LANDFILL FULL COST ACCOUNTING A KEY ELEMENT OF AN INTEGRATED SOLID WASTE STRATEGY

Transcription

1 LANDFILL FULL COST ACCOUNTING A KEY ELEMENT OF AN INTEGRATED SOLID WASTE STRATEGY A. P. Kortegast BSc, BE(Hons), M.Env.Eng.Sc, FIPENZ, Director - Tonkin & Taylor Ltd C. Purchas BTech, Policy Analyst Ministry for the Environment ABSTRACT In New Zealand, solid waste disposal has traditionally been a key service provided by Territorial Local Authorities. The relatively small population in most Territorial Local Authority areas has influenced waste service provision, which has traditionally been on a least viable cost basis. Waste collection (servicing) is a major component of the overall waste disposal cost and its true cost is readily recognized through the process of competitive tendering for waste collection contracts. However, the final disposal component (usually open tip / landfill), has traditionally been accounted for based predominantly on known operational costs. The requirement to upgrade landfills that resulted from the introduction of the Resource Management Act in 1991, together with the involvement of private sector landfill operators in the larger urban markets, started to focus attention on the real cost of landfill disposal, highlighting cost areas that had often previously been overlooked, or ignored. As part of an integrated solid waste issues programme developed recently by the NZ Ministry for the Environment an up to date Landfill Full Cost Accounting Guide was produced and published in April This guide, described in this paper, provides a straightforward, spreadsheet-based approach to deriving a commercially sound base cost of disposal covering the establishment, operation and aftercare of both new and existing landfill sites. This base cost of disposal figure forms the basis for setting landfill gaterates. Recognition of the full cost of disposal is essential to avoid distortions of cost, either deliberate or inadvertent, that may affect the final outcome, both financially and environmentally of any waste disposal strategy. Key words: NZ Ministry for the Environment, Landfill, Disposal Cost, Gaterate, Full Cost Accounting, Computer Model. 1. INTRODUCTION In 1996, as part of its programme of solid waste management initiatives, the New Zealand Ministry for the Environment (MfE), introduced a first landfill costing guideline. This document and model were based on the United Kingdom model and provided a simple method of calculating landfill disposal costs. However, the general nature of the model, together with inconsistencies both within the model, and on the part of model users, meant that a standardised approach to landfill costing and pricing was not achieved (Kortegast et al, 1999). This led MfE in 2000 to commission preparation of an updated model using both international precedent and local waste industry experience as a basis for a more robust approach. Page 1 of 11

2 The new model (the Landfill Full Cost Accounting Model [LFCAM]) was developed for MfE by Tonkin & Taylor Ltd, with supporting input from Ernst & Young, Envirowaste Services Ltd, and an industry review team. The model was published for use in April This paper describes the format and functioning of the LFCAM and explains its applicability to determining the true cost (in accounting terms) of landfill disposal. The paper highlights model features, compares it with other types of model and explains the role the model plays as part of a nationally integrated waste strategy. 2. THE LANDFILL FULL COST ACCOUNTING PROCESS 2.1 Background In New Zealand, solid waste disposal has traditionally been a key service provided by Territorial Local Authorities (TLAs). Often the population served by a TLA was relatively small (typically 100,000 or less) and waste service provision was generally on a least viable cost basis. As a result the focus often tended to be on waste collection services and landfills, particularly the old style tips and controlled dumps, tended to be accounted for in terms of only the service provision cost, based on known (historic) operating costs. The advent of private sector landfill developers and operators in the early 1990s started to highlight inconsistencies in the way that disposal costs were calculated in light of modern standards of landfill design, construction, operation and aftercare. Proposals advanced after 1991 also needed to be costed cognisant of more rigorous consent processes under the Resource Management Act (1991). During the 1990s, it became apparent that in general: existing airspace was undervalued capital development costs were generally considered by TLAs to be sunk costs and were not reflected in disposal charges operations cost estimates were based on sub-standard facility management practices no provision was generally being made for site closure and aftercare (at least not in terms of disposal charges being applied). It is clearly important that in order to ensure equity within a waste system with competing initiatives (e.g. recycling versus cleaner production / resource recovery versus landfill disposal), that the true cost of landfill disposal needs to be understood. Only then can the true cost of disposal be reflected in user charges, so avoiding other waste system initiatives being at an economic disadvantage due to artificially low landfill charges. Externalities (e.g. environmental benefits) are often hard to quantify in dollar terms. Hence they cannot be included in the model a factor which means the economic balance in a waste system is always an approximation. The key point is that the model enables a waste manager to understand in as full a way as practicable, the true cost of providing landfill airspace. This cost has not always been recognised in the past often inadvertently. 2.2 Model Types Models used for calculating landfill costs (as a basis for deriving user charges or gaterates) are essentially of two types: Page 2 of 11

