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Solid Waste Management
Privatization Procedural Manual

Solid Waste
Solid Waste Technical Assistance Financial Management

Solid Waste Technical Assistance

Ministry of
State for
Environmental Affairs
TABLE OF INTRODUCTION:
Financial Management in the Solid Waste Sector

CONTENTS
STEP 1:
Collect Revenue Data

STEP 2:
Collect Cost Data
Operating Costs
Capital Costs

STEP 3:
Collect Operational Data
STEP 4 :
Analyze Data

STEP 5:
Use Capital Budgeting to Anticipate Future Capital
Expenditure

STEP 6:
Use Cash Flow Analysis for Decision-Making
Build Operational Forecast Model
Create Income and Expense Statement
Develop “Utility Basis” for Calculating Tariffs

STEP 7:
Determine Types of Fees/Tariffs
Flat Rates
Variable Rate Systems

STEP 8:
Determine Method of Collection
INTRODUCTION s Egypt’s Governorates
and municipalities focus
If a local government decides to continue
self-managing solid waste services, good
more attention and financial management will create practices
resources on improving that should translate into more effective
FINANCIAL solid waste management
(SWM), the importance of sound
collection services, cleaner cities, and
satisfied citizens.
MANAGEMENT IN financial management within the overall
solid waste management effort becomes Financial management can be described
THE SOLID WASTE crucial. Scarce monetary resources to as a cyclical resource allocation process.
SECTOR pay for this improvement will have to The process has three principal
be carefully mobilized and efficiently components:
utilized. Whether or not Governorates
choose to improve solid waste • Determine actual current costs.
management by upgrading existing • Estimate future costs.
internal capacity, or by contracting with • Set and collect solid waste
the private sector, effective financial management fees.
management plays an important role.
Because the operational environment
Ensuring that sound financial management and resultant costs are always changing,
practices are incorporated into the overall this process will need to be repeated
municipal solid waste management on a regular annual or bi-annual schedule.
If a local government does structure is critical for local governments. And once it determines actual costs,
not know its true costs of If a local government is considering the operator must again estimate future
collecting and disposing of contracting with the private sector for costs and plan for tariff/rate changes to
solid waste, how can it municipal solid waste collection and accommodate any changes.
disposal services, good financial
effectively evaluate any management practices become important Figure 3.1 shows these three
financial proposal from a in the context of dealing and negotiating components and the associated steps
private sector bidder for the with the private sector. for developing a financial management
services? system for solid waste management.
FIGURE 3.1: FINANCIAL MANAGEMENT PROCESS

1. Collect revenue 5. Use cash flow 6. Determine type of

data. analysis to assist in fees/tariffs to be
2. Collect cost data. determination on applied to waste
STEPS

3. Analyze data.
4. U s e c a p i t a l contracting for services producers.
budgeting to estimate (computer modeling). 7. Determine method
needed capital outlays of fee/tariff collection.
over a reasonable time
frame.
COMPONENTS

Determine Set/Collect
Estimate
Actual Waste
Future
Current Management
Costs
Costs Fees

2
A current “best practice” in the solid FCA, on the other hand, is an accrual Similarly, gross billings of rates (not
waste management field is the use of system of accounting that recognizes actual receipts of money) would be
Full Cost Accounting (FCA). FCA is costs as resources are used or committed, recognized as income under FCA rules.
defined as: “…a systematic approach regardless of when money is spent. Persons or companies that didn’t pay
for identifying, summing, and reporting Using the previous example of the their rates would be reflected under a
the actual costs of solid waste purchase of a collection truck, FCA separate account in the system.
management. It takes into account past recognizes that the truck, as a resource,
and future outlays, overhead (oversight will not be used up in the year This chapter is not meant to be an
and support service) costs, and operating purchased. Rather, it will have a useful accounting guide. As such, it will not
costs.”1. The seven steps presented in life of many years. As a result, the provide and describe charts of accounts
this chapter show how to use FCA to expense of the truck will be spread out or posting procedures. That is the job
develop and operate a financial over those years of service (depreciated). of the local government or Governorate
management system. A critical concept inherent in FCA seeking to upgrade accounting systems.
systems is the differentiation of the terms What this chapter will do is guide the
Historically, local governments have used outlay and cost. Outlay refers to the user through the various steps of
cash flow accounting methods (cash actual expenditure of monies for the organizing data for analysis and
basis or general fund accounting) to purchase of an asset or the payment for interpretation. Whether a Governorate
reflect the flow of financial resources, services. Cost refers to the monetary seeks to privatize solid waste management
both income and expenses. A cash flow value of resources as they are used or services or not, the proper organization
accounting system records income and expended. In the above example, the of financial data and its analysis can
expenses when they occur. For example, outlay for the vehicle is the price paid assist governments to more efficiently
the purchase of a collection truck would to acquire the vehicle. The cost of the apply scarce resources to improve the
be recorded as one expense on the date vehicle will be the annual depreciation lives of citizens.
the truck was purchased, and income applied against its value.
from service fees would be recorded as
it is received from customers.

