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

5 Model Input Parameters

5.1 Introduction

This section provides guidance on all the inputs the model requires in order to generate the IBC. As noted in Section 4, the model can accommodate the development of new landfills (Greenfields) or the ongoing operation and possible extension of existing landfills (Brownfields). The inputs required for these two types of investments are broadly similar. The key difference is in the estimation of the initial capital expenditure (in the case of the Greenfields model) rather than the opening asset value (Brownfields model). Apart from this, the rest of the input parameters are similar for both models, and the guidance on the input is the same. Specific instructions relevant to the Brownfields approach can be found in sections 5.3.2 and 5.4.1.

It is important to note that for variables that require dollar value estimates, you will need to input the value in today's dollars, even if the variable requires an input in a future period. There is no need to account for inflation in providing these estimates. [Note, however, that over time the IBC will need to be adjusted to reflect inflation. See the discussion in Section 4.5.] The model automatically accounts for dollar value inputs being in today's dollars, and produces output in today's dollars.

5.2 Costs not included in the FCA model

A more detailed description of the costs not included in the FCA model is given in

Appendix C, but they can be summarised as follows.

• Replacement costs - the landfill FCA model does not include the provision of replacement funds for a future landfill, as these costs are attributable to a different project.
• Aftercare of closed landfills - the landfill FCA model does not include the aftercare costs of other landfills that are now closed.
• Site selection costs - the site selection process may involve research on many potential sites. Normally TLAs or private-sector landfill developers consider these costs as general expenditure. Only the costs of research and investigations that can be attributed directly to the site that is finally chosen should be included in the model. The model currently allows these costs to be included if required.
• Environmental and community issues - there are environmental and community issues relating to landfills that are not direct or indirect financial costs paid by the waste manager. These relate to externalities that occur on a local, national or global scale. Externalities are costs (or benefits) that are borne by (or accrue to) society in general, and which in the past have not generally been accounted for in decisions relating to landfills. Because legislation requires waste managers to avoid, remedy or mitigate some effects, some externalities are internalised - or taken into account - in the financial costs of landfill development, operation and aftercare through the resource consent process. The calculation of the cost to society of all externalities associated with landfills is beyond the scope of this Guide. However, externalities can have a significant effect on the decision-making process and therefore need to be considered by local authority waste managers.
• Discharges to land, groundwater, surface water and air - the cost relating to the effects on the environment of a landfill is considered to be accounted for in the costs of siting, resource consent applications, design, operation and monitoring, as these costs relate to the avoidance of actual and potential effects.
• Effects on local ecology - these are considered to be accounted for in the costs of siting, resource consent applications, design, operation and monitoring, as these relate to the avoidance of actual and potential effects.
• Community effects - community effects are partly taken account of in landfill siting, community consultation and resource consent procedures. The costs associated with these activities are included in the full costing model. These costs, however, may not take account of all issues. One approach adopted overseas, and used in New Zealand for some new large landfill sites, is the payment of 'host fees' to the local community affected by the landfill, for appropriate community projects such as a community hall. Host fees, where they apply, need to be included as a cost in the landfill FCA model.
• Opportunity costs of land - the value of the net benefit forgone by the community in using the land for a landfill, rather than for some alternative use, is the opportunity cost of that land. However, the value of land when used as a landfill may be higher than for the existing or alternative land uses, in which case opportunity cost does not apply. For this reason, and the fact that the waste manager incurs no cost, community opportunity cost is not included in the FCA model.
• Remediation or corrective action costs - if corrective action measures are required at a landfill facility, a detailed scope of work, appropriate cost estimates, and financial assurance documentation should be submitted to the appropriate regulatory authority. Corrective action plans will be site-specific and will vary widely. These costs are not included in the FCA model.

5.3 Landfill FCA model input parameters

The model is based on up to 11 information parameters and eight cost parameters relevant to landfill full cost accounting, as shown in Table 1. These parameters correspond to the item categories/headings in the model input worksheets (General Input,Brownfields Input, Waste Input, Geometric Input, and Cost Input), which provide the space for entering most data.

