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

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

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 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. Focus on operating account Cost structure Portion of municipal governance, administration and planning costs Overheads Cost of capital (interest), bad debt, depreciation, contribution to capital reserve Finance charges Customer management Metering and billing Mainly payments to Eskom and water boards Bulk costs Maintenance cost Material and plant running costs for repairs and maintenance, departmental employee costs Operating costs

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

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

14. Water results

15. Sanitation indicators

16. Sanitation results

17. Electricity indicators

18. Electricity results

19. Roads and stormwater indicators

20. Roads and stormwater results

21. Solid waste indicators

22. Solid waste results

23. Environmental management

24. Public Transport

25. Cost recovery through tariffs

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