FCA requires a new way of thinking about solid waste management. The benefits of FCA are many, the most
important of which are summarized below:
FCA makes it easier to identify true costs. When local governments truly know their solid waste management
costs, it is easier to control them.
With FCA, “peaks and valleys” in cash expenses can be avoided. FCA employs depreciation and
amortization which spreads costs out giving a more realistic picture of solid waste management programs without
the distortions prevalent under cash flow accounting policies.
FCA is useful when contracting with the private sector. Because local Governorates better understand costs
under FCA, they position themselves for better negotiating and decision-making with private sector operators
who bid on privatization contracts. Essentially, using FCA allows a Governorate to view solid waste management
operations as would a private company.
FCA is a powerful analysis tool. FCA allows municipalities to account discretely for each component of solid
waste management services, so that each can be evaluated for effectiveness on its own. For example, FCA would
allow analysis of a recycling operation apart from other solid waste management operations. This differs considerably
from local Governorate systems that frequently use centralized costing without regard for cost center activities.
FA enables benchmarking. FCA allows municipalities to compare their performance in solid waste management
against industry standards. This can be a useful evaluation tool.
FCA makes financial transparency available to Public Awareness Programs. FCA allows for accurate
disclosure to citizens as part of any public awareness/education component.

1 United States Environmental Protection Agency, Full Cost

Accounting for Municipal Solid Waste Management: A
Handbook, Washington, DC 1997.

3
STEP 1 he first step in upgrading information systems to FCA standards is collecting
accounting data. On the revenue side, begin by listing all sources of revenue
for the past year. In the Egyptian context these sources of revenue could
fall into the accounts listed in Figure 3.2.
COLLECT
REVENUE DATA
FIGURE 3.2: SAMPLE SOURCES OF REVENUE
Income Account Description
Cleansing Tax Tax (generally 2% of rental value of apartments) imposed
and collected from residential property owners.
Transfer from Simple transfers from the municipal general fund to the
General Fund solid waste management department.
Transfer from Direct subsidy provided by the national government
National Government though the Ministry of Finance

Sales Revenue from the sales of composted mulch, recyclables.

Also includes any dumping fees collected.
Contracts Revenue from negotiated collection contracts with large
producers such as hotels, restaurants, etc.

Figure 3.3 provides an example of an organizing framework for collecting revenue

data. At the start of this exercise, list only totals on the bottom line. Income can
be allocated later among principal solid waste management activities as they become
known.

FIGURE 3.3: EXAMPLE OF TABLE FOR COLLECTING REVENUE DATA

Income Accounts
Activity Cleansing Transfer from Transfer from
National Sales Contracts Totals
Tax General Fund Government
Waste Collection
Waste Transfer
Waste Recycling
and/or Processing

Waste Recycling
and/or Disposal
Street Cleaning

Public Cleaning
(parks, monuments, etc.)

Totals

4
STEP 2 he use of FCA means recognizing many costs that would not have been
recognized under a cash flow accounting system. Figure 3.4 reflects some
of the costs used in a FCA system, and although not all of the costs shown
may be applicable in every Egyptian context, they are noted here as a
COLLECT due diligence item.
COST DATA In FCA, there are two different kinds of costs; Operating Costs and Capital
Costs. Each is discussed in more detail in this step.

FIGURE 3.4: SAMPLE FCA COSTS

Type of Cost Cost Components
•Public awareness and outreach programs
Front-End Costs •Land acquisition
•Costs of permits
•Building construction
• Recurring costs
Operating Costs - Operations and Maintenance (O&M)
- Debt Service
• Purchase of assets used in the course of business with
Capital Costs life in excess of one year (subject to depreciation).
• Site Closure
Back-End Costs • Building/equipment decommissioning
• Post-closure maintenance
• Retirement and health benefits for current employees
Contingent Costs • Remediation costs
• Liability costs (property damage, personal injury, etc.)

OPERATING COSTS The costs of running these activities must listed in Figure 3.5 together with a
be allocated across appropriate expense further description.
Operating costs are recurring costs or accounts. These expense accounts are
expenses of doing business. There are
generally two principal operating costs:
• Operations and maintenance FIGURE 3.5: OPERATING COST CATEGORIES
(O&M).
• Debt service (interest payments Expense Account Description
on loans).
Labor Wages Wages/salaries of employees, including: the cost of
These two types of operating costs can employee benefits such as health insurance, retirement
be divided into direct and indirect plans, bonuses, etc. Also includes day labor wages.
categories. Direct costs are those
attributable to the principal activities of Vehicles & Equipment Cost of operations of vehicles including: fuel, oils and
lubricants, maintenance, etc. Also includes cost of lease
running a solid waste management if applicable.
operation, such as waste collection,
transfer station operations, landfill Rent or Lease Rent or Lease payments. Examples of this would be
operations, recycling operations, etc. amount paid for leasing land for landfill operation, transfer
Payments station, fleet garage, offices, etc.
Indirect costs are those incurred in Contract Services Expenses of contracting for specific services such as:
support of operating activities. Examples street sweeping, recycling, etc.
of these costs are accounting costs, Loan Repayments Interest payments on any loans taken out for principal
clerical staff, payroll services, data solid waste management activities.
processing, insurance, etc. These kinds
of costs are referred to as “overhead”. Other Payments Any other type of payment not described above.

5
The activities and expense accounts in FIGURE 3.6: DEPRECIATION GUIDELINE
Figure 3.5 are only examples and may
not cover everything needed for certain Description Number of Years to Depreciate
situations. With the information obtained
from the data in the table, a local Buildings 20 - 25 Years
government can set up framework (see
Figure 3.8), which allocates direct and Machinery 10 - 15
indirect costs among appropriate financial
accounts. The examples cited here are Vehicles 10
for Residential and Commercial Solid
Waste Management. A local government Furniture 10
also may want to develop similar Electronics and
frameworks for industrial waste, medical Computers 5
waste, street sweeping and public
cleaning, or other waste management
services as the situation applies. FIGURE 3.7: CAPITAL ASSET INVENTORY SAMPLE
The main idea is to organize expenses Vehicle and Equipment Inventory Framework
in a logical fashion that properly states
allocated expenses among various SWM Activity Quantity Purchased
(P) or
Date Amount Remaining
activities. Leased (I) Aquired Paid Life
Equipment
CAPITAL COSTS Rear Compactors
Front Compactors
The majority of assets in a SWM system
Collection

