Stage 6 Finance and Economics

Financial and Economic Analysis

Once the cost and the benefit streams have been quantified, an economic and financial analysis should be carried out to determine whether the improvement plans are viable or not. Two agencies are investing – public authorities like the city government and the bus companies. As a first step, it is necessary to assign costs and benefits between them. For example, fare box revenue is a cash inflow for the bus operator, but not for the city government. In several project reports this distinction is not made and a macro economic and financial analysis is undertaken for the entire plan, which often leads to misleading results. The economic analysis is required to make policy decisions.

The financial analysis is necessary for bus operators. The economic benefits accrue to other agencies or users.

The analyses should include FIRR (Financial Internal Rate of Return) and EIRR (Economic Internal Rate of Return) and NPV (Net Present Value). They may guide decision makers on fares policy. For example if economic return is very high, subsidizing public transport through tax concessions is appropriate. A high EIRR may indicate potential financial benefits can be realised.

Next page Page top