6.2 - Service provider costs

6.2 - Service provider costs

Basis

Service provider costs are calculated either from industry standard unit costs or from cost estimates from service providers. The costs include maintenance and operating costs.

If costs can be obtained, either from industry standard unit costs or other sources (eg service provider) then undertake a full analysis of service provider costs.

If the service provider will only disclose a 'price', net of user revenue, for providing the transport service then it can be assumed that the service provider costs are equal to the 'price' plus user revenue for use in the economic efficiency evaluation.

Rules

Service provider costs shall be calculated for the do minimum and all proposal options.

All costs shall be presented both graphically and as a table, showing where the costs occur over the life of the project.

All costs shall be exclusive of GST.

Indicative quotes

Indicative quotes may be used when project costs cannot be calculated, for example if service providers will not divulge costs.

Indicative quotes are most likely to be used when there is a sole service provider. An indicative quote should only be sought after user charges have been fully defined (see chapter 7). Care is required not to form a contract when seeking quotes.

Proposal costs

Proposal costs include:

  • project design and supervision costs
  • capital costs
  • disruption costs during construction
  • operating and maintenance costs
  • costs of decommissioning.

In some cases, costs may be offset by the salvage value of capital assets. Each of these costs are described below in more detail.

Capital costs

Capital costs are split into two types:

  • physical infrastructure costs
  • vehicle, vessel or rolling stock costs.

Physical infrastructure costs

Physical infrastructure costs include:

  • land acquisition
  • design
  • construction
  • environmental mitigation costs
  • a contingency allowance for the total physical infrastructure costs.

In the case of the do minimum, these costs may include essential rehabilitation.

Where expenditure on a proposal has already been incurred, it shall still be included in the evaluation if the item has a market value which can be realised. Land is an example.

Costs irrevocably committed which have no salvage or realisable value, are termed sunk costs and shall not be included in the evaluation, eg investigation, research and design costs already incurred.

Vehicle, vessel or rolling stock costs

Enter any capital costs relating to service vehicles or rolling stock. Include a contingency allowance for the total vehicle, vessel, or rolling stock costs where the price is not absolutely fixed at the outset.

Disruption costs

Include disruption costs to the service provider during construction.

Disruption costs may include revenue loss, where services are disrupted to accommodate construction, or cost increases such as providing alternative services during the construction period.

Operating and maintenance costs

Estimate operating and maintenance costs over the operating period.

Maintenance costs shall include routine and periodic maintenance costs as well as refurbishment and replacement costs occurring in the analysis period.

Treatment of depreciation

Depreciation is a non-cash item and shall not be included separately in the cash flows used in the financial analysis to estimate the net present value (NPV) of a proposal. Only actual cash flows associated with maintenance and asset replacement, (which effectively fully account for depreciation of capital assets), shall be included in the analysis.

Treatment of interest

Interest expenses associated with project financing often represent an actual cash cost outflow. Despite this, the deduction of interest charges should not be included in the annual cash flow as the required rate of return used in the NPV analysis already takes account of debt-financing interest.

If interest payments were deducted from discounted cash flows, the interest charges would be double counted and the proposal's funding gap would be overstated and the efficiency ratio understated.

Salvage value of capital assets

In many instances, assets will have a longer life than the time period used in the evaluation. Except in the case where a 25 year time period is used for the evaluation, the salvage value of capital assets shall be evaluated where:

  • items have a market value
  • there is an alternative use (for example, a bus can provide urban passenger services or could be used for school services or tours, but a road can usually only be a road)
  • there is a scrap demand for items.

Any costs involved in decommissioning should be incorporated in the salvage value of the asset.

Note: Salvage values are quite distinct from book values of assets.