Trailers
usually are comprised of vehicles, Micro Trucks
equipment, land and facilities that have
a useful life in excess of 1 year. Thus, Pickups
the outlay (price paid) for these assets Motorcycles
will not be recognized in 1 year, but Garage
will be spread out over the useful life Maintenance Shop
of the assets. In other words, the assets Front Loader
Back Loader
Transfer Station

will be depreciated, and each year’s

and Transport

depreciation will constitute the asset’s Pickups

cost for that year. Costs for resources Transfer Vehicles
with useful lives in excess of 1 year are Trailer
commonly called capital costs. Crane
Scalehouse/Office
In Egypt, certain legal guidelines Land
governing the depreciation of assets Recycling, Building
exist.(see figure 3.6)
Operations

& Machinery
Recycling

Turners
An inventory of all capital cost assets Front-End Loaders
must be established and maintained so Other Vehicle
that costs related to the use of these Land
resources can be allocated properly. Weighing Scale
Figure 3.7 provides an example of an Water Trucks
Operations

inventory format that a local government

Landfill

Graders/Compactors
could use for this purpose. The purpose
of the inventory is to separate assets Dump Trucks
that will be classified as capital assets, Bulldozers
and subject to depreciation, from those Other Vehicles
that aren’t. Note: Leased items are not capital costs.

6
Once the inventory of capital assets has the project becomes operational. These associated with maintaining the site.
been completed, calculate the remaining costs include feasibility studies, landfill Any predictable costs that will be
life of each asset and the annual acquisition, construction costs, incurred after operations cease should
depreciation to be allocated. For our permitting, etc. Even though these be amortized during the period of
purposes, use a straight-line depreciation represent outlays made prior to operation. In other words, the future
method (i.e., outlay amount divided commencing operations, they should be outlay is recognized as a debt and annual
by the number of years of depreciation). shown as an annual depreciation cost payments are paid into an account
Do not continue to depreciate an asset during operations. (amortized) so that there will be sufficient
after its depreciable life is over, even if funds available to pay the debt when
the asset continues to be utilized. Back-end costs represent another it “comes due”.
challenge. Back-end costs are anticipated
Additionally, front-end costs associated costs that will be incurred after operations Figure 3.8 provides an example of how
with setting up the solid waste cease. An example of these would be a framework for data collection can be
management operation must be the closure of a landfill. After closure constructed along these lines.
accounted for through depreciation. the landfill no longer is part of the
Front-end costs are those incurred before operation, but there will be some costs,

FIGURE 3.8: OPERATING COST FRAMEWORK FOR RESIDENTIAL

& COMMERCIAL SWM
Financial Accounts
ACTIVITIES Vehicles Rent/Lease Contract Loan Other
Labor Totals
Equipment Payments Services Payments Payments
Collection
Direct Expenses

Transfer Stations
Transfer Vehicles
Landfill Operations
Recycling Center
Public Awareness Program
Monitoring Unit
Sub-total
Accounting
Billing
Indirect Expenses

Building Operations
Clerical Activities
Communications
Data Processing
Insurance
Legal
Payroll
Personnel
Purchasing
Other
Sub-total
Total

7
Allocating indirect costs can be a bit
trickier than direct costs. If the indirect SWM Annual Budget ÷ Total Municipal Budget less shared
costs (overhead) are exclusive to the
solid waste management effort, then services = Allocation Multiplier
they should be allocated among the
various cost centers based on the
percentage of time/resources devoted For example, assume that a municipality has a total annual budget
to each cost center (or some other
equitable allocation system). of LE 100 million. The budget for the SWM department (or
If, however, indirect costs are shared Beautification Authority) is LE 30 million. The total amount of
with other municipal functions, then shared services and resources amounts to LE 10 million. The
those portions attributable only to solid
waste management must be determined, allocation multiplier is calculated as follows:
and then allocated amongst the cost
centers. For example, if payroll operations
costs also cover other municipal
departments, then the portion to be LE 30 million ÷ (LE 100 million – 10 million) = 0.33
allocated to the solid waste management
operation must be calculated. The
simplest method to do this is known as Thus, the SWM share of the shared cost would be
the Budget Share Method, and it is
calculated by dividing the solid waste LE 10 million x 0.33, or LE 3.3 million.
management annual budget by the total
local government annual budget less This amount would then be allocated proportionally among the
total shared costs. The result of this is various SWM cost centers.
known as the allocation multiplier. An
example is shown on this page.

8
STEP 3 fter organizing accounting data, a Governorate needs to gather operational
data. Operational data refers to specifics regarding the service area falling
under the SWM system. They should include details such as demographics,
COLLECT units serviced, neighborhood growth rates, waste collected, etc. Once
these data are accurately collected and maintained, they can be used together with
OPERATIONAL SWM costs to further develop discrete operation factors. Ideally, these operational
data could be represented as in Figure 3.9.
DATA
FIGURE 3.9: EXAMPLE OF HOW TO ORGANIZE
OPERATIONAL DATA FOR RESIDENTIAL
SOLID WASTE COLLECTION SERVICE
Operational Data : Residential Solid Waste Collection
Neighborhood Number Avg. Avg. Collection Collection
of Annual Annual Method Frequency
Households Household Waste (door-to- (daily,
Income Produced door, weekly)
(in m3)* pooling
site, etc.)