Table 1: Landfill parameters

Model input worksheet	Parameter
General input	Situation - Section 5.3.1 Dates - Section 5.3.1 Waste - Section 5.3.1 Financial - Section 5.3.1
Brownfields input	Existing conditions - Section 5.3.2 Works to be completed during residual life - Section 5.3.2 Stockpiles - Section 5.3.2 Financial - Section 5.3.2
Waste Input	Waste - Section 5.3.1
Geometric input	Site constants - Section 5.3.3 Development programme - Section 5.3.3
Cost input	Sunk costs - Section 5.3.4 Planning and pre-development - Section 5.3.4 Base costs - Section 5.3.4 Development - Section 5.3.4 Operation - Section 5.3.4 Closure - Section 5.3.4 Aftercare - Section 5.3.4 Contingencies - Section 5.3.4

5.3.1 General input

The general input data include the following.

• Situation - selecting the Greenfields or Brownfields site development option.
• Dates - project commencement, operation commencement, duration of pre-development period, sunset date, duration of consented operating life, duration of actual operating life, duration of aftercare period.
• Waste - selecting the Custom Waste Tonnages or Generated Waste Tonnages option. If the Generated Waste Tonnages option is selected, the input data include the annual waste tonnage at the start of the operation, the annual waste growth/reduction rate, and the minimum annual waste tonnage. If the Custom Waste Tonnages option is selected, the input data need to be entered into the separate Waste Input worksheet. Input data relating to the waste stream (general and special waste proportions), waste charging (general and special waste), assumed compacted density, and target cover to waste ratio (hence volume utilisation), all form part of the General Input data irrespective of whether the Custom Waste Tonnages or Generated Waste Tonnages option is selected.
• Financial - the cost of capital (for planning and consenting, construction, operation, and aftercare), interest rate, and allowance to model real annual movement in the IBC (see section 5.4.21).

5.3.2 Brownfields input

The Brownfields input data include the following.

• Existing conditions - residual constructed airspace / constructed cell airspace remaining, life of residual airspace in constructed cell, footprint of existing landfill, continuing development (overlay or extension to footprint), stockpiles (volumes of existing topsoils, unsuitables, sub-topsoil, low permeability, and structural materials), opening / accumulated value of aftercare fund, capital cost to complete and close existing cell.
• Opening asset value - the Brownfields model requires an input related to the opening asset value of the existing landfill (see section 5.4.1).

5.3.3 Geometric input

The geometric input data include the following.

• Site constants -leachate generation (typical regional values or customised values), existing materials (topsoil, sub-topsoil, liner), landfill dimensions (liner, final cap), length of access road, length of boundary fence, timing of installation of leachate treatment and disposal, timing of gas management system installation.
• Development programme - quantities by cell associated with airspace, footprint, clearing, earthworks materials balance (topsoil, sub-topsoil, unsuitables, low permeability material, structural material, etc.), perimeter access road, subsoil drainage, leachate collection system, stormwater system, gas management system.
• Cell Construction - selecting the Cell Construction Staged in Equal Annual Amounts or Cell Construction Completed in Single Year option (see Appendix E: Typical Example).

5.3.4 Cost input

The cost input data include the following.

• Initial/ sunk costs for a Greenfields site or existing asset value for a Brownfields site.
• Planning and pre-development - project management, site selection, consultation, land pre-purchase/ pre-leasing arrangements, survey and preliminary design, geotechnical and groundwater investigations, other detailed studies (noise, traffic, visual, etc.), baseline monitoring, resource consent process (Assessment of Environmental Effects AEE and consent application, draft landfill management plan, legal, hearing, appeal), land acquisition and associated set-up costs, and proceeds from the disposal of excess land.
• Base costs - engineering (detailed design and documentation, and construction management), and contractors preliminary and general (P&G).
• Development - site access, site amenities and services, cell construction (earthworks, liner, and leachate), stormwater management system, gas management system, and final cover system.
• Operation (direct and indirect costs) - refuse placement, daily cover, nuisance control, general maintenance, salaries, wages and overhead, aftercare levy, royalty and/or host fees, intermediate cover, temporary roading, leachate treatment and disposal, monitoring and compliance, regional council costs, utility charges (rates, water, electricity) and bond.
• Closure - removal of facilities, modifications to site stormwater, leachate, landfill gas and other systems (final cover, landfill gas management system, leachate management system, on-site surface water control system, and design consultants/ third party engineering).
• Aftercare - administration, regional council liaison, site inspections, maintenance (of cover, vegetation, leachate system, gas system, stormwater system), environmental monitoring, removal of remaining facilities, and end of post-closure certification.
• Contingencies - contingencies for pre-development, development, operations, closure, and aftercare.

