TNAG-0770-FCO40-974-Construction-of-underground-railway-system-in-Hong-Kong-1978 — Page 113

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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.

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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.

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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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