3
* m = cubic meters

Once data such as the example above are collected and updated, the Governorate
has a wealth of operational and demographic data. For example, it will be able
to estimate future waste volumes based on predicted population growth and
correlate waste production against household income to more efficiently allocate
service vehicles, and plan capital expenditures.
Figure 3.10 shows an example of organizing operational data for commercial
service.
FIGURE 3.10: EXAMPLE OF ORGANIZING OPERATIONAL All of the collected data can then be
DATA FOR RESIDENTIAL SOLID WASTE used to further refine operational factors
COLLECTION SERVICE for the SWM department. The list
below shows various indicators that can
Operational Data : Commercial Solid Waste Collection be produced:
Neighborhood Number Type Avg. Avg. Collection Collection
of of Annual Annual Method Frequency • Crew size per collection vehicle,
Commercial Shop Gross Waste (door-to- by neighborhood.
Shops Sales Produced door, • Vehicles needed per number of
(in m3)* pooling residences and/or shops, by
site, etc.) neighborhood.
• Fuel cost per vehicle per year.
• Maintenance costs per vehicle per
year.
• Fuel and maintenance costs per
3
vehicle hour of operation.
* m = cubic meters • Laborers per kilometer (km) of
These kinds of data should be collected and maintained for all aspects of solid street for manual street sweeping.
waste management. Chapter 2 has information on additional data that should be • Km per day of street per street
collected. sweeping machine.

9
STEP 4 horough data collection practices coupled with FCA systems allow local
governments to do the following:
• Prepare sound budgets that stand up to scrutiny and questioning.
ANALYZE DATA • Pinpoint inefficiencies or other problems within discrete cost centers.
• Compare their own financial results/ratios with those of other countries or
against other Egyptian local governments.
In the end, good financial analysis is only possible with good financial accounting.
The results of financial analysis serve as a tool to improve efficiencies, eliminate
waste, improve service to citizens, and lower costs. Figure 3.11 contains some
cost and operational benchmarks for solid waste management.
FIGURE 3.11: SAMPLE BENCHMARKS FOR ANALYSIS
Costs of Municipal Solid Waste Management: A Comparison (1988 $)

Basis Low-Income Middle-Income Industrialized

Country Country Country

S.W. Generated tons/capita/year 0.2 tons 0.3 tons 0.6 tons

Collection cost $/ton $15-30 $30-70 $70-120
Collection cost $/capita/year $3-6 $9-21 $42-72
Collection Collection cost % of per capita income 0.9-1.7% 0.5-1.1% 0.2-0.4%
In FCA, there are two different types of costs, Operating Costs and Capital
O&M* cost % Costs.
of totalEach
costis discussed45%
in more detail below.
30% 20%
Labor cost % of total cost 15% 40% 70%
Capital cost % These
of totalkinds
cost of costs are40%
referred to as accounts.
30% These expense 10%accounts are
Collection cost “overhead”.
$/ton $30-60 listed in Figure 3.5 $140-240
$60-140 together with a
Collection cost $/capita/year $0.6-1.2 further description. $4.2-7.2
$1.8-4.2
Public Collection cost % The costs
of per of running
capita incomethese activities must 0.1-0.2%
0.2-0.3% 0.02-0.04%
Cleansing be allocated across appropriate expense
O&M* cost % of total cost 20% 10% 10%
Labor cost % of total cost 50% 70% 65%
Capital cost % of total cost 30% 20% 25%
Disposal cost $/ton $1-3 $3-10 $15-50
Disposal cost $/capita/year $0.2-0.6 $0.9-3.3 $9.0-30.0
Sanitary Disposal cost % of per capita income 0.05-0.2% 0.05-0.2% 0.05-0.2%
Landfill
O&M* cost % of total cost 35% 30% 25%
Labor cost % of total cost 10% 20% 35%
Capital cost % of total cost 55% 50% 40%
Transfer cost $/ton $3-5 $5-15 $15-20
Transfer cost $/capita/year $0.62-1.0 $1.5-4.5 $9.0-12.0
Transfer cost % of per capita income 0.2-0.3% 0.1-0.2% 0.05-0.07%
Transfer
System O&M* cost % of total cost 25% 25% 20%
Labor cost % of total cost 10% 25% 45%
Capital cost % of total cost 65% 50% 35%

Source: Cointreau-Levine, Sandra Private Sector Participation in Municipal Solid Waste Services in Developing Countries (Vol. 1), The World Bank, Washington, DC 1994.
*O&M = Operations and Maintenance

10
STEP 5 apital budgeting is the process of anticipating capital expenditures at
future dates and planning for the outlay. A simple example is shown in
Figure 3.12.
USE CAPITAL A municipality owns a fleet of nine collection trucks. They were all purchased
BUDGETING TO at the beginning of year 1 at an outlay of LE 250,000 each for a total of LE
2,250,000. This fleet is capable of servicing collections for 30,000 residences.
ANTICIPATE The size of the municipality at year 1 is 27,000 residences.
FUTURE CAPITAL The city is growing at 3 percent per year, so that at the end of the fourth year;
EXPENDITURES there will be almost 30,300 residences. That means that one additional collection
vehicle needs to be purchased in year five. Inflation at 4 percent per year,
however, will have pushed up the price of these vehicles to LE 292,465.
Population growth will continue to require new vehicle purchases in years 8 and
11. Additionally, the vehicles have a depreciable life of 10 years, so at the end
of year 10, all the vehicles purchased at year 1 will need replacement. Inflation
will have driven up the price of these vehicles to LE 370,000 for a total outlay
needed of LE 3,833,837 at the beginning of year 11 (replacement of the nine
original vehicles plus one vehicle due to growth).

