Landfill Full Cost Accounting Guide for New Zealand

Acknowledgements

Preface

1 Introduction

2 Current Overseas and New Zealand Practice

3 Legislative Framework

4 Landfill Full Cost Accounting

5 Model Input Parameters

6 Income Streams

7 Model User Guide

8 Expanding the Model: Other Waste Management System Costs

9 Illegal Dumping

Glossary

References

Appendix A: Landfill FCA Model - Overview, Structure and Algorithm Flowcharts

Appendix B: Landfill FCA Model Input Costs - Default Values

Appendix C: FCA Landfill Model - Description of Costs not included in the Model

Appendix D: Financial Assurance

Appendix E: Typical Example - District Landfill Site

Appendix F: Landfill FCA Model - Blank Copies of Worksheets

1 Introduction

1.1 Background

Traditionally, landfill charges have covered only a part of the actual (or real) costs incurred during the life of a landfill. This point was highlighted in the Parliamentary Commissioner for the Environment's report Solid Waste Reduction Initiatives (1993), which noted that many councils charge solely on the basis of landfill operating costs. This approach underestimates the real costs of landfill disposal, by ignoring factors such as the cost of the land, mitigation of environmental effects, unplanned closure, corrective actions, site rehabilitation and aftercare [The PCE noted that this approach also ignores the indirect or social costs of landfills. This aspect is not covered by the model presented here.]

In many cases councils do not apportion funding for the administration and overhead costs of landfills separately, which results in hidden costs and cross-subsidisation. This view was reinforced in the 1998/99 National Landfill Census report (Ministry for the Environment 2000), which noted evidence [See section 2.3.1 for further detail on the 1998/999 census results.] suggesting that "councils do not accurately reflect the full environmental costs of landfill disposal".

1.2 Strategies for waste management

In the course of preparing the 1998/99 census the Ministry established a set of objectives for effective landfill management. The objective relating to cost stated that:

the true cost of landfill management [is] to be met through the correct pricing of waste disposal.

This has been taken up in the New Zealand Waste Strategy (Ministry for the Environment 2002), in which waste disposal targets encourage waste generators to pay the true cost of waste treatment and disposal. This change may be gradually phased in where there is a big difference between the current charge and the true cost. Targets allow true cost accounting to be introduced over a period acceptable to the local community (see below for timeline).

Some local authorities may need to re-evaluate their funding policies for more flexibility and a fairer allocation of costs. These targets will be looked at again once the Strategy has been implemented and the second national waste data report delivered in 2003.

The New Zealand Waste Strategy sets the following targets for waste disposal.

1. By December 2003, local authorities will have addressed their funding policy to ensure that full cost recovery can be achieved for all waste treatment and disposal processes.
2. By December 2005, operators of all landfills, cleanfills and wastewater treatment plants will have calculated user charges based on the full costs of providing and operating the facilities, and will have established a programme to phase these charges in over a timeframe acceptable to the local community.
3. By December 2005, all cleanfills will comply with cleanfill disposal guidelines.
4. By December 2010, all substandard landfills will be upgraded or closed.
5. By December 2020, all substandard wastewater treatment facilities will be upgraded, closed or replaced with systems that comply with all relevant regional and coastal plans, standards and guidelines.

Developing waste disposal pricing policies that, as far as practicable, reflect full cost is crucial to successfully implementing the Strategy. Failing to reflect all costs in the price of waste disposal weakens the incentive to prevent waste and avoid disposal.

1.3 How are local authorities affected?

Since the introduction of the Resource Management Act 1991 (RMA) many territorial local authorities (TLAs) have incurred significant cost increases, especially for the operation of small landfills. As a result, communities face the decision to either upgrade or expand existing sites, or close sites and open new facilities. This may include considering options such as transfer stations and regional landfills in light of the target set by the New Zealand Waste Strategy ("By December 2010, all substandard landfills will be upgraded or closed").

The Local Government Act (1974) and Local Government Bill require TLAs, through their annual plan process, to identify significant activities and consult with the community over options. This requires accurate information on the full cost of landfills, and the Full Cost Accounting Guide has been developed in response to this need. The Guide is recommended to TLA waste managers and other landfill owners as a formal method for costing landfills to achieve Strategy targets.

It is important to recognise that publicly and technically viable landfill sites are becoming an increasingly scarce resource. Existing landfills represent valuable assets in terms of their remaining disposal capacity, and should be priced accordingly. This will encourage the best use of existing assets and reinforce other initiatives aimed at minimising final waste disposal volumes.

In addition, if environmental costs are not fully counted, the environment subsidises the price of disposal. Where only part of the disposal cost is met from council rates, ratepayers are subsidising waste generators, or real costs are being deferred and will be borne in the future - by others. Inefficient pricing policies can also encourage waste flight to facilities that don't account fully for environmental cost.

