This appendix explains the method the Department used to calculate the benefits and costs of the Link. It explains the numbers in Figure 19 of the main text, showing the May 1998 value for money assessment of the Link, based on Government Central Case patronage forecasts.
1. In summary, the framework for the Department's value for money assessment was as follows:
| Total Costs | (Capital and Operating Costs) |
Less | Total Revenues | (Financial Benefits) |
= | Funding Gap | (Amount of public sector contribution for which bidder bids) |
plus | Total Non-financial Benefits | (User plus Non-User Benefits) |
= | Net Present Value |
|
These terms are explained below.
2. If the net present value is greater than zero, then the project can be judged to be economically justified, though a reasonable margin for error is usually allowed due to uncertainties in estimation methods and passenger forecasts. What is judged to be a reasonable margin will depend on the size of the project. The net present value takes no account of other impacts, which are not quantified in monetary terms in the value for money assessment, but are still important impacts of the project.
3. The economic justification for a public transport scheme such as the Link depends on a combination of financial and cost-benefit analysis. The financial analysis establishes the degree of commercial viability of the scheme by comparing the discounted stream of expected revenues with that of expected costs over the appraisal period, in this case up to 2052. As explained in Appendix 6, a major rail infrastructure project such as the Link involves enormous capital cost for construction and it is seldom the case that the initial investment can be recovered through fare revenues alone. The difference between the financial results of total expected revenues and total expected costs is the "Funding Gap". This is the amount of public sector support for which the private sector bidder bids.
4. In order to justify the decision to provide public support to the Link, the Department attempted to estimate the level of welfare benefits such support would be purchasing. These are generally benefits for which no market exists, but which are judged to represent benefits to society. The assessment then uses a form of cost-benefit analysis to quantify these benefits in order to judge whether they are sufficient to cover the funding gap and justify Government support for the project.
5. The Department, in agreement with the Treasury, decides which benefits can be counted in monetary terms towards a transport project's economic justification. In the case of the Link, the then Department of Transport included passenger benefits for rail passengers resident in the UK, travelling on Eurostar UK international services and on new domestic services. These were based mainly on increases in consumers' surplus (see below) due to estimated capacity improvements and time savings. There is no UK precedent for including international user benefits for a rail project, as this is the first scheme for which they could be considered relevant.