FIGURE 3.12: EXAMPLE OF COLLECTION VEHICLE CAPITAL BUDGETING

Budgeting period 11 years
Depreciation period 10 tears
Annual household formation growth rate 3%
Inflation rate 4%
Number of households year 27,000
Ratio of collection vehicles to households 1:3,000

Based on the information in the example, Figure 3.13 shows how a table can
be constructed to show capital outlays and costs.

11
 FIGURE 3.13: CAPITAL BUDGETING TABLE
Depreciation
Yr Outlay 1 2 3 4 5 6 7 8 9 10 11
1 2,250,000225,000 225,000 225,000 225,000 225,000 225,000 225,000 225,000 225,000 225,000 225,000
2
3
4
5 292,465 29,247 29,247 29,247 29,247 29,247 29,247 29,247
6
7
8 328,983 32,898 32,898 32,898 32,898
9
10
11 3,833,837 383,384
Tls. 6,750,000 225,000 225,000 225,000 225,000 254,247 254,247 254,247 287,145 287,145 287,145 445,529

Manually, this process can become very complex when dealing with numerous
depreciable items. Personal computers and spreadsheet programs, however, can
facilitate this type of planning. The local government will need to execute this
type of budgeting for all capital assets. Generally, budgeting should not exceed
10 to 11 years as forecasting beyond that becomes problematic and error-prone.
Once a capital budgeting plan is completed, it will play an important part in
forecasting cash flows and setting solid waste tariffs/fees.

STEP 6 nce a Governorate has gathered the accounting data needed to accurately
reflect its revenues and true costs, and has completed a capital budgeting
exercise, it is ready to begin the process of preparing forecasts of its
revenues and expenditures (also known as preparing pro forma income
USE CASH FLOW and expense statements). These will be needed to accurately set user fees (tariffs,
ANALYSIS FOR or cost of service fees).
DECISION-MAKING The following is a step-by-step construction of a simple cash flow model that will
represent a pro forma statement for an imaginary local government in Egypt.
Microsoft Excel, a spreadsheet program for personal computers, will be used.
Apply the same assumptions used in the capital-planning model and add a few
more as well. This example will demonstrate the process for residential solid waste
collections. This same exercise would have to be performed for all of the other
components of a solid waste management system in order to consolidate all data
into one integrated cash flow statement.

12
BUILD OPERATIONAL FIGURE 3.14: UNDERLYING ASSUMPTIONS
FORECAST MODEL DRIVING THE MODEL
We begin by building an operational Annual inflation rate: 4%
forecast “model” that sets out the
underlying drive factors for our financial Annual household formation growth rate: 3%
statements. Number of households in service area: 27,000
All the calculations in Figure 3.14 take Households per collection vehicle: 3,000
into account population growth (changes Crew size per collection vehicle (non-driver): 3
in fleet size) and inflation (changes in Wages for crew (including benefits)/day: 20
wages and maintenance expenses). Note
that if good operational data are available Wages for driver (including benefits)/day: 24
related to the collection service area, a Overhead rate (% of total labor): 20
more accurate “volumetric” modeling
approach can be utilized to forecast Hours of operation per day per vehicle: 10
equipment needs (fleet size/crew size). Fuel and maintenance cost per hour: 30
For our purposes now, however, we
make use of a simpler assumed ratio of Collection frequency (times per week): 6
vehicles to residences.
CREATE INCOME viewpoint, no profits are built in to the inflated over time. This makes the exercise
AND EXPENSE STATEMENT cash flows. Essentially, the government of setting tariffs fairly simple in the sense
wants to break even, that is, take in that the gross total of tariffs needed to
Next, migrate these data over to an revenues to match expenses. That is sum revenues to equal expenses can be
why it is critical that accurate expense calculated. Arriving at required gross
income and expense statement, numbers be generated. Note too, that
samples of which are provided in Figures tariffs is the first goal of tariff setting.
revenues were forecasted This basis of presentation is also called
3.15 and 3.16. over the cash flow period. Cleansing a cash needs basis, and is frequently
taxes and transfers from the national used by municipal-owned SWM
Notice that because we are looking at government were the assumed constant operations.
this exercise from the government sources of income and these were

FIGURE 3.15: SAMPLE INCOME AND EXPENSE STATEMENT

Base
Year 1 2 3 4 5 6 7 8 9 10 11
Number of 27,000 27,810 28,644 29,504 30,389 31,300 32,239 33,207 34,203 35,229 36,286 37,374
households

Number 9 9 9 9 10 10 10 11 11 11 12 12
of vehicles

Number 9 9 9 9 10 10 10 11 11 11 12 12
of drivers

Number 27 27 27 27 30 30 30 33 33 33 36 36
of crew

Labor
67,392 70,088 72,891 75,807 87,599 91,103 94,747 108,391 112,726 117,235 133,009 138,329
expense-
drivers
Labor
expense- 168,480 175,219 182,228 189,517 218,998 227,757 236,868 270,977 281,816 293,088 332,522 345,823
crew
Vehicle
maintenance 842,400 876,096 911,140 947,585 1,094,988 1,138,787 1,184,339 1,354,883 1,409,079 1,465,442 1,662,610 1,729,115
expense

13
 FIGURE 3.16: SAMPLE INCOME AND EXPENSE STATEMENT FOR
GOVERNMENT OPERATION
INCOME 1 2 3 4 5 6 7 8 9 10 11
Cleansing Taxes 223,274 230,765 238,556 270,065 284,107 293,844 330,299 347,148 359,196 401,343 4490,900

Transfer from 300,000 312,000 324,480 337,459 350,958 364,996 379,596 394,780 410,571 426,994 444,073
National Govern.