Full cost pricing is a key waste management principle. It encourages both waste reduction initiatives and the minimisation of environmental effects by ensuring full environmental costs are, as far as practicable, reflected in the charges applied.

1.4 Purpose of the Guide

The purpose of the Landfill Full Cost Accounting Guide is to assist decision-makers to implement a consistent full cost accounting (FCA) approach to landfills, incorporating landfill planning, development, operation, closure and aftercare in a uniform and consistent way.

An FCA approach aims to accurately portray overall costs and risks associated with developing or owning and operating a modern landfill. It will enable landfill owners, including TLAs and other users of the model, to make meaningful comparisons of different waste management options in order to estimate, with reasonable accuracy, the basic cost of landfill disposal. This will help to decide not only appropriate gate rate charges, but also ways to fund and improve the efficiency of waste management services.

Local authorities as well as private companies need to determine the extent to which landfills are funded through user charges or other sources of funding. Use of the landfill FCA model will make the methods of funding and the cost of providing for landfill projects more obvious, more uniform and more consistent than is currently the case. The model can be used in conjunction with other tools for product life cycle assessment, or to determine overall waste disposal costs. (See the Ministry for the Environment website, www.mfe.govt.nz, for the latest information about such tools.)

Note: this Guide is intended to provide a sound approach to costing and pricing landfill services. It is not intended as a guide on how to account for landfills for financial reporting purposes. Section 3 does provide a summary background to financial reporting issues, but we strongly advise you to obtain specialist advice in relation to the detail of the issues involved in financial reporting for landfill [A useful guide on this issue is Accounting for Environmental Obligations: Guidelines for Applying FRS-15: Provisions, Contingent Liabilities and Contingent Assets (NZ Society of Local Government Managers, 2001). Copies can be found on the society's website, www.solgm.org.nz.]

1.5 Using the model

What is this FCA model and how does someone use it? Put simply, the model is a user-friendly electronic spreadsheet, which you work your way through by entering information (numbers or text) intodata entry cells, and selecting from the various check boxes, options buttons and drop-down menus. To operate the FCA model you will need to have an IBM-compatible personal computer and Microsoft Excel for Windows 97.

The output of the model is an "indicative base cost of landfill disposal" (indicative base cost, or IBC). This is not an instant solution to what you should be charging at the gate of your landfill. This IBC figure may (and probably will) differ from the actual gate rate or user charge because it is simply the calculated cost, over the life of the asset, of providing for waste disposal. It does not account for related intangible costs or other charges such as:

• benefits/costs or levies related to waste diversion or recycling initiatives (other than overall reductions in waste quantity over time, which the model can account for)
• recovery of sunk costs from previous undercharging (where applicable)
• other charges
• tax. [The IBC output calculated by the model is a pre-tax estimate. In order to convert this estimate to a post-tax estimate, it will be necessary to obtain specialist advice.]

The IBC is thus a base figure which gives a good indication of the actual dollar cost of providing residual waste disposal to the landfill. Facility owners and managers then need to develop an actual charging structure from this figure, in the light of all other relevant factors (see sections 4.3 and 4.5). This is provided for on the Model Summary output page of the spreadsheet.

1.6 Overview of the Guide

Section 1 - Introduction.

Section 2 - Current Overseas and New Zealand Practice outlines relevant overseas practice, New Zealand practice, and the key findings of the 2001 local authority waste managers' survey undertaken as part of the preparation for this Guide.

Section 3 - Legislative Framework sets out the legislativerequirements for financial reporting (particularly relevant to TLAs and Local Authority Trading Enterprises or LATEs), and describes how the model output should be used and integrated with wider financial and other reporting processes.

Section 4 - Landfill Full Cost Accounting explains the approach to full cost analysis and its accounting basis. It lists the types of costs that are included in the definition, outlines the benefits of using the model, details when it can be used, and describes the process of implementation. It sets out the rationale for using both Brownfields and Greenfields sub-models within the overall model structure. Section 4 also addresses issues of latent and contingent financial risk and risk minimisation options, and sets out, using flow charts, how the model is structured and how it functions.

Section 5 - Model Input Parameters works through the input (cost) items that are included in the model so that waste managers can assign costs to these items for their own site(s).

Section 6 - Income Streams describes the sources of income for a landfill and how they are included in the model.

Section 7 - Model User Guide outlines how the model can be used and describes the structure of the model for each option. It includes a description of the type, accuracy and general format for input data, as well as guidance for the use of default/typical data values where these are applicable.

Section 8 - Expanding the Model: Other Waste Management System Costs lists the cost items associated with other waste management facilities and services which would be included if a full cost analysis were expanded to include all waste management system costs.

Section 9 - Illegal Dumping provides an overview of the issues associated with illegal dumping, which is a potential negative outcome of implementing landfill charges based on full cost accounting.

The appendices include default/typical values for model input costs, a full worked example, the model algorithm, financial assurance and items/costs not included in the model.