Issue 7.3, December 2003
The necessity of cost capture is often overlooked in the mine action community. A truly successful cost assessment must include clear and effective cost-capture mechanisms and even a standard structure used throughout different mine action programs.
by Robert Keeley, Imperial College London
One issue that has been found in the observation of mine action programs is that of incomplete cost capture in assessing the cost of units of output. For example, not including the cost of expatriate technical assistance in a cost benefit analysis (CBA)1 lowers the apparent cost of demining programs and hence makes them look more cost-effective than they actually are. Similarly, it seems appropriate to include the cost of machines in cost-capture assessments—even where donated—in order to assess the true effectiveness of their provision compared to the cost.
Failure to capture costs may also have allowed demining programs to set low prices for services they have provided to client organisations as an extension of their core activities.2 The rationale for programs doing such work is that it generates cash for supporting their other “humanitarian” projects and thus develops mechanisms for future sustainability. However, if the true cost of those demining services is not captured, it may have been that the returns were actually too low to justify this activity. It may have been more appropriate to (a) raise prices to reflect true costs or (b) forgo the opportunity to carry out the commercial work and concentrate on the core activities of the organisation.3 The knock on results of inaccurate cost capture could include:
Clear and effective cost-capture mechanisms should also assist donors in the evaluation of different mine action programs, as they will establish a “level playing field” that will allow the comparison of the different programs. The aim of this paper is to set out some possible structures for a cost-capture standard and consider some of the problems with its implementation, in the hope of generating discussion on this issue.
The Elements of a Humanitarian Mine Action Program
An integrated humanitarian mine action program4 tends to consist of the following core productive elements:
Any program will also have the support elements set out in Table 1. As none of these will directly generate any “output” they could be considered as overheads for the program. Their cost could therefore be divided among the productive elements (see below).
|Table 1: Mine action program support elements.|
Cost Capture of Productive Elements
The items in Table 2 make up the main costs incurred directly by the productive elements. Their proportion will vary depending on the service being provided. They can also be divided into standard definition of fixed and variable costs, with consumables and the operation and maintenance (O+M) costs making up the variable costs.
|Table 2: Typical mine action program costs incurred by productive elements.|
This raises the need to define what comprises a “productive element.” For example, demining teams have medics and drivers; teams may have a team leader; and teams may be grouped together under a site manager. None of these people actually “demine” themselves. Similar divisions of labour exist in EOD and MRE teams, and many demining programs also have a number of regional offices that are not part of the national headquarters. There may be many ways this could be addressed. One simple method would be to use the divisions between “single tasking” and “multi-tasking” and between “field” and “staff” as a means of allocation. For example, all personnel engaged in a single task (i.e., members of an EOD team) are costed as personnel engaged in that task, whereas all personnel in staff or support positions (including regional offices) are costed as overheads.
Treatment of Survey Teams
One area where the division between “productive” and “overhead” is not immediately clear is that of survey. There are a number of survey processes, from the impact surveys that are analogous to surveys carried out in other development sectors, to technical surveys that are used to determine the extent of physical contamination.5 For cost capture, it is possible to divide them as follows:
Division of Overheads Among Productive Elements
Being able to divide overheads among the different productive elements provides the means to establish the price of the products of the demining program. This has two other main advantages. First, it allows services provided by the program to be compared with similar services provided by other agencies. Second, it allows the costs of the different services provided by the program to be compared with each other.
In order to divide overheads among the different productive elements, there is a need to choose the unit of allocation. The four main choices are as follows:
Expatriate Technical Assistance
In the particular case of expatriate technical assistance, failure to capture this item may introduce bias against more mature programs that have reduced dependency on expatriate technical assistance.
The allocation of technical assistance services could follow the same principles as used for other overheads. In other words, the cost of technical assistance provided specifically for the operation of EOD teams would be included in the cost of EOD teams, the cost of technical assistance provided to operate machines would be included in the cost of area clearance and the cost of “technical assistance” provided to maintain the organisation’s database would be an overhead cost that would be divided among the productive elements.
The inclusion of technical assistance in cost capture might encourage the efficient use of such services—and the prompt removal of them when no longer necessary. There may by a residual requirement, depending on donor practices, to maintain a limited presence over the length of the donation in order to help ensure financial probity. This residual requirement is akin to the “technical assistance” provided in standard development projects and may be considered as a transaction cost of the donor and, perhaps, not included in the program costs.