RequiredUser fees 872,190 899,518 927,938 1,080,380 1,140,602 1,177,683 1,354,476 1,427,747 1,475,208 1,680,056 1,870,652
(Tariffs)

Total Income 1,395,465 1,442,285 1,490,977 1,687,907 1,1775,671 1,836,529 2,064,378 2,169,682 2,244,984 2,508,402 2,755,637

EXPENSES 1 2 3 4 5 6 7 8 9 10 11
Labor (including 245,307 255,119 265,324 265,324 318,860 331,615 379,367 394,542 410,324 465,531 484,152
benefits)
Administration
(overhead) 49,061 51,024 53,065 53,065 63,772 66,323 75,873 78,908 82,065 93,106 96,830

Fuel and 876,096 911,140 947,585 947,585 1,138,787 1.184,339 1,354,883 1,409,079 1,465,208 1,662,610 1,729,115
maintenance
Depreciation 225,000 225,000 225,000 225,000 254,247 254,247 254,247 287,145 287,145 287,145 445,529

Total espense 1,395,464 1,442,283 1,490,974 1,490,974 1,775,666 1,836,523 2,064,371 2,169,674 2,244,975 2,508,392 2,755,626

Notice that the above calculations show government were unable or unwilling to capital is needed. Again, this is an
no debt service or any other entry that do this (and that may be a likely scenario unlikely scenario, as the amounts needed
would indicate that capital outlays were in the future), then the government would be large and the tariff burden
utilized at the beginning of the cash would have to find other sources to would be onerous and politically
flow period, again at year 9, and finally raise capital. One way would be to explosive. This is a major reason why
at year 11. In this case, it is assumed borrow, but many local Governorates more local governments are turning to
that the national government simply paid in Egypt have no credit standing and the private sector to contract for solid
for the vehicle fleets at all points in time, would be unable to secure financing. waste management services. Let’s now
a 100 percent subsidy. If the national The other way would be to raise user look at how a private operator might
fees/tariffs for the years the approach the issue.

14
DEVELOP “UTILITY BASIS” statement after making these changes. Using these two examples, the cost to
FOR CALCULATING TARIFFS (See Figure 3.17). the government will be higher if a private
operator is contracted to manage the
We need to construct the pro forma Note that the cash flow goes out only SWM operations. The reason for this
statement from the perspective of a 10 years. The reason for this is to is cost of capital, the price the private
private company that has shareholders anticipate a private operator decision operator must pay for borrowing money
funding its operations. This is also known not to enter into any contract with a to purchase the vehicle fleet (in this
as the utility basis for calculating tariffs. municipality that would require major case, borrowing from shareholders). For
new capital outlays soon before these examples, we’ve assumed operating
For this example, assume that a private termination of the contract. Thus, if the costs to be the same in both cases.
operator funds its capital requirements majority of the assets depreciate out
entirely from shareholder equity. If the after 10 years, one might expect a
shareholders are expecting a 20 percent contract proposal from the private sector
return on their investment, then the for that term as well. In this case, at the
SWM operation must generate a positive end of 10 years the local government
net income that accomplishes this would tender another contract for a
requirement. Let’s look at the pro forma similar period of time, or take over
operations on its own.

FIGURE 3.17: INCOME AND EXPENSE STATEMENT FOR

PRIVATE OPERATION
Pro Forma Income and Expense Statement: Private Operator/Shareholder Funded

INCOME 1 2 3 4 5 6 7 8 9 10
Cleansing Taxes 223,274 230,765 238,556 270,065 284,107 293,844 330,299 347,148 359,196 401,343

Transfer from 300,000 312,000 324,480 337,459 350,958 364,996 379,596 394,780 410,571 426,994
National Govern.

RequiredUser fees 1,322,190 1,349,518 1,377,938 1,530,380 1,649,095 1,686,176 1,862,969 2,002,036 2,049,498 2,254,346
(Tariffs)

Total Income 1,845,465 1,892,285 1,490,977 1,687,907 2,284,164 2,345,022 2,572,871 2,743,972 2,819,274 3,082,692

EXPENSES 1 2 3 4 5 6 7 8 9 10
Labor (including 245,307 255,119 265,324 265,324 318,860 331,615 379,367 394,542 410,324 465,531
benefits)
Administration
(overhead) 49,061 51,024 53,065 53,065 63,772 66,323 75,873 78,908 82,065 93,106

Fuel and 876,096 911,140 947,585 947,585 1,138,787 1.184,339 1,354,883 1,409,079 1,465,208 1,662,610
maintenance
Depreciation 225,000 225,000 225,000 225,000 254,247 254,247 254,247 287,145 287,145 287,145

Total espense 1,395,464 1,442,283 1,490,974 1,490,974 1,775,666 1,836,523 2,064,371 2,169,674 2,244,975 2,508,392

1 2 3 4 5 6 7 8 9 10
Net Income 450,001 450,002 450,003 450,004 508,498 508,499 508,500 574,298 574,299 574,300

Shareholder 2,250,000 2,250,000 2,250,000 2,250,000 2,250,000 2,542,465 2,542,465 2,871,448 2,871,448 2,871,448
equity

15
 What these examples don’t show is that private operators may incur lower costs than the government-
run operation, if they run a more efficient operation than the government. If this is the case, the
costs for private operation may be closer to or even less than the costs for a government-run operation.

