recycled Public cleansing cost R/km paved road 23,605 1, Finance cost R/hh and non-res customers served Overheads R/hh and non-res customers served

23 Environmental management Case studyAnnual expenditure (R/hh) Metro 165 Western Cape B1 58 Gauteng B3 158 Mpumalanga B2 Eastern Cape B3 735 Limpopo B1 116 Free State B3

24 Public Transport Case studyAnnual expenditure (R/hh) Metro 473 Western Cape B1 Gauteng B3 136 Mpumalanga B2 Eastern Cape B3 Limpopo B1 Free State B3

25 Cost recovery through tariffs A B1 B3 B2 B3 B1 B3 Ratio of revenue from service charges to total operating cost Western CapeGautengMpumalanga Eastern CapeLimpopoFree State Water Sanitation Electricity Solid waste

26 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

27 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


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