5.4 Landfill FCA model input costs and values

The following sub-sections provide guidance on some of the items. Indicative values or costs (range, typical and default costs or values) for items are provided in Appendix B by way of guidance.

The sources - and therefore the accuracy - of costing information will depend on whether the site is an existing and operating landfill or a planned site, and the degree to which planning, resource consent processes and design have progressed.

Information sources will include:

• current site development costs
• operators of landfills of a similar size
• consultants' reports on landfill development
• contractor and supplier estimates and quotes
• tendered contract prices
• construction and contracting cost handbooks and indices.

5.4.1 Value of existing Brownfields asset

The Brownfields model requires an input related to the opening asset value of the existing landfill. This value should be as per Financial Reporting Standard 3 (FRS-3) or NZIV [NZ Institute of Valuers. These guidelines are broadly consistent with FRS-3.] guidelines. You should consult your accountant(s) or specialised financial advisers to ensure that the value you input here is consistent with these standards and guidelines.

5.4.2 Initial/sunk costs

Only the costs that can be attributed directly to the site finally chosen should be included as initial/sunk costs in the FCA model. Typically these would include site selection (directly related to the proposed site), planning and site investigations.

5.4.3 Planning and pre-development costs

Project management

This covers all costs for management, administration and organisation overheads associated with the landfill during the pre-development phase of the project, including:

• salaries and wages and benefits for management and clerical staff
• accounting costs
• communications.

Site selection

Only the costs of research and investigations that can be attributed directly to the site finally chosen can be included in the model. Sources of information on the costs of landfill site selection include:

• internal cost records from previous siting studies
• local authority waste managers who have undertaken siting studies
• consultants' reports and/or proposals on site selection.

Consultation

The costs of consultation are specific to the project and should include public consultation (meetings, information bulletins, media releases, etc) as well as consultation with interested and affected parties. Sources of information on the costs of the consultation include:

• internal cost records from previous consultation processes
• managers of similar sites or projects
• consultants' reports and/or proposals on consultation costs.

Site investigations

The costs of survey and preliminary design, geotechnical and groundwater studies and other detailed investigations or studies (noise, traffic, visual, etc.) depend on the scale and significance of the project as well as the specific attributes of the site. Sources of information on the costs of site proving include:

• internal cost records from previous site-proving processes
• managers of similar sites or projects
• consultants' reports and/or proposals on site-proving costs.

Baseline monitoring

A preliminary site assessment and discussions with the regional council as well as specialist advise from consultants can provide a guide to baseline monitoring requirements and associated costs.

Resource consents

As with the site selection process, the resource consent process can be long and involve substantial cost. The time and cost can be expected to be greater for a new site than for an existing site. The resource consent process requires the following:

• extensive site investigations
• preliminary design
• consultation
• preparation of an assessment of effects on the environment in accordance with the fourth schedule of the RMA
• preparation of a landfill management plan
• pre-hearing meetings
• consent hearing
• (possibly) an Environment Court hearing
• (possibly) a High Court case.

In the model the resource consent item covers:

• AEE and consent application
• draft landfill management plan preparation
• legal
• hearing
• appeal.

Sources of information on the costs of the resource consent process include:

• internal cost records from previous consent processes
• managers of similar sites who have obtained resource consents
• consultants' reports and/or proposals on resource consent costs.

Land cost

Land cost covers the cost of all land purchased and used for the landfill. It includes the cost of any land bought for leachate and/or stormwater treatment, access roading and buffer areas, legal costs, and the cost of negotiations associated with land purchase.