3 income and expenditure models capital models. Income and expenditure models are based on capital and operating expenses buildups, offset by an income generation forecasts based on waste tonnage and charging projections. They assume (or iterate) a gaterate based on key financial information and an assumed revenue stream. Such models, which typically include provision for depreciation and tax, are often used by commercial waste companies, are generally company or project-specific, and are usually developed in-house. That is, they are often proprietary and commercially sensitive. The second type of model is conceptually simpler as it takes depreciation and tax (which are situation-specific), out of the calculation. Capital models are generally based on estimating both capital and non-capital costs over time and amortising them over the life of the facility, usually cell by cell. Hence these models are more generic than commercial in their approach. They are usually simpler to structure and are more suited to menu-based data entry than income and expenditure models. The LFCAM is of this type. 2.3 Definition and Relevance of Full Cost For the purposes of the LFCAM, full cost is defined as: Any real, definable and measurable cost, from any source, attributable to a particular landfill and incurred, or likely to be incurred, by the Owner. Thus the model and its categories of cost include: management, administration and organisational overhead costs planning and resource consent costs land cost (value) development costs operational costs closure and aftercare costs. When it is recognized that, even today, many TLAs in New Zealand are charging for waste disposal at their landfill based only on points 4 and 5 above, and occasionally taking into account points 1 and 3, the potential inequity within overall waste system economics is readily apparent. This is particularly the case where existing sites are expanded or added to and the historic costs associated with the site are ignored (e.g. underlying land value). However, in defining full cost it is recognised that, strictly, not all relevant costs, particularly externalities, can be accounted for. Not included in the model are: replacement costs aftercare of existing closed landfills site selection costs environmental and community issues effects on local ecology community effects the opportunity cost of land Page 3 of 11

4 remediation or corrective action costs. The LFCAM model is MS Excel based and is a tool for planning purposes. It is not intended to replace financial reporting tools and will generally need to be used in conjunction with other financial and engineering management information. 3. THE MfE FULL COST ACCOUNTING MODEL (LFCAM) 3.1 Overview In order to respond to the need for a general model, particularly by the large number of TLAs in New Zealand, the simpler capital model approach was adopted. In this approach the capital cost of airspace development is estimated using a series of templates, as are the likely operating costs (without going into a fully detailed breakdown of machinery and labour assets). Then, using simple financial parameters an Indicative Base Cost (IBC) of disposal is calculated by equating all amortised costs to the projected income stream, such that the project NPV is zero over its life. That is, all costs including the holding cost of sunk capital equal all income over the life of the facility both aspects adjusted for timing, but excluding inflation. The model is thus a balanced capital model, in today s dollars, that works to produce a projected NPV of zero for the project over its life. 3.2 Greenfields and Brownfields Models Two landfill development scenarios are typically encountered: GREENFIELDS A proposed landfill on a new site (or significantly new cell within an existing site) OR BROWNFIELDS An existing landfill with residual life (with or without expansion) The two approaches are generically obvious, but in New Zealand require quite different accounting treatment for TLA owners (this is explained in detail in the model guide). Choosing which modeling approach to follow is usually an obvious decision. The key difference is that a Greenfields model (i.e. essentially a new landfill) requires data and cost inputs related to the pre-operation capital expenditure required to establish the landfill. A Brownfields model (i.e. for a lateral or vertical expansion of an existing landfill), requires input of the current assessed asset value of the site as the initial cost entry. This value needs to reflect the value of the asset based on specific financial reporting procedures, namely FRS-3 and FRS-15. These accounting aspects are dealt with in detail in the model guide. 3.3 Model Structure and Input The overall model structure is shown in Figures 1 and 2. An example of a typical input sheet is shown in Figure 3. Page 4 of 11

5 Figure 1 Full Cost Model Overview Figure 2 Financial Model Algorithm Structure Page 5 of 11

6 The model is designed to be intuitive, menu-based and easy to use. Once a decision is made on which modeling approach to follow (Greenfields vs Brownfields), a series of inputs is prompted covering: timing site-specific details financial parameters engineering parameters. Figure 3 Typical Input Sheet Page 6 of 11

