SP9 - New passenger transport services

Introduction

These procedures provide a simplified method for appraising the costs and benefits of new passenger transport (PT) proposals that are passenger transport services and/or capital infrastructure.

The calculation of the benefit cost ratio (BCR) in this simplified procedure assumes that:

1. New PT services are provided in the peak period so that commuters change modes from cars to bus or rail. The peak period is defined by the project proposer and justification must be provided.
2. Benefits of providing peak period services accrue to both the PT user and road user.
3. The primary benefits are: travel time savings (including congestion relief), vehicle operating cost savings, accident cost savings, and CO₂ reductions.
4. The proposal will not generate road maintenance cost savings, as the majority of traffic removed from the road network will be light vehicles. There will also be no road capital cost savings.
5. Other benefits (positive or negative) are generally not significant. However, allowance can be made for other benefits in these procedures.
6. The calculation of benefits and costs are based on incremental changes from the do minimum to the option, the benefits and costs of the do minimum are not calculated separately.
7. Proposals adopted will be established or constructed in the first year and will be operating by the start of year 2.
8. A 10 percent discount rate and 25 year evaluation period are used.
9. A 12 percent rate of return is used for analysis of the funding gap.
10. All costs are exclusive of GST.

Note: In cases where the above assumptions are not appropriate, either the simplified procedure should be modified or full procedures used.

The simplified procedure is designed to consider one option at a time. Where it is logical to do so, the analyst should consider other options in order to select the optimal solution. If there is more than one option, the evaluation will involve incremental analysis of the costs and benefits of the different options.

For projects with a funding gap of less than $1 million, only the worksheets for the chosen option need be submitted. For projects over $1 million, worksheets for all options should be provided.

Summary of analysis of chosen option

Worksheet 1

Worksheet 1 provides a summary of the economic and project data for the preferred option. Provide a brief description of the problem that the proposal is intended to address. For the do minimum, describe the existing road network affected by the new PT proposal, referring to worksheet 2

Worksheet 1 - Summary of analysis of chosen option

Proposal map

Worksheet 2

On a separate page supply a map that clearly identifies the roads that will be affected by implementing the proposed service, as well as the route of the proposed service

Funding gap analysis

Explanation sheet for worksheet 3

The service provider costs are compared to the projected revenue stream using a net present value (NPV) calculation to determine whether or not the proposal is commercially viable. The NPV is the discounted value of the net cash flow.

Funding gap

1. The deficit between the total revenue (for a new service) or the change in revenue (for an existing service) and the service provider costs is the funding gap. The funding gap is the amount that needs to be funded by local and central government if the proposal is to proceed.

2. Where the funding gap is zero or negative, the proposal is commercially viable and no financial assistance is required from government.

Service provider costs

3. Service provider costs may be calculated either from industry standard unit costs or based on cost estimates from the service providers. The proposal costs include capital costs (for physical infrastructure and/or vehicles, vessels or rolling-stock costs), disruption costs during construction, operating and maintenance costs, and costs of decommissioning. In some cases, costs may be offset by the salvage value of capital assets. Indicative quotes may be considered when the project proposal costs cannot be calculated.

Service provider revenue

4. The future demand for the PT service may be estimated by one of several methods, as outlined in chapter 4 of this volume. The proposed service will be expected to generate revenue through a user charge or fare. The financial analysis must take this into account.

5. The proposed user charge should be based on the willingness to pay of the potential users of the PT service. The maximum user charge may be determined in discussion with the local authorities and service provider, and should take into account current charges for similar services.

Service provider required rate of return

6. The weighted average cost of capital (WACC) can be used to estimate the service providers required rate of return. The WACC is the weighted average of the required return on equity and the (interest) cost of any debt financing.

7. It is generally expected that the required rate of return will reflect the industry norm of 12 percent. If an alternative rate of return is used, then this needs to be explained and justified.

Calculating the funding gap

8. The use of a computer spreadsheet function, such as the Goal Seek function in the Excel programme, is the simplest method of assessing the financial viability of a proposal and determining the value of the funding gap. Refer to chapter 6 of this volume.

Worksheet 3 - Funding gap analysis

PT user benefits

Worksheet 4

The calculation of the PT user benefits for a new service is based on the willingness to pay of the users for the new service in the peak period, usually expressed as the maximum user charge (fare) they are willing to pay. The proposed user charge is subtracted from the maximum user charge to find the net PT user benefit.

For a new PT service the evaluator may draw on information from existing services to derive a willingness-to-pay value for the new service. All assumptions must be clearly stated.

Note that the rule of a half applies to the calculation of new PT user benefits.

Worksheet 4 - PT users benefit

Road user benefits

Worksheet 5

Table 2 provides diversion rates for users diverting from vehicles to the new PT service. Table 2 also provides a combined value for travel time savings, vehicle operating cost savings, accident reduction and CO₂ savings for one vehicle-kilometre removed from a road corridor in Auckland, Wellington and Christchurch. Smaller urban centres may use the values for Christchurch. The values provided are averages. If there are known to be significant variations by corridor, then a fuller analysis should be used for road user benefits.

The calculation of the combined benefits in table 2 assumes that there are congested traffic conditions, where the ruling intersection or bottleneck operates at least 80 percent capacity during the peak one hour period, and includes a factor for the induced traffic effect. If there is no point in the corridor where the traffic volume reaches at least 80 percent capacity during the one hour peak, the marginal changes in travel time experienced will be negligible and road user benefits should not be included.

Worksheet 5 - Road user benefits

Benefit cost ratio and incremental analysis

Explanation sheet for worksheet 6

Benefit-cost analysis

1. Under benefits, enter the discounted values for the PT user benefits and the road user benefits for each option. Add together the benefits to obtain the total benefits for each option.

2. Under costs, enter the discounted value of the funding gap for each option.

3. Calculate the benefit cost ratio for each option by dividing the total benefits by the funding gap.

Incremental analysis

4. Rank the options in order of increasing cost to government.

5. Compare the lowest cost option with the next higher cost option to calculate the incremental BCR.

6. If the incremental BCR is less than the target incremental BCR specified in appendix A12 of volume 1, discard the second (higher cost) option in favour of the first. Compare the first option with the next higher cost option.

7. If the incremental BCR is greater than the target incremental BCR, the second (higher cost) option becomes the basis for comparison against the next higher cost option.

8. Repeat the procedure until no higher cost options are available that have an incremental BCR greater than the target incremental BCR.

Worksheet 6 - Benefit cost ratio and incremental analysis