In some cases land may be leased for any of the above activities. Here it is important to ensure that any financial costs associated with the lease are reflected in the discount rate and not in the operating costs. This will avoid any risk of double counting such costs. Generalised guidelines cannot be provided in these cases and specialist input should be obtained.

Current landfill siting and design requirements mean that the types and locations of land appropriate for development as a landfill in a district are limited. For new landfill sites the cost of land may be significantly higher than the value of the land under its existing use. This is a reflection of the market demand due to limited availability of appropriate land and the likelihood that the land is more valuable to a council, or community, as a landfill than in some alternative use.

5.4.4 Base costs

The base costs of engineering (detailed design and documentation, and construction management) and contractor's preliminary and general (P&G) associated with landfill development are included.

5.4.5 Site access costs

All intersection upgrades, other roading network upgrades/contributions, access road to the landfill footprint, and special structures (diversions, bridges, etc.) required to cater for increased traffic or increased vehicle loads due exclusively to the landfill should be included.

5.4.6 Site amenities and services

This item covers:

• site entrance
• administration building
• weighbridge and kiosk (weighbridge, weighbridge kiosk, cash registers and any computer hardware and software)
• machinery shed/ maintenance facility
• power and phone, sewerage, water supply
• general civil works (sealing, parking)
• washdown/wheel-wash facility
• fencing (site boundary and security fencing)
• landscaping (screening bunds, planting, etc.).

5.4.7 Groundwater control

This covers all costs associated with the installation of groundwater collection drains and discharge of groundwater from beneath the site.

5.4.8 Earthworks

This covers all costs associated with bulk earthworks for site preparation, including the costs of removing or importing material.

5.4.9 Liner construction

This covers all costs associated with purchase of liner materials, liner protection materials (including temporary protection), liner construction and additional site preparation required prior to the placement of liner materials. Also included are costs associated with testing liner materials and quality assurance/quality control procedures employed during liner construction.

The geometric and cost inputs for liner construction allow for the use of up to 6 different liner types. Each liner type can incorporate subgrade preparation, low permeability material (i.e. clay), synthetic liner (i.e. FML and/or GCL), a liner protection layer, and a leachate collection layer.

In many cases, a single liner type will be suitable for the whole landfill, however in some cases, differing liner types may be required such as where the sidewall liner type differs from the base or floor liner type. The difference may be as small as omission of, or reduction in, the thickness or material type of one layer in the proposed liner.

Each cell can use any combination of liner types, however the default is Liner Type 1. All residual footprint area not allocated to another liner type is allocated to Liner Type 1.

Apart from the low permeability material, all layers are costed per square metre. Therefore the unit rate costs entered in the Cost Input sheet for each layer must be calculated to take account of any relevant thickness variations. Any layer which is not required for a given liner type should have its cost deleted (or set to $0) in the Cost Input sheet. Where low permeability material is not required for a particular liner type, its thickness should be set to zero in the Geometric Input sheet.

All geometric inputs are based on plan areas and not projected areas. Where slopes are particularly steep, some adjustment to the liner costs may be necessary to allow for the difference between the plan and projected areas.

At the initial project planning stage the type of liner may be unknown, and hence for this case the user should only input values for a default liner (Type 1).

The default liner suggested is the United States Environmental Protection Agency (USEPA) Subtitle D liner: a composite liner consisting of two components. The upper component must consist of a minimum 0.75mm (30 mil) flexible membrane liner (FML), and the lower component must consist of at least a 600 mm layer of compacted soil (clay) with a hydraulic conductivity of no more than 1 x 10^-9 m/s. Under Subtitle D, FML components consisting of high density polyethylene (HDPE) must be at least 1.5 mm (60 mil) thick. It should be noted that the model does not automatically calculate or allow for a Subtitle D liner.

5.4.10 Leachate collection and transmission system

This covers all costs associated with the development of the system, including pipes, sumps, cleanout ports, manholes, automated pump station (pumps, valves, fittings and electrical) and collection layer.

5.4.11 Leachate treatment and disposal

This covers all costs associated with the development of the leachate pre-treatment / treatment and/or disposal system, including:

• construction of leachate retention ponds
• construction of a leachate pre-treatment / treatment plant
• development of a leachate irrigation system
• connection of the leachate collection system to the local sewerage system (where applicable).