It is commonly said that local governments should seek private sector participation in their municipal
services because the private sector is “more efficient and can do the same job more efficiently and
cheaply”. This may or may not be true. If a local government is disorganized and mismanaged, then
the private sector could likely do a better job and at a lower price. But, if the government runs a
well-organized and managed solid waste operation, then there is no reason to believe that the private
sector would be so much more effective as to force a shift in management.

The more important fact is that the governments are turning to the private equity shares. The operator will require
private sector is much more efficient and sector. a payment from the local government
effective in its ability to raise capital. each year that equals the line item titled
National government resources, especially This section has explained how to present “Total Income”. This will cover his
in developing countries, are becoming financial data—forecasted into the expenses and yield an amount sufficient
scarcer. Local governments are often future—from two perspectives: a to achieve a 20 percent return to
stretched to the limit financially and are municipal and a private operator. Now, shareholders.
unable to tap into credit or capital a local government can use the data to
markets unless they have outstanding make some decisions. If the local government is incapable of
credit ratings or unless a sovereign raising the funds necessary to purchase
guarantee accompanies their loan Based upon the pro forma statement the vehicles, its only option may be to
application at a bank. Again, this is shown above, the operator has pay the higher annual costs (fees) to
becoming a rare scenario indeed. Thus, forecasted his expenses inclusive of the private operator. The local
faced with the prospect of vastly scaled inflation and growth, has accounted for government will now have to determine
down SWM programs, or no program depreciation, and has tailored capital how it will raise these fees.
at all, more and more local funding through the sale of

16
STEP 7 Once the correlation is established,
rates can be set for neighborhoods where
going unpaid, then this amount is
calculated and added to the gross
general income data are known without billings. Essentially, this type of system
too much fear of delinquency and non- transfers the delinquency burden to
DETERMINE TYPES payment. regular payers. If we know that the
OF FEES/TARIIFS In the absence of good survey data,
annual contract amount due to the private
operator is LE 1,845,465 (first year),
Governorates or local government can and if we also know that cleansing taxes
set up computer models and base rates and a government subsidy will be a part
FLAT RATES on some other underlying correlation. of our revenue source, then we can
For example, studies have shown some more accurately determine a billing target.
There are numerous methods available correlation between electricity usage
to set rates or user fees. The easiest is and income. In a residential context the From the pro forma statement, (Figure
to simply divide the total fees required correlation is strong, and less so for 3.17) we can see that we will collect
by the number of users to arrive at a commercial and industrial settings. Given LE 523,274 in revenues from the
flat rate. While simple, this method is this correlation, rate requirements can national government and from cleansing
inequitable; burdening poorer ratepayers be spread among electricity customers taxes. That leaves LE 1,322,190 to
with the same fees as wealthy ones. A based on estimated equity burdens. The be collected from ratepayers. However,
flat rate system is one that charges one Governorate of Alexandria is using this if we estimate that 10 percent of
rate, irrespective of the amount of trash method to calculate tariffs and other ratepayers will not make their payments,
set out for collection (i.e., a rate payer Governorates are planning to follow. and if we further assume that the
would pay the same for 3 cubic meters Electricity Corporation will charge a fee
of trash collected as for 10 cubic Assume that a local government decides for their collection services, then we
meters). Thus, a flat rate system is to award a contract to a private operator. need to gross up our collection target
inequitable for two reasons: it does not Using the example from Figure 3.17, to account for these costs (the collection
differentiate between households and the required annual revenue from user fee was not previously included in the
businesses with respect to income, and fees (tariffs) will be LE 1,322,190 cost section of the proforma statement).
it is insensitive to the amount of trash for the first year of the private operator’s To determine the gross tariff billings
disposed. contract. But, is this the amount that required, use the formula shown in Figure
the local government will need to bill 3.18.
To improve the equity of a flat fee users? In order to achieve target
structure, a local government may wish collection rates from ratepayers, local Figure 3.19 shows the results of a
to develop one that makes use of governments may need to “gross up” simple model that derives these numbers:
detailed demographic data in terms of required billing amounts to account for
income and household size. One method anticipated non-payment problems. For
of accomplishing this is to conduct what example, if 10 percent of billings are
is known as a “willingness to pay”
survey. The survey is set up to sample
households in representative FIGURE 3.18: GROSS TARIFF BUILDINGS FORMULA
neighborhoods and collect income data.
The goal of the survey is to develop a
correlation between income, household
waste generated, and a tariff amount Net Tariff Collection Required
=Gross Tariff Billings Required
that the household would be willing to 1 - (Uncollectables+Collection Fees)
pay.
THUS
A “Willingness to Pay” survey
can also serve as an excellent tool
for determining service options 1,322,190 1,322,190
= 1,519,760
when planning SWM systems. 1 - (0.10+0.03) 0.87

17
 FIGURE 3.19: ESTABLISHING FIGURE 3.20: SAMPLE TARIFF SCHEDULE
COLLECTIBLE TARIFFS
Calculated Amounts
Total Revenue Required 1,845,465 Category Number Burden Monthly Annual
of Users Distrib. Tariff Revenue

Annual Tariff Elec. Corp. Fees 3% 1-50 kwh 7,019 10% 1.80 151,976
Revenues Generated Uncollectible % 10%
51 -200 12,221 30% 3.11 455,928
Cleansing Taxes 223,274
210-350 5,133 27% 6.66 410,335
Other Income Source ---
Government Subsidy 300,000 351-650 1,877 17% 11.47 258,359
Total Constant Revenues 523,274
Net Tariff Collections Required 1,322,191 651-1000 373 5% 16.96 75,988
Fees and Uncollectibles 197,569 >1000 375 11% 37.11 167,174
Gross Tariffs Billings Required 1,519,760
27,000 100% 1,519,760

