The cost of airspace development can be calculated for a landfill of any size or age at any site, amortised over the site life. To this can be added sunk and operational costs, corrected for financing, together with allowances for landfill closure and aftercare. These costs can be amalgamated using a timeline-based, ordered-input spreadsheet model to develop an overall 'indicative base cost' (IBC) of landfilling over the facility's life. This is what the FCA model does.
Using such a model, a whole-of-life IBC of landfill disposal is derived, which will only change if:
- financing costs change
- waste volumes (and hence the development timeline) change markedly
- operations costs increase markedly (for example, due to fuel or labour price hikes).
A carefully managed and operated landfill can, however, react to gradual change by utilising such a financial model to apply progressive costing refinements, reflected in smoothed changes in the gate rate. The biggest problems (in terms of artificial disposal costs or financial mismanagement) occur when:
- full costs are not properly recognised (especially at an early stage)
- there is undercharging for prolonged periods
- landfills need to be upgraded or significantly expanded to modern standards, causing capital cost shocks, which result in increased capital development costs and hence charges out of line with the (then) current charging regimes.
The most appropriate basis for charging is likely to be based on:
- estimating whole-of-life costs (IBC of disposal) using a comprehensive FCA model and adjusting for:
- cashflow considerations
- recycling or other local or national waste levies
- deriving a structured gate rate (price) from the above, in light of the actual 'global' financial position of the asset, depreciation, cashflow and tax considerations (all depending on the specific nature of the entity).
Adopting this approach for a new or expanding landfill could potentially result in - or highlight - significant pricing aberrations in the short term, but over the long term should even out to a predictable pricing range reflecting:
- the true (and relatively invariant over the short- to medium-term) cost of airspace development
- site-specific cost factors related to the site's age, size and throughput (economies of scale)
- other waste charges that may be applied for strategic/commercial reasons or to achieve long-term waste reduction targets.
4.2 Definition of 'full cost'
For the purposes of this Guide, '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.
Full cost accounting (FCA) encompasses the capital and operating costs that will be incurred over the life of a landfill, which have to be recovered and on which a return is required. Typical categories of costs include:
- management, administration and organisational overhead costs
- planning and resource consent costs
- land cost
- development costs
- operational costs
- closure and aftercare costs.
FCA is a dynamic process that needs to be able to respond to changes over the lifetime of a landfill project. This is readily achievable with the FCA computer model presented here. Once set up for a particular project, the model needs to be revised on a regular basis to reflect new and better information. For a landfill project it is recommended that full cost modelling be undertaken, or repeated, at the following stages:
- planning and project evaluation
- site selection and preliminary design
- detailed final design following resource consent processes
- at intervals throughout the landfill operating life, including reviews that take into account waste minimisation and recycling programmes, as their economic input on final disposal cost can be significant due to cashflow movements.
At each stage, refined information will be available to enable more accurate determination of actual disposal costs, or any charging or cost adjustments needed.
An FCA approach should also be used for analysing the overall costs of waste management systems. A waste management system covers all the services and facilities provided and, where required for the management and disposal of wastes, includes:
- administration and management
- education and promotion
- refuse collection
- recycling facilities and services
- composting facilities
- transfer stations and transport of refuse
- handling of special or hazardous wastes
The FCA model can also be used when planning new system components to determine the costs and benefits resulting from changes in waste flows.
4.3 Charging structures and gate rates
4.3.1 The basis for charging
Historically most landfill disposal sites in New Zealand have been run by TLAs. Normally, this has been on an 'actual and least cost' basis, with charges usually applied through a uniform service charge as part of council rates. In recent years, with the advent of commercial sector involvement (in commercial waste collection in particular), there has been a move towards a combination of charging mechanisms based on increased and improved tracking of waste quantities (by weighing) and recognition of the increasing full cost of waste disposal.
For purely commercial enterprises such as private sector landfills, disposal charges have had to reflect the full commercial cost of providing the service while making a commercial return on the landfill investment. This contrasts with a typical TLA situation where charges have often been based on contracted costs for collection and disposal operations.