The costs of the system may vary considerably depending on the method of treatment and disposal and the quantity and quality of leachate. The model provides the flexibility to include all treatment and disposal options, including short-, medium- and long-term methods of leachate management to deal with changes in leachate quality and quantity over the life of the facility.

5.4.12 Stormwater management

This item covers all costs associated with the construction of major stormwater diversion (for example, dams and canals), open drains, stabilised drains / flumes, piped drains, and stormwater treatment (ponds and instrumentation).

5.4.13 Landfill gas management

This item includes the installation of any landfill gas collection and monitoring bores, pipework, treatment systems, vents, flares and sampling points, both in and around the site.

For existing sites this item should include the cost of property purchase or installation of gas cut-off trenches and barriers to reduce gas hazards in the vicinity of the landfill site when these actions are required.

5.4.14 Final cover, capping and revegetation

This includes the cost of all cover material, revegetation and any placement of final cover and revegetation not accounted for in the daily operations budget or operations contract.

The placement of daily cover and intermediate cover is accounted for in the landfill operations.

5.4.15 Landfill operations

This item covers either the contract for day-to-day landfilling operations at the site, or the costs of site staff and plant operation. In some cases it may be a combination of the two. Included are all the day-to-day operations undertaken by the contractor or site staff, such as:

• on-site management
• maintenance of access
• working face preparation
• gate control and fee collection
• waste acceptance and inspection
• refuse placement and compaction
• the disposal of special wastes, such as date-expired products, material seized by customs, and quarantine wastes
• placement of daily, intermediate and final cover
• maintenance of cover and vegetation
• control of nuisances due to litter, noise, dust, vermin, birds and odours
• prevention of scavenging
• routine monitoring carried out by site staff
• maintenance of records not included in administration costs
• health and safety procedures.

Where a landfill is a component of a larger waste management system, administration and overhead costs related to the landfill should be separated out and charged directly to the landfill.

5.4.16 Monitoring

This item covers the cost of environmental and other monitoring not carried out by staff on site, along with associated expert advice, interpretation, record keeping and reporting, and external costs. The types of monitoring to be accounted for are:

• stormwater
• groundwater
• leachate
• landfill gas
• local ecology
• waste analysis surveys
• landfill topographic surveys to determine volume of refuse in place
• cost of regulator involvement.

This item includes the cost of installing monitoring facilities such as groundwater monitoring bores, surface water weirs and landfill gas monitoring bores during the operating life of the landfill. It also includes the purchase of specialist monitoring equipment, if required.

5.4.17 Host fees

Host fees, where applicable, are payments made to the local community affected by a landfill for appropriate community projects (for example, a community hall). They can take the form of lump sum grants or an amount per tonne of refuse accepted at the site, or a combination of the two, for the development and/or maintenance of community facilities. The value of host fees may be calculated during the resource consent process.

5.4.18 Closure and aftercare

The Landfill Guidelines (Centre for Advanced Engineering, 2000) state that the minimum time period for aftercare of a landfill is around 30 years. The full cost accounting process for a landfill includes all costs associated with the post-closure rehabilitation and aftercare of a site until such time as the appropriate regulatory authorities determine that it has no significant potential for adverse effects on the environment.

Regulatory authorities generally require the preparation of a closure and aftercare plan prior to completion of landfilling at a site.

If the landfill user charges are derived from the full cost analysis and reflect the costs of aftercare, then this proportion of the landfill income will not be spent until after the site is closed and (possibly) available for other uses.

For existing or new landfills, the opportunity exists to levy each tonne of solid waste disposed at the facility via the tipping fee as a disposal cost levy (section 542 of the Local Government Act) to provide the funds for these costs. Another method is to pay the costs of closure and post-closure using rates or taxes collected from the relevant community, or a combination of rates, taxes and disposal cost levy. If financial assurance for meeting future costs has not been implemented during the operational life of the now-closed facility, the costs of closure and post-closure will probably have to be met by the community in the form of rates and taxes.