Dealing With Multiple Accounts
In order to ensure that programs are properly costed, this process should be carried out even where the funds are in multiple accounts that may be “ringfenced” or otherwise inaccessible to program managers (e.g., assistance that is provided in kind to the program). For example, if a budget of $10,000,000 did not include the cost of $1,000,000 for providing machinery, provided as an “in kind” contribution, the organisation would be able to externalise some of the costs of mechanisation, the apparent cost would not reflect true costs and it would give an erroneously favourable comparison with other agencies.
Other Expenditure by Donors
Other expenditures by donors that do not directly contribute to mine action programs, such as funding conferences or campaigns, should not be attributed as donations to specific mine action programs (though the donor may well attribute them as contributions to “mine action” in general). This includes research and development (R&D), except where R&D is recovered by inclusion in the market price of technology placed on the open market. An example of this would be a donor purchasing a machine developed by a private company on behalf of a program. As described above, the market price of the machine should be included in the calculations as an “in-kind contribution,” and it is assumed that the manufacturer has included an element of R&D costs as part of the cost recovery calculations set in establishing the price of the machine. There is some risk of “dumping” technology at a less-than-market price (which would make the machine appear more cost-effective than it is), but this is unlikely unless the machine was not purchased on the open market. At any rate, it may be that the donor would rather exaggerate than underestimate a contribution.
Fictional organisation consists of 850 personnel with:
This organisation has an annual budget of $10,000,000, divided as follows:7
Overhead costs, marked in the table above with an asterisk (*), would be allocated according to the ratio 55:6:5.
Costs (with allocation):
The model is clearly very sensitive in absolute terms to the variations in productivity, salaries and other costs, and it would still not be possible to carry out clumsy “apples and oranges” comparisons of programs in different countries.10 However, variation of all such figures still leaves a clear demonstration that proper consideration of overheads in pricing will considerably affect the unit cost of demining.
The Prisoners’ Dilemma
The term “prisoners’ dilemma” is based on the following scenario: two prisoners are arrested and questioned separately. If they both keep silent, they both go free. On the other hand, if one talks, he gets a reduced sentence while the other one gets the full punishment…and he knows his partner has the same options. What do they do?
Economists often use a model called the “prisoners’ dilemma”11 to model the risks of compliance and non-compliance with such things as treaties regulating pollution. In this case, it can be represented thus: Imagine two different mine action programs appealing to a donor for funding. There is a limited amount of funding available and the donor has a policy of supporting “cost effectiveness.” Both programs are identical in terms of socio-economic benefit they generate and are equally compliant with the international codes of practice set out in the International Mine Action Standards (IMAS). However, there are no IMAS provisions for cost capture; thus, the programs have a choice about how they present their costs. Their options are as follows:
|Option 1||Option 2|
|Program B||Option 1||Status quo||B “wins”|
|Option 2||A “wins”||Better overall understanding|
|Table 3: The prisoner’s dilemma of mine action cost capture.|
If both programs opt for full cost capture, the demining community benefits overall; however, if one program adopts it unilaterally, it risks appearing more expensive than the other. The likely result of this situation is that both programs might—all other things being equal—retain any existing accounting practices that made them appear more cost effective if they believed that they were in competition with other demining programs. A similar logic could have been applied to the provision of personal protective equipment (PPE). Before there were clear standards on the requirement for PPE, programs were left with the choice to provide or not: programs that did comply would be more expensive. However, the introduction of a standard for PPE in IMAS has reduced the risk of this problem. There may therefore be an argument for a similar standard for cost capture protocols for mine action programs.
A cost capture process appears necessary if the strategic planning of mine action is to accurately measure the true costs of demining programs. This will become particularly important when planners (and donors) attempt to measure the effectiveness of new technologies, such as machines. Nevertheless, there appears to be little incentive for programs to adopt such procedures unilaterally.
Standardisation is a complicated matter and an issue that is always fraught with sensitivity. However, if there is no standard for cost capture, there is a potential risk for programs that attempt to adopt such cost-capture processes unilaterally.
Given a desire to increase real cost effectiveness and properly consider the potential impact of dogs, machines and other new technology, there is a need to consider the introduction of a standard of cost capture as a “best practice” for mine action programs in order to safeguard those programs that are truly working hard to improve cost effectiveness.
*Comments on this article would be greatly appreciated and should be directed to the author.
Imperial College London
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