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CHAPTER SEVEN: COSTS OF SERVICE PROVISION

7.1 Introduction

This section discusses the issue of costs relating to co-location of services. The original proposal set out the aim of measuring cost-benefit ratios for 6 delivery options, 2 in each of 3 locations where the benefits surveys had been targeted. In each location the idea was to cost alternative service arrangement for comparison with benefit data. The chapter presents information derived from the qualitative meetings on service costing and basic data on costs derived from existing reports on costs of provision. Because of the variety of co-located outlets, the precise nature of the cost sharing arrangements and the absence of recorded cost information, this task was more challenging than originally anticipated.

The stakeholder workshop in Perth was used to explore cost arrangements and estimates. An exercise asked groups to consider specific cost categories, items and funding sources for each of the co-located services included in their identified models. However, due to the complicated nature of the models produced this exercise became a general discussion around the issue of costs. Several relevant topics came into the discussion and are presented as they arose. The aim of this discussion was to validate a generic cost pro forma that might be used to elicit cost information from a wider sample of service providers. However, this part of the project proved more difficult in practice, and the analysis ultimately made more use of existing cost estimates from the literature.

7.2 Costs

While apparently more straightforward, the costs of delivery are in fact more complex to determine and it is important to distinguish between additional costs of all service provision in rural areas and the costs attributable to co-locating services. In general there is limited evidence on co-located outlets and their cost sharing arrangements. Although cost reduction is not the principal objective of co-location ³⁸, cost considerations have featured prominently in discussion of service delivery options. More commonly, the focus of efficiency savings is on cost per transaction, which is essentially the annual operation and maintenance costs of each service divided by number of transactions. Essentially, for any cost, the objective is to maximise the number of transactions, which is what co-location attempts to achieve by increasing cross referral and in doing so increase transaction volumes.

There is both cost effectiveness and a cost benefit indicator to consider in this project. Both indicators require us to be clear on the costs that we attribute to delivery. Cost-effectiveness compares costs for the delivery of the same services of an equivalent quality ³⁹. Cost-benefit analysis translates the benefits of different levels of service quality into common units of account to be compared with costs of provision.

7.3 Cost of service delivery

While cost saving is not normally the first objective of co-location, good cost control and accounting are basic requirements of securing best value and good corporate governance. Moreover, anecdotal evidence suggests that it is common for co-located rural service arrangements to be hampered by poor financial control and cost allocation. In shared or co-located arrangements, a key issue is how costs are shared between co-locating service partners. To date, the good practice examples tend to have overlooked the details that specify the cost sharing arrangements. In many cases there is anecdotal evidence that these arrangements are informal with minimal cost accounting procedures being followed. These arrangements are often a contributory factor to the very presence of co-located services. In other words, the arrangement could be functional because of the trust and co-operation which is not costed and accounted in any formal way. But these models are more complex to cost because they may include elements of voluntary input that is at once both a social cost and a benefit.

The rural services literature is varied in its treatment of costs, with considerable attention paid to the more general question of whether rural services are inherently more costly to provide than urban services. This question is nevertheless a central issue in this research and so the results are of interest even if they are derived from areas of greater population density.

Gilder et al (2004) and Sutton et al (2006) ⁴⁰ provide alternative views on the additional costs of rural service provision. The former considers the additional costs incurred by Highland council in the supply of six service categories due to low population densities. The latter considers the cost differential in the context of the national funding formula for allocating health spending. Focussing on hospital and community health services, the report notes varying rural-urban margins for infrastructure costs, input prices including labour. Neither report is able to provide a general indicator of cost disparities across the range of capital and recurrent costs.

A A Astudy by Hindle et al (2004) ⁴¹ observes that there are three specific cost categories (mileage, time-related and economies of scale) that, other things being equal, can give rise to higher rural provision costs relative to urban areas. The authors adopt an operations research approach to approximate these costs for ten case study services across twelve local authority areas. The approach uses spatial modelling to simulate the cost of delivering a specified level of a particular service over a defined geographical area, while allowing the cost to vary. Unsurprisingly the population variations across wider settlement areas (what they term 'geodemographic' variables) give rise to surprisingly high cost variation between rural and urban areas that are consistent for their range of 10 service types. The authors place areas in approximate "rurality" categories that enable the comparison to be made to the average delivery cost per capita. Accordingly benchmarking of costs shows the following index scores relative to the average (= 1):

• Mainly urban = 0.73
• Mixed Urban/Rural = 1.28
• Mainly rural = 1.85

While the Hindle study is the most methodologically robust, other studies include some qualitative description of cost control ⁴² or appraisals of specific initiatives ⁴³. But there currently appears to be no good cost models or received cost accounting framework for organisations to follow when considering co-location. Service delivery costs can be broken down into a number of categories. Harrop and Palmer ( op cit.) evaluate costs of co-location for 13 case studies in England covering a range of services models (for example: library services, medical services, council centres, community education advice services and similar). The report is less specific in identifying the underlying cost breakdowns related to capital (for start up) and operation and maintenance costs (they term as on-going costs). Accordingly the data only offer an approximate match for costing outlets in the examples given in this report.