5.4.19 Closure and aftercare costs

The impact of the decisions made in the first three stages of the project (see 'Different WACCs for different Greenfields stages', section 5.4.21) on the environment will be felt in this final stage as the site is restored to a useable state. There is considerable uncertainty over the rehabilitation liability taken on by a landfill operator once the landfill is closed, and also over quantifying the cost involved in the clean-up and rehabilitation phase of the project. Also, the estimated time frame for the rehabilitation and clean-up stage (15-30 years beyond the closure date of the landfill) of the project is fairly uncertain, with the highest projected monitoring period as long as 35 years after closure. This estimate is dependent on the location of the site selected (for example, drier terrain will increase the time required for the waste to decompose, and vice versa).

The methane gas produced by the landfill may be able to be used to incinerate the leachate and produce electricity, which would result in a reduction in the cost of stage 4. This option is dependent on where the landfill is situated (near a power station or population) and the amount of capital expenditure required. If this possibility were to be factored into the cashflows for stage 4 and then did not occur, for technical or economic reasons, unexpected stage 4 costs would result. This adds to the uncertainty surrounding the cost that will be incurred during this phase and the level of risk.

As a result, this post-closure exposure period is best characterised as one of low expected costs, ideally covered by amounts calculated and funded during the operating period. At the start of the project evaluation an estimate will be made of the closure and aftercare costs. The sum of these must be accumulated during the operation of the landfill taking into account current deposit rates. The model will need to reflect the accumulation of the 'sinking fund' when calculating the gate price per unit.

While there are some closure activities that are common to all landfill sites, others are site-specific and/or resource consent-specific. Typical closure activities include:

• construction of the final cover and maintenance
• gas management system completion and maintenance
• leachate management system completion and maintenance
• surface water management system completion and maintenance
• environmental monitoring.

It is important to reiterate that actual costs will be site-specific and may vary significantly from those presented in Appendix B. The reader is also referred to A Guide to the Management of Closing and Closed Landfills in New Zealand (Ministry for the Environment, 2001b).

Closure and post-closure cost estimates are best developed using actual costs from current landfill operations, as well as historical costs from closure and post-closure activities. Changes over time are likely to occur in the estimates due to increasing regulatory requirements and/or new technologies. The following major components of post-closure may be expected to decrease over time.

• Leachate management: the management of leachate has the potential to be the most expensive aspect of post-closure care. The decreases in volume of leachate produced at the site following final cover installation may reduce cost over time.
• Compliance monitoring: monitoring requirements of a landfill facility have increased since landfills have been consented under the RMA. However, if a facility is in environmental compliance, the regional council may reduce the frequency and extent of monitoring. Most landfill consent conditions include review provisions. Section 127 of the RMA allows consent holders to apply for a variation.
• Gas management: as the landfill ages and decomposition of refuse slows down, the production of LFG decreases, resulting in lower gas management costs.

Key financial considerations for closure and post-closure are as follows.

• In order to determine the cost of closure and post-closure care, the landfill owner/operator must determine the steps necessary, as required by the resource consent conditions, to close a facility as well as care for the facility post-closure.
• Closure and post-closure costs are scale-dependent and can be a significant part of the facility's tipping fee.
• Design, construction, operating practices and maintenance are all factors that influence potential closure and post-closure costs, as well as remediation or corrective actions.
• It is important to apply site-specific cost models when developing closure and post-closure cost estimates.
• Actual historical costs from site operations and construction activities should be used whenever possible. Cost guidelines and estimates from published sources should only be used as supplementary reference materials.
• Applying any 'typical' per hectare costs to sites should be avoided, as these could grossly underestimate or overestimate closure and post-closure costs.

5.4.20 Contingencies

Contingency costs associated with the pre-development, development and operation, closure and aftercare of the landfill should be included. Typically figures of between 5% and 25% are used, depending on the level of accuracy of the costs of the individual items in the analysis.

5.4.21 Cost of capital and weighted average cost of capital (WACC)

Introduction

The cost of capital is defined as the return investors in a firm or project expect to earn given the degree of risk associated with that firm or project. It represents the opportunity cost of investing in an asset with risk comparable to the asset being evaluated. For example, a relatively risky venture, such as investing in oil exploration, has a higher cost of capital than investing in a utility company.

