SP10 - Existing passenger transport services

Introduction

These procedures provide a simplified method for appraising the costs and benefits of proposals to improve an existing passenger transport service through the provision of capital infrastructure and/or service improvements.

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

1. Service improvements primarily concern existing peak period services and as a result of improvements commuters change modes from cars to bus or rail.
2. The primary benefits are travel time, vehicle operating cost and accident cost savings.
3. 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.
4. Other benefits (positive or negative) are generally not significant. However, allowance can be made for other benefits in these procedures.
5. Proposals adopted will be established or constructed in the first year and will be operating by the start of year 2.
6. A 10 percent discount rate and 25 year evaluation period are used.
7. A 12 percent rate of return is used for analysis of the funding gap.
8. 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 PT service, the route of the existing service, and 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 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 (for physical infrastructure and/or vehicles, vessels or rolling-stock), disruption during construction, operating, maintenance, and 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.

4. In the case of an expansion of, or improvement to, an existing PT service, the increase or change in service provider costs shall be calculated and used in the funding gap, as the funding request will be to facilitate the improved service rather than to fund the existing service.

Service provider revenue

5. The future demand estimate of the proposed service extension may be estimated by one of several different methods, as indicated in chapter 4 of this volume. It is expected that the proposed service will generate revenue (generally through a user charge or fare for use of the PT service). The financial analysis must take this into account.

6. 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.

7. In the case of an expansion of, or improvement to, an existing PT service, the increase or change in revenue shall be calculated and used in the funding gap, as the funding request will be to facilitate the improved service rather than to fund the existing service.

Service provider required rate of return

8. 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.

9. 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

10. 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

Road user and PT user benefits

Explanation sheet for worksheet 4

For improvements to an existing PT service, road user benefits and additional PT user benefits are based on the benefit formulation used by Land Transport NZ for its patronage funding growth payment rates. The benefit value incorporates road user travel time, accident and vehicle operating cost savings, and environmental benefits, as well as the benefits of the improved PT services for existing and additional PT users.

The calculation of the travel time savings value assumes that during peak periods there are congested traffic conditions (where the ruling intersection or bottleneck operate at least 80 percent capacity during the peak one hour period) and includes a factor for induced traffic effect. If there is no point in the corridor where the traffic volume reaches at least 80 percent capacity during the peak then use the off peak rates.

Table 1 Benefits per additional passenger boarding (July 2002)

Caveat on using the above data:

The above values are based on passenger transport trips of average length for each urban area or mode. Where the values in table 1 above do not accurately represent local conditions, the analyst should provide additional information that shows what values have been used and whether these have been calibrated to local conditions.

Table 2 Discount factors (DF) for different growth rates for years 2 to 25 inclusive

Worksheet 4 - Road user and PT user benefits

Benefit cost ratio and incremental analysis

Explanation sheet for worksheet 5

Benefit-cost analysis

• Under benefits, enter the discounted value for the benefits for each option.
• Under costs, enter the PV of the operating and maintenance costs for the existing service (before improvements), for the do minimum and the discounted value of the funding gap for each option.
• Calculate the benefit cost ratio for each option by dividing the total benefits by the funding gap.

Incremental analysis

• Rank the options, including the do minimum, in order of increasing cost to government.
• Compare the lowest cost option (usually the do minimum) with the next higher cost option to calculate the incremental BCR.
• 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.
• 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.
• Repeat the procedure until no higher cost options are available that have an incremental BCR greater than the target incremental BCR.

Worksheet 5 - Benefit cost ratio and incremental analysis