Beyond this however, the authors suggest that cost implications can differ depending on who is the host and who is the guest (they do not seem to identify joint host cost sharing issues). Strictly speaking, a cost-benefit analysis has to abstract from how the cost is shared between the co-located service providers. What counts for an economic analysis is the overall cost (relative to benefits) rather than its distribution. Clearly some models could be less sustainable if the host-guest cost share is inequitable.

The categorisation of costs in each of our case studies will depend on the nature of the sharing arrangement and in particular whether there is a need for new buildings as opposed to using existing premises. New premises require an initial capital investment cost and periodic interest repayments on any loan capital. Thereafter, the significant cost categories entail operation and maintenance costs for: a) maintenance of the premises; b) the delivery of the actual services supplied by the co-located providers. Within the operations costs, both providers will have to budget for staff costs including any superannuation.

The importance of these cost categories will vary according to the different co-location combinations. But the cost categories mentioned here are the basic accounting framework for any arrangement.

7.4 Consideration of costs from stakeholder workshop in Perth

General issues

In terms of funding sources to cover costs, there was some discussion about the mix of public and private undertakings in co-located provision of services. The basic theme here was that successful arrangements would need one tenant that had a sustainable income stream and that generally this would be a public body. In relation to the priority list therefore, this narrowed options down to local authority and health board facilities.

Overall there was a view that the problem was one of sustainable revenue rather than capital spending. Service cost recovery in rural areas is always likely to be a problem and accordingly there is always likely to be a greater dependence on public support. The key issue raised by this project is how co-location can leverage or maximize the return to that support.

Besides identifying expected cost categories for the co-location developments proposed, the group also raised some general issues relating to the establishment of services and these are discussed below. The group placed particular emphasis on the need for training costs and full time staff.

Funding sources

The group identified some general issues that had to be considered when embarking on a process of co-location of services. Putting the funding in place is time consuming and complicated therefore it is essential to identify initial funding sources. These, however, may be identified from a variety of agencies etc, and cross-subsidisation and co-funding have to be taken into consideration. However, there was no clear preference as to whether funding initiatives should come from public, private or joint initiatives. One way forward might be to set up a trust fund that would secure long-term funding and ensure that the management of the facility remained in local control.

It was emphasised that short-, medium- and long-term funding had to be secured to ensure the ongoing success of a project. An initial injection is required whether 'new build' or alterations are required and it is crucial that the local communities are involved at this stage and are included in the identification of priorities. Reusing land already publicly owned was seen as an advantage. Funding sources may be diverse and include the creation of future income streams from private tenancies or letting out business resources. Sources included:

• Local Authorities
• Scottish Executive
• Community funds
• Private enterprise
• Funds/expertise from entrepreneurs
• Trust funds

The ongoing success of a project of this type depends on recognising the importance of social capital as well as investment capital - building in 'people costs' as well as 'building costs' to the model. Those involved need the support of ongoing teaching and mentoring to run and manage co-location facilities. An interesting discussion that followed from this was whether voluntary labour to a rural service outlet (co-located or otherwise), should in fact be treated as a cost in terms of the foregone or opportunity cost of that time, or a benefit that arises because of the social capital generated from the presence of the service outlet in a rural community. This issue does not appear to have been explored in the existing literature on volunteering.

Issues relating to costs/funding

A series of issues were raised during this discussion, mainly based on the experiences of those present in being involved in local initiatives. These fell into the following categories:

Demographics

• Is there a critical mass required to sustain co-location developments?
• How does the use of cars support/negate the need for development?
• What's happening to the youth in the area? - they are critical to the future
• Are there enough economically active households in the area?

Funding

• Funders must set out their priorities and policies clearly
• Local Authority budgets are already committed to running essential services and their planning regulations may not allow enough flexibility
• The model must include savings that can be identified as part of the justification
• Public and private funding should be used
• We need to move away from per capita models of funding

Management

• Who is deciding priorities and who is deciding on whose behalf?
• Can we get away from the rural dependency on public money, or do we need to recognise an ongoing need for support in some cases?