Cost of capital can then be used to 'discount' the cashflows of projects or businesses as investors are forgoing the opportunity in the intervening period. When used in this way future cash flows are converted to a 'present value', expressed in today's dollars (a key component of the landfill model). Essentially, this discount factor accounts for both the 'time value of money' (a dollar today is worth more than a dollar in the future) and the riskiness of a project or business.

Calculating WACC

The commonly accepted cost of capital is the weighted average cost of capital, or WACC. The calculation of WACC is a relatively complex task and you should seek specialised advice from either your accountant(s) or external sources before calculating the required input. WACC is not directly equal to debt cost.

The formula below broadly outlines the approach that should be followed in order to calculate the WACC input for the model:

Where:

Debt = market value of debt

Equity = market value of equity

Cost of Debt = pre-tax return required by debtholders

Cost of Equity = pre-tax return that shareholders expect.

In short, WACC is a weighted average of the returns expected by debtholders and equity or shareholders for investing in an asset such as a landfill.

The cost of equity, or the risk-adjusted return required by shareholders, is not directly observable, but can be estimated using the capital asset pricing model (CAPM). This estimate is made as follows:

Where:

Risk free interest rate = the interest rate of risk free security

Market risk premium = the premium that the market returns over and above the risk free rate

"Beta" of Equity = the sensitivity of the returns of a firm's shares to fluctuations in market returns.

Consistency of cashflows and discount rates

An important point to note in the context of both forms of this landfill model [Greenfields and Brownfields.] is that the WACCs used need to be estimated in pre-taxand real [As distinct from nominal, or including the effects of inflation.] terms. This is because there needs to be consistency between the cashflows being discounted and the discount rate being applied. As the cashflows being discounted are before tax and 'real' (they are not adjusted for inflation), the discount factor or WACC must be consistent with this and so should be reflected in pre-tax real terms. Again, because of the complexity of this issue, you should seek specialised advice from either your accountant(s) or external sources before deciding on the appropriate discount rate.

Different WACCs for different Greenfields stages

A Greenfields landfill project can be divided into four specific stages based on the types of risks that an operator will be exposed to during its life. These stages are outlined below.

• Stage 1: Planning and pre-development - ensure that the project is technically and economically feasible, prepare construction plans, and obtain all required planning and resource consents. Note that this period also includes the cost of acquisition of the underlying land required for the landfill and hence there will be an overall negative cashflow in this stage, as no revenue will be generated.
• Stage 2: Development - build the necessary landfill, lock volume commitments in place, and ultimately get the gates open. This phase again includes only negative cashflows.
• Stage 3: Operating - manage the day-to-day operations of the site, continue to source volume, and expand the landfill as necessary.
• Stage 4: Aftercare - close the site in the agreed manner, managing any on-going environmental exposure and closure risks. This phase is expected to last 15-30 years beyond the closure date, before all residual or potential liabilities can be safely assumed to have passed.

Examples of the level of WACC risk rating that each different stage would attract are indicated below. The differing discount rates will reflect the quite different risks faced in each phase of a landfill project. For example, typically the site selection phase is inherently more risky than the operation phase because of the relatively greater risks inherent in finding suitable sites.

Table 2: Examples of WACC ratings at different stages of a landfill

	Stage 1	Stage 2	Stage 3	Stage 4
Project stages	Planning and pre-development	Development	Operating	Aftercare
WACC risk rating	Venture capital	Building company	Operating company	Operating company

Note that in the case of a Brownfields landfill, only one WACC is required - relating to that of a landfill operating company. From stage 3, the risks are representative of the business risks of the landfill.

Indicative WACC values

As you may note the model already has data in the Cost of Capital data entry cells. These values are as follows.

Table 3: WACC for different stages of landfill development

	WACC*
Planning and pre-development	25%
Development	25%
Operating	10%
Aftercare	10%

* This should be expressed in real, pre-tax terms.

However, note that these default values are inserted only to enable the model to generate an IBC value.

Before taking the results of this model beyond an initial drafting stage, you are strongly advised to obtain advice on these inputs. These rates are likely to alter depending on relevant market and economic parameters.