6.5 - Funding gap
- 6.1 - Funding gap analysis of transport
- 6.2 - Service provider costs
- 6.3 - Service provider revenue
- 6.4 - Net present value of cash flow
- 6.5 - Funding gap
- 6.6 - Sensitivity testing of the funding gap
6.5 - Funding gap
Funding gap
The deficit between the change in revenue (for an existing service) or total revenue (for a new service) and the service provider costs is the amount that needs to be funded by local and central government if the proposal is to proceed. The amount that requires funding by local and central government is the 'funding gap'.
Where the funding gap is zero or negative, the proposal is commercially viable and no financial assistance is required from the government.
Method
The simplest method of assessing the financial viability of a proposal and determining the value of the funding gap is likely to be through the use of a computer spreadsheet programme, such as the 'goal seek' function in the Excel programme. This may require iterations using different values for the annual funding gap until the NPV of the cash flow is zero.
Example calculation
In this example of improvement(s) to an existing service, a 12 percent required rate of return is used. Different proposals may justify lower or higher rates of return.
The period of analysis for this particular proposal is 10 years, including year zero (the first year of capital expenditure). The revenue flow is the increase or change, in revenue from the base case (pre-existing service levels). The revenue for a new service would be equivalent to the number of users multiplied by the proposed user charge.
Different values were inserted for the funding gap until the NPV of the cash flow equalled zero, that is NPV = 0.
| Year | Capital cost of proposal | Operating and maintenance costs of improved service | Revenue increase | Funding gap | Annual total |
|---|---|---|---|---|---|
| 0 | −2,500,000 | −2,500,000 | |||
| 1 | −2,500,000 | -84,600 | 846,000 | 126,723 | −1,611,877 |
| 2 | -84,600 | 846,000 | 126,723 | 888,123 | |
| 3 | -84,600 | 846,000 | 126,723 | 888,123 | |
| 4 | -84,600 | 846,000 | 126,723 | 888,123 | |
| 5 | -84,600 | 846,000 | 126,723 | 888,123 | |
| 6 | -84,600 | 846,000 | 126,723 | 888,123 | |
| 7 | -84,600 | 846,000 | 126,723 | 888,123 | |
| 8 | -84,600 | 846,000 | 126,723 | 888,123 | |
| 9 | -84,600 | 846,000 | 126,723 | 888,123 |
Service provider's required rate of return = 12 percent
NPV = $0
As the funding gap is positive, the proposal is not commercial and financial assistance of $126,723 per year is required to make it viable.