7 In many cases the model provides qualified default values to guide the user where either no site-specific data are available, or the model is being used for the purpose of developing preliminary estimates and hence the use of approximate data is appropriate. 3.4 LFCAM Calculations and Output Once all inputs have been made, the model calculates an Indicative Base Cost of disposal (the IBC ). The model does this by solving for a target revenue, given: the starting asset value (in the case of a Brownfields landfill) or capital expenditure required to begin operations (in the case of a Greenfields landfill) the various ongoing expenditures required (both operational and capital related) the cost of capital that reflects the return required for the particular operation the user is considering the defined waste stream. The IBC is the base unit cost of disposal (in dollars per tonne exclusive of GST), derived by the FCA model. The IBC is in today s dollars and requires future adjustment for inflation. It is important to recognise that the IBC is not a gaterate. The IBC is simply the accounting cost of providing waste disposal at the facility, taking into account all relevant financial information. From the IBC a gaterate can be derived, taking into account: the charging policy of the landfill owner / operator (the mix of rates and user charges) recycling / waste reduction levies refuse collection costs (kerbside) green waste / composting costs education and waste minimisation costs. This is provided for on the summary output sheet of the model reproduced as Figure 4. Page 7 of 11

8 Figure 4 Summary Report Sheet Page 8 of 11

9 4. MODEL INNOVATIONS AND INTERPRETATION 4.1 Innovation As the LFCAM guide notes, landfill cost models are referred to by various agencies around the world, but few authoritative models exist. The USEPA model is an income and expenditure type model that is relatively complex and very much country-specific. The LFCAM is innovative in that it uses simple algorithms and logic to develop a robust estimate of disposal costs (the IBC). This figure can then be used as a fundamental determinant of the disposal charge that should apply to a particular facility or waste system. The model is also innovative in using a series of screen menus to prompt input. The beauty of the model is that a waste manager can start with (for a Greenfields site for example) very little actual engineering or other site-specific information, and within a 1-2 hour period derive a very good initial estimate of the IBC for the subject site. This is because the model prompts for information, and/or provides suitable default values and thus allows approximation for initial estimate purposes. Generally, however, the better the information available on up-front costs and timing, as well as waste quantities, the more reliable (accurate) the derived IBC values are. 4.2 Interpretation of Output The FCA model generates three principal outputs: Summary Report Cashflow Summary Cashflow Chart. The Summary Report provides all key data for the model run and importantly highlights how the key factors affecting model output (the predicted IBC value) compare. That is, it shows the relative proportions of: sunk costs planning / pre-development costs base costs development costs operations costs closure / post-closure costs contingency costs separately on capital and operations. Thus the relationship between key timing factors in the development and the relativity between capital and operations cost components become readily apparent. The sensitivity of the IBC to changes in such key inputs as Weighted Average Cost of Capital (WACC), applicable finance rates, up-front sunk costs or contingency provisions can be checked in minutes by re-running the model for changes to these key parameters without the need to alter gross geometric or other engineering input. The model generates a cashflow summary which details all expenditure, over the entire life of the facility from the project start date to the end of the aftercare period. The model sorts this into capital and non-capital items. Page 9 of 11

10 Figure 5 Cashflow Chart Page 10 of 11

11 The graphical cashflow summary gives a very clear picture of the key financial functioning of the project as shown in Figure SUMMARY AND CONCLUSIONS The MfE 2002 LFCAM and related Guide provides a valuable tool for landfill and waste system managers. The LFCAM allows both rapid generic assessment of landfill disposal costs and very detailed assessment where site-specific data are available. The model is intuitive, screen-based and easy to use. The IBC figures derived by the model can be quickly checked for sensitivity to key input data and hence a very good understanding of the drivers of disposal cost at a particular site can be quickly arrived at. The IBC value derived from the model provides the key base figure from which to develop the landfill gaterate, taking into account other specific financial and waste system considerations. The MfE LFCAM is an innovative and robust planning tool. Its generality and applicability are unique in the landfill field and the model thus represents a world-leading technology in this key area of waste system management. 6. ACKNOWLEDGEMENTS The assistance from MfE staff during model development, together with MfE s permission to publish this paper is gratefully acknowledged. The inputs of the other members of the project team, namely Arthur Amputch and Andrew Shallard (Tonkin & Taylor Ltd), Stephen Powell (Envirowaste Services Ltd), Jai Basrur, Marin Matulovic and Rod White (Ernst & Young), are all duly acknowledged, as are the inputs of the industry technical review team (Neal Absalom, Siegfredo Coralde, Richard Cotton, Chris Humphrey, Bill Mitchelmore and Justin Reid). 7. REFERENCES Centre for Advanced Engineering Landfill Guidelines. Centre for Advanced Engineering, Christchurch, New Zealand. Kortegast AP, Amputch AR, Khire, MV Financial Modeling for Landfill Management. Proceedings of the 11 th Waste Management Institute NZ Inc Conference (WasteMINZ 99), Queenstown, New Zealand, November. Ministry for the Environment. 1997a. Landfill Guidelines: Landfill Full Costing Guidelines. Ministry for the Environment, Wellington, New Zealand. Ministry for the Environment Landfill Full Cost Accounting Guide for New Zealand. Ministry for the Environment, Wellington, New Zealand. Page 11 of 11