Measuring Up
Whether working in the public or private sectors, it is valuable to regularly assess the effectiveness of a community’s refuse management system.
Friday, April 30, 2010
By Thomas T Karston
While concepts like return on equity and assets are useful on a traditional financial level, it can also be valuable to have metrics more readily appreciated by the broader public and its political representatives.
Before suggesting two specific indicators that might be helpful, let’s agree that any such concepts should be:
- easy to calculate from traditionally available data;
- easy to understand by the public, regulators—and your employees;
- able to reflect improvements throughout the full cycle of operations, from receipt of refuse, transfer to a landfill, final disposal, and any supporting shop operations; and
- focused only on decisions over which management has direct control.
With these general criteria in mind, a first, and very broad, performance measure is simply to compare the past and projected tipping fees with the rate of local inflation. Having remained consistently below this threshold can be a strong credential with regulators, politicians, and community groups when proposing modest tipping fee increases.
A possibly tricky issue though is how far back in history to take this comparison. It is often best to start with some milestone event in the past, such as the opening of a new landfill, the switch to rail export, or perhaps the start of an incinerator program. The more well defined the starting point, the easier it will be on your audience.
Fortunately, the US Dept of Labor provides inflation data for numerous regions throughout the country, going back many years. As a result, if your tipping fee was $50 per ton in January 2000, it is easy to compare the percent change in how your rate has evolved with what it would be today had it grown at the rate of inflation in your area. Note that a prospective 2010 inflated value importantly needs to include any price level increase during the initial year 2000 itself.
For example, suppose that since 2000 inflation has been a steady 3% per year in your service area, and you are proposing a 2010 fee of $65 per ton. If your tip fee has been raised modestly every three years, the relevant comparison might look like Figure 1.
Our experience is that outside advisory groups, often including mayors of cities throughout the county, find this first type of performance comparison entirely clear and informative.
Nonetheless, it can be useful to employ a second, more production-oriented concept, especially in public sector operations, where profit-related measures, though powerful, are not appropriate, even for an enterprise fund.
Although it is helpful to see how total operating costs have been trending, management is often not in control of many factors affecting these results and should not be penalized or rewarded because of them. Some standard adjustments might include the removal of several things:
- The actual cost of fuel, replacing it with “gallons used at $2 per gallon”—This allows observing efficiencies in actual usage, but takes out the large swings in price, which we know all too well lately.
- Sales taxes paid—These are going to reflect changes in the gross tip fee itself, and will contaminate measures of production efficiency.
- Charges paid by a public-sector solid waste operation to another political entity for use of various major resources—These costs are often set by much broader considerations than what can be controlled by solid waste management per se.
- Inflation in general—This is achieved by dividing each year’s (adjusted) production costs by the relevant inflation index number to get the “real cost.” For example, in column two of the chart on page 65, we have historical costs after removing non-controllable items. Column three is a (hypothetical) local inflation index from the Federal Reserve. After dividing [2] by [3], we get an approximation of what the adjusted costs would have been with zero inflation in each of the years being reviewed here.
Dividing column 4 each year by tons disposed produces what can be called “real adjusted cost per ton.” If this index is trending up, one can focus directly on possible drivers other than overall inflation or the specific non-controllable costs that have been removed.
This measure is soup-to-nuts inclusive, so that a productivity-enhancing investment at the start of the cycle, perhaps shifting from open-top trailers at transfer stations to compactors, or a technical change at the final disposal site, such as using tippers instead of live-floor trailers, would both be reflected here. This way, management and staff can be recognized for improvements at any point along the full processing system. The question of administrative overhead efficiencies is another story, of course.
We should recognize that in light of the current recession and shrinking refuse volumes, any performance measure that divides by tons processed is going to be volatile. If refuse received drops 20% in one year, it is unlikely that production costs can fully adjust without a lag. On the other hand, using a measure that does not include tons processed would lose a credible connection to the magnitude of work needing to be accomplished.
Each solid waste operation has its own history, community setting, and technical requirements, but the two straightforward measures of performance suggested here can be readily implemented, are relevant in a wide variety of settings, and are likely helpful to management and outside advisory groups, as well as governmental regulators.
Author's Bio: Thomas Karston is in the finance section of the King County Solid Waste Division, Seattle, WA.
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