1.26
Steering Group significantly influenced which alternatives
should be evaluated in the first place.
In conducting the evaluation it is important to establish
the orientation of the analysis. Should it be concerned
with costs incurred solely by transport operators or by the
nett cost to the whole community? Is it concerned solely
with the revenue returns to the operator or with the overall
gain to the travelling public as well? Between these two approaches, the narrow and the broad, lies the distinction
between financial and economic evaluation.
1.27
The Steering Group agreed that the Government must be satisfied
that in directing policy towards a certain investment plan,
not only is the desired financial impact on the operators
achieved, but also the best result is achieved for the
community as a whole. The evaluation of options was therefore
considered in two parts:
(i) a financial analysis, to ensure commercial viability
of the transport operators; and
(ii)
an economic analysis, in which community costs and
benefits are considered.
1.28
1.29
To take account of the different pattern of investment, and the different periods required to achieve benefits to transport operators and transport users, implied by the four options,
the financial analysis and the economic analysis were
conducted on a discounted cash flow basis.
To ensure a common basis for the evaluation it was necessary
to specify a discount rate to be used in the discounted
cash flow analysis. For the purposes of the financial analysis
the discount rate reflects the alternative available return
on capital in the private sector. The Study Team used a
value of 12 percent in real terms before tax. The equivalent rate used in the economic analysis was 8 percent in real
terms and is intended to reflect Government's view of the
alternative use value of resources.
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