Financial Models
The authority may require a model to evaluate financial aspects. The financial model is an analytical tool prepared on a spreadsheet. It presents a condensed picture of the bus system’s capital and operating expenditures, the revenues and funding sources that support these expenditures and appraises the bus system’s financial position. It differs from financial statements in that it allows the user to quickly assess the implications of changes in key variables such as fares, fuel and labor prices, inflation, system design and others.

The structure of the financial model will depend on the reform option selected. The financial model also shifts from a primary role as a financial management tool in the public monopoly situation to a regulatory function for private contracts. The authority can also adapt the financial model to assist it to:

• Prepare tender documents to procure private contractors.
• Evaluate bids.
• Monitor compliance with the signed contracts.

Financial model objectives
The financial model allows the transit authority to perform financial management and assess the effect of changes in key variables affecting the bus system. It has general objectives regardless of the reform option chosen, and specific objectives depending on the reform option. General objectives are discussed below; specific objectives are noted on the pages devoted to each reform option.

The first general objective is to assist the authority to improve the financial operation of the bus system. The authority can use the financial model to assess the cost and revenue impact, on the bus system’s financial position, of changes to the system design.

The second general objective is to assist the authority to manage the financial operation of the authority itself. System planning, management, regulatory and oversight functions cost money, and must be properly funded to ensure sustainability.

Constructing a financial model
There are many different ways to construct a financial model depending on:

• Its purpose.
• The nature of the bus operations and extent of private operations.
• The nature of the information database that provides cost, revenue and other bus system data inputs.
• Government accounting and auditing laws and standards.
• Other financial management information system factors.

The financial model is a dynamic tool that estimates the bus system’s initial financial position and simulates, on an annual basis, its future financial position. It must reflect the specific characteristics of the bus system and authority requirements. Construction of such a model is a complex task.

Initially, the financial model builder uses existing bus system data to model the “baseline” situation. A variety of forecasting techniques are then used to project future bus operating and capital costs and the amount of revenues required to fund these costs. The model also takes into account the cost and funding sources for bus system infrastructure improvements.

As the bus system shifts toward greater degrees of private contracting, the financial model relies on the bids submitted by the private bus operators for a significant amount of cost data.

To insure reliable data for the financial model, the authority may require private contractors to submit audited annual financial statements that corroborate its monthly or periodic regulatory and contract compliance reports.