The figures in Figure 3.19 lead to the VARIABLE RATE SYSTEMS waste they generate makes it relatively
tariff schedule shown in Figure 3.20. easy to calculate volumes collected and
The schedule to collect this amount was If a Governorate collects good data on to derive a billing.
determined by spreading ratepayers volume of waste collected and hauled,
among electricity consumption categories. variable rate fee systems may offer some Residential variable waste fee systems
Then, a “burden” was assigned to each additional equity not found in flat rate are generally more difficult to administer
category. systems. A variable rate system is one and require vigorous enforcement efforts.
that charges waste producers based on At this time, a variable rate system for
The burden distribution column in Figure the weight or volume of the waste residential collections would likely prove
3.20 shows the percentage each collected. Also known as “pay as you unfeasible in Egypt. Various options are
category pays of the local amount. In throw” fee systems, they create incentives being used in more developed countries
this example, the 7,019 users in the to reduce waste. and some of these are briefly summarized
lowest category would pay 10 percent in Figure 3.21 along with pros and
of the total amount, and the 375 users In the Egyptian context, pay as you cons for each.
in the highest category would pay 11 throw systems would be highly desirable
percent of the total amount, or LE446 for large waste producers such as
per year. factories, hotels, and
large commercial
Of course, this shows the tariffs for the establishments. Indeed,
first year. Tariffs would have to be Governorates
increased each year to match the contract contemplating
amount from the operator. Alternatively, privatizing their SWM
annual contract payments could be operations should ask
averaged, allowing a tariff calculation for this type of
that wouldn’t need to be increased for proposal with respect
a number of years. to these types of waste
generators. Under this
This method of calculating fees relies system, a variable fee
heavily on subjective judgment as to would be negotiated
affordability/willingness to pay levels with the waste
but if good demographic data are generator in advance.
unavailable, this may be the best method The large amount of
to use. If willingness to pay data are
available, using this system together with
the survey results should produce highly
equitable and balanced tariff schedules.
18
 FIGURE 3.21: PROS AND CONS OF VARIABLE FEES SYSTEM OPTIONS
System Option Pros Cons
Variable Can System: Customers are No bags required; More cumbersome than bags;
billed on the number and/or size of trash Less film plastics enter waste stream. Costly to set up and maintain collection
cans set out. system.

Prepaid Bag System: Customers purchase No billing system needed; Ordering, distribution system must be
special garbage bags with logos. The Bag size can be regulated insuring equitable set up;
price of the bag includes the costs of service for all customers; More plastics in waste stream;
collection and disposal. No unpaid bills; Easy for customers to Invites possible forgeries, counterfeits.
understand.

Prepaid tag or sticker: Customers purchase See Prepaid Bag system pros; Difficult to regulate bag size options;
tags or stickers that are affixed to the Also, ordering/distribution is much easier Invites possible forgeries, counterfeits.
waste set out for collection and disposal. and smaller than with prepaid bags

STEP 8 he need to maintain high collection rates on tariffs is essential in a normal

context, but when contracting with the private sector, collections are crucial
to insure timely payments to the operator.
DETERMINE Tariffs, or rates, can be collected from ratepayers in a variety of ways. Figure
METHOD 3.22 shows a table summarizing a number of these collection methods.
OF COLLECTION
FIGURE 3.22: TARIFF COLLECTION METHODS
Collection Method Description Comment
Direct billing A local government bills ratepayers Requires establishing and running a billing
directly. department.
Can be expensive.

Third party billing Local government contracts with a third Collection rates can be high. Eases
party to undertake billing tariffs (e.g., administrative burden of having to set up
have electricity corporation bill for solid a direct billing department. Can be
waste collections) expensive.

Pre-paid billing Households and businesses purchase bags Insures high collection rates. Establishes a
or other “official” containers to use in more equitable variable rate system.
solid waste disposal. Can be burdensome and expensive to set
up system. System may be circumvented
by many users.

Tax rolls Property taxes are raised to cover solid Inexpensive. Collection rates can be low.
waste costs. Expensive and time-consuming to enforce.

19
In Alexandria, tariffs for waste collection service are added to electricity bills.
This ensures high payment rates, as customers will almost always find ways of
paying their electricity bills. This type of billing is arranged with the electricity
corporation, which usually charges a fee for its services.
As mentioned previously, “pay as you throw” systems ensure payment from large
commercial/industrial waste producers because non-payment of a bill can bring
a business to a halt and begin affecting revenue flows.
A Governorate must stay vigilant with respect to tariff setting and collections in
order to maintain consistently high revenue flow. Simply relying on a third party
collection agent (such as the electricity corporation) to handle all collections does
not absolve the Governorate from exercising due diligence in record keeping and
analysis. The tasks of collecting data, analyzing the data, setting rates and collecting
are a recurring theme. Governorates should strive to achieve the following standards
with respect to their SWM systems:
• Maintain operational/demographic/income data on service areas.
• Update willingness to pay survey data.
• Strive to achieve more of a variable rate tariff system in the interest of equity
and waste reduction.
• Emphasize public awareness programs—an informed public is one more
willing to pay for services.
• Establish good accounting practices. Good accounting is necessary for
effective financial management of solid waste management programs. It lays
the foundation for all subsequent steps in the process of capital budgeting,
collecting operational data, and allows for an honest analysis of the data.
In return, the data generated from the process will allow a Governorate to
set adequate and appropriate tariffs.

20
 Ch
ap
3 ter
Solid Waste Management
Privatization Procedural Manual

Solid Waste
Solid Waste Technical Assistance Financial Management

Solid Waste Technical Assistance

Ministry of
State for
Environmental Affairs