7.5 Case study area cost information

A cost pro forma was distributed to several participants at the Perth workshop of service providers. The aim of this pro forma was to collate information on cost categories from current provision on co-location. This survey was subsequently distributed for consideration by a wider group of stakeholders. Returns from this survey suggest that while the cost categories are fairly obvious to state, respondents have some difficulty in determining how these might be split between different services. The limited feedback meant that information on costs had to be drawn from a variety of sources. In the first instance these cost estimates were based on the case study areas of Eastriggs, Applecross and Lewis. Cost information for Eastriggs was provided directly from council sources ⁴⁴. For Lewis data were drawn from the Annual report of Voluntary Action Lewis ⁴⁵. Applecross estimates were derived from the report by Harrop and G. Palmer (2000). For the latter, the cost estimate is derived from a reasonable approximation between the outlet types detailed in that report and the service provision that is currently being provided at Applecross. While these were not an exact match, this approximation provides a reasonable estimate for comparison with benefit estimates. These basic estimates are summarised in table 10.

Table 10: Annual costs for co-located services.

The estimated costs for different elements of the council services outlet co-located in Eastriggs Post Office are presented in more detail in Table 11. The outlet is currently open from 9.30am to 12.30pm on Tuesdays and Thursdays (3 hours per day over 2 days) ⁴⁶, and the associated costs are presented in the baseline cost column of Table 11, with the annual costs amounting to £8,311. The components of cost are either fixed or variable and how these are treated will affect the likely total costs of changes in service provision. The "basic unit cost" column presents the cost for opening the service for 1 hour on 1 day per week and is used as the basis for calculating the costs of different service scenarios in the remaining columns.

In estimating costs a number of assumptions have been made. Rental costs remain constant as it is assumed that the floor area of the Post Office used to deliver council services remains configured as such regardless of whether the service is open, i.e. it is not used for any other rent or revenue generating purpose. Fixed costs have been discounted over 5 years at a rate of 3.5% to provide an annualised value rather than an up-front set up cost ⁴⁷. Salary, utility and consumables costs are directly proportional to opening hours, whereas travel costs are on a per day basis.

Four alternative service scenarios have been proposed over the existing service level. These range from all day opening on two days per week (14 hours), 3 or 4 hours per day for 5 days (15 and 20 hours) to full time opening (35 hours). The resultant costs range from £16,280 to £37,704 per annum.

Basic costing information for the Applecross library and were derived from the study by Harrop and Palmer (2000). The closest example to the Applecross library was a one day a week library in Coniston, Cumbria, which was co-located in the village community centre. Costs excluding staff costs were estimated at £4,000, of which £1,500 was transferred as rental income to the host service. We estimate staff costs to be of a similar order to those for the Eastriggs council service point at £4000 and allocate the £4,000 non-staff costs across fixed and variable costs in a similar ratio as for Eastriggs. Note that the correspondence between the £1,500 rental figure for both the Coniston library and the Eastriggs council service point suggests that this assumption is not unreasonable. Total costs for the Applecross library are therefore estimated to be £8,000.

Cost estimates for the Stornoway Voluntary Resource Centre are estimated from the Voluntary Action Lewis Annual Report 2002-2003. Detailed costs are not available, however the total costs for Voluntary Action Lewis were £285,000, which we take as the upper bound costs for the Voluntary Resource Centre in the following cost benefit analysis. We stress that these sources only enabled an approximation of the delivery costs of these service delivery points. We include them here largely for demonstration purposes and assume that alternative service configurations would not alter these costs significantly.

What is not clear is if the cost of services, for example the Eastriggs council service point or the Applecross library, would be substantially reduced through co-location when compared to provision in their own dedicated premises. The estimated costs above suggest that premises costs account for 18% of the non-staff costs of the co-located services. However, we do not know if this represents a constant proportion of costs. Co-location offers the possibility of achieving cost efficiencies by utilising under used space within host premises and allowing services to be provided where demand is insufficient to justify dedicated premises. In some respects the issue may be more one of whether the services would be provided at all if they were not co-located rather than if co-location is the most cost effective means of provision.

7.6 Conclusion

The absence of consistent cost data complicates the analysis of co-located service options and while we can speculate about the costs incurred in relation to peripheral location, no research similar to that conducted by Harrop and Palmer has been conducted in Scotland. Obvious disparities in population density suggest that the cost adjustment between rural and urban areas would be higher in Scotland. This can lead us conclude that delivery cost estimates need to be weighted along similar lines. It is more difficult however to conclude on the offsetting cost savings that can arise by proposing co-located services. The limited evidence presented here is that if only part of the capital cost is being shared then the savings can be small. In this case the benefits of cross referral are crucial and this depends on matching of services.

However, it is important not to focus on costs in isolation when considering the efficiency of co location. Some variants will clearly deliver greater social benefits that are more significant than any cost saving arguments.

Table 11: Annual service provision costs for council services outlet co-located in Eastriggs Post Office (2005 £).

* Initial £2,250 furniture costs discounted over 5 years at 3.5% discount rate to give annual cost.

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