However, this situation is changing with a better understanding of the full cost of waste disposal, and setting disposal changes now requires considering:
- creating incentives to reduce waste
- meeting waste reduction targets
- New Zealand Waste Strategy principles
- user-pays considerations
- ease of applicability
- ability to accommodate change.
The last point applies particularly to situations where current charges are artificially low and a higher charge is required due either to development of a new facility or in recognition of full disposal costs. Phasing in charges based on full cost requires, in those circumstances, considering issues such as the potential for illegal dumping (fly tipping) and waste flight (to cheaper, remote facilities).
4.3.2 Types of charging structure
There are two main types of charging structures, each with advantages and disadvantages.
Here, the full cost of disposal is applied, with or without additional charges or levies to support recycling or composting operations. For private sector operations this includes the required commercial return on the investment. Some TLAs and LATES also apply this charging principle (the FCA model allows this to be included by way of a WACC figure).
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Subsidised charging (from levies or transfer pricing)
Often rates-based charging mechanisms follow this form, where a charge is made based on historical charges and an assessment of what is politically acceptable. The degree to which such charges reflect actual full cost on a per capital basis can be highly variable, and often depends on the sophistication (or conversely, simplicity) with which costings are prepared.
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Clearly the latter scenario above is inconsistent with sound resource and financial governance, as well as with New Zealand Waste Strategy principles. It is simply how things have developed historically, and the current trend is to move rapidly towards knowing the full cost of disposal, driving down waste volumes using a range of measures, and applying the full cost residual disposal through appropriate tipping charges or rates-based disposal charges on a user-pays basis.
4.3.3 Setting gate rates
The process of setting an actual gate rate involves (depending on circumstances) a range of financial, political and commercial decisions. Attention needs to be given to the whole waste disposal structure for a facility, district or region, as the commercial considerations can prove very sensitive to fundamental factors such as waste tonnage (revenue) and transfer pricing/ subsidies (for example, in relation to recycling or organic waste diversion).
The model enables the user to test the sensitivity of the IBC to variations in key model parameters, of which income is a principal variable.
There is no simple formula or method for setting gate rates from the IBC. However, the model allows scenarios involving altered or increasing gate rates to be tested, and allows facility IBC figures to be readily checked and updated as circumstances change. This process is the fundamental management tool for assessing gate rates and other waste charges as the mix of disposal options and costs changes. At present this change is rapid and requires careful management by TLA managers of waste flows and disposal charges to ensure equity and balance in the waste system and charging structure.
In the case of a privately owned facility, setting gate rates tends to be commercially based and directly linked to confirmed or projected waste tonnages, capital investment and required rates of return. Therefore, determining the commercial gate rate tends to be a more straightforward exercise, even though actual charges may differ for commercial (and other) reasons over time.
4.4 Model overview
Figure 1 outlines the key interactions and processes of the model. Put simply, the model is a series of spreadsheets into which users enter known or estimated cost data. The model then carries out a series of calculations to derive an output, from which users can utilise as an IBC in order to derive an actual gate price (gate rate).
The steps illustrated in figure 1 are explained below:
- Is the landfill an existing landfill (Brownfield) or a new landfill (Greenfield)?
- If the landfill is a Brownfield landfill then input current asset value; or
- If the landfill is a Greenfield landfill input pre-operation capital expenditure
- Input site specific engineering data, financial and other data using templates
- The model then calculates the Indicative Base Cost (IBC) based on zero Net Present Value (NPV) over the life of the site.
- The model produces outputs of the IBC and cashflows
- The user can input other factors such as waste reduction policy, levies, market sensitivities, political considerations
- User sets gate rate on the basis of the calculated IBC and other factors
First, you need to decide whether you are modelling:
- a Brownfields site - an existing landfill with residual life, with or without future expansion; or
- a Greenfields site - a proposed landfill to be engineered on a new site.
4.4.1 Choosing between Greenfields and Brownfields
In most cases the approach to adopt will be obvious. However, a lateral or vertical extension of a Brownfields landfill may present some difficulties and require more specific judgement. If you consider that an extension will not present any extraordinary development or consenting issues, then you should treat the extension as part of the existing operation and develop a Brownfields model to cover the site's full residual life.
Periodic extensions (new cells) are often an integral part of an existing landfill facility and can be catered for in the business risks of the Brownfields operation itself through the financial parameters selected. However, if you consider the extension will present a materially new development, then you should treat the extension as a Greenfields development. The essential issue here is that where there is new and different or significant additional risk in the development of the extension, then the Greenfields option is the correct one to use. This is because the Greenfields option reflects the increased riskiness of new developments.
Once the decision is made on which type to adopt, you will need to makes a series of inputs. This is where the key difference between the Greenfields and Brownfields landfill models occurs. A Greenfields landfill requires data and cost inputs related to the pre-operation capital expenditure required to establish the landfill. A Brownfields operation requires the user to input the current asset value as the initial cost entry. This value needs to reflect the value of the landfill asset based on the relevant Financial Reporting Standard NZIV [NZ Institute of Valuers.] requirements. Sections 5.3.1, 5.3.3 and 5.3.4 provide detail of the types of inputs required for a Greenfields landfill, and sections 5.3.2 and 5.4.1 provide guidance on inputting the current asset value of the landfill needed for a Brownfields landfill.
Once these inputs have been made, you need to make a further series of inputs related to site-specific engineering, financial and other data (see sections 5 and 7). The model does not provide costs, or cost estimates, for the various components of landfill development, operation or aftercare because these will be site-specific and are likely to vary in different parts of the country and over time. However, the model does provide qualified default values where possible. Waste managers will still need to obtain or estimate costs to ensure that the most up-to-date and site-specific information is used, based on the specific site locality, size, design and operational requirements.
The key financial data required pertain to 'cost of capital' calculations. Details of these are given in section 5.4.21.
Once all the inputs have been made, the model calculates an IBC of disposal. 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.
On the last point, the cost of capital [Essentially, this discount factor accounts for both the 'time-value of money' (i.e. a dollar today is worth more than a dollar in the future) and the riskiness of a project, or business.] is used to discount the cashflows the model derives after input from the user. These cash flows can then be converted to a present value, expressed in today's dollars. The model is constructed in such a way that, given these present value cashflows, it solves for a required revenue that returns to capital contributors their costs of capital (and no more). This condition can also be stated as the project net present value (NPV) equals zero (as per Figure 1). That is, over its life, the landfill project has revenues that just return its cost of capital to its capital contributors (and no more), so the NPV of the project is zero.
More detailed figures outlining how the model manipulates the input - including the interaction between engineering cost data and the cost of capital inputs - can be found in Appendix A.
The FCA model has been designed and developed to be intuitive, for ease of use. It is an Excel-based electronic spreadsheet, with the formulas and option buttons, macros, and other features embedded in several worksheets. This format makes the model an easy-to-use analytical tool, which is on a popular software platform. Section 7 gives a fuller description of the technical requirements of the model, and an outline of its structure.
4.5 Interpreting the FCA model output
The following are important points to note when interpreting the value of the IBC derived from the model.
- The IBC is the base unit cost of disposal in dollars per tonne derived by the FCA model, and gives an indication of the actual dollar cost of providing residual waste disposal to a landfill.
- The IBC does not include GST.
- Over time the IBC does need to be adjusted to reflect inflation. A simple way to do this is to increase the IBC by an inflation estimate (for example, the Consumer Price Index). A more time-consuming (but accurate) method would be to re-estimate all inputs at today's dollar value, so that they would include only inflationary impact since the IBC was last calculated.
- You can then set the landfill gate rate / tipping fee on the basis of the IBCand other factors including:
- 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.