Route Contract: Net Cost / Financial Aspects / Financial benchmarks and indicators

Financial benchmarks and indicators
The financial model should measure, at a minimum, the following financial benchmarks and indicators in each of the model’s forecast years:

Operating surplus or deficit before interest and tax based on current fares.
Total government operating subsidy.
Other operating subsidy (e.g. employer contributions).
Total government capital contributions including loan guarantees.

The authority validates the data used in the compilation of each financial benchmark and indicator with data collection methods that are independent of the bus operator, whether public or private. Any financial benchmark or indicator used in the financial model should accurately measure bus operating financial performance.

This is especially important in monitoring and regulating private operators as the authority’s role shifts from public monopoly bus system supervisor to regulator of increasingly private bus operations.

Financial indicator ratios
Financial indicators are ratios to measure the financial performance of the bus system, and to show whether the system has made productivity improvements over time. The ratios indicate a level of operating costs per unit of service, such as total operating expenditure per kilometer of bus service per year. The authority can use the financial model to evaluate whether the bus system is making progress toward its financial objectives.

Financial indicators as a financial management tool
Each year the authority compares the bus system’s financial benchmarks and indicators, prepared in the previous year, with the actual indicators achieved during the fiscal year. The difference between projected and actual indicators is a useful bus operations management tool. Financial indicators are also useful to prepare the bus operator’s budget and to monitor private contracts as bus operations shift toward greater private participation.

There is a wide variety of financial indicator ratios that the authority may use to measure the bus system’s objectives over time (see benchmarks and indicators). ] One of the most common indicators is the ratio of fare income to operating costs or the cost recovery ratio. Since many bus operations do not recover all operating costs with fare revenues, the cost recovery ratio is often less than 1.0.

Progress toward greater cost recovery
Although there are exceptions, bus operations in many developing countries are barely viable. In cases where they are unable to earn sufficient revenue to maintain their vehicles to a reasonable standard of roadworthiness and reliability, and to provide adequately for their replacement, the result is often a poor standard of service with insufficient capacity to meet demand, and the operation of old, unsafe and unreliable vehicles.

Understandably, social service provisions keep fares low to minimize transport costs for poor households. Nevertheless, the authority should structure the financial model to provide it with the analytical capability to assess progress toward a higher farebox recovery ratio especially as it incorporates greater private participation in bus operations.

Other financial indicators
In addition to the cost recovery ratio, the financial model may have a worksheet that lists other financial indicators to illustrate how the authority forecasts the change in these indicators over time based on its operating and capital cost projections (see funding sources).

The specific benchmarks and indicators to use will vary among bus systems. They will also depend on the primary purpose of the financial model. Is it a tool to manage a public operator or an instrument to monitor and regulate private contracts, or both?

Analysis of financial indicators is an important tool for the authority. It will help the authority understand how changes in the bus system’s productivity can lead to cost savings. It can then decide how to use these operating cost savings — reduce fares, make infrastructure investments or other purposes.

However, unless the authority is able to accurately collect and account for cost and revenue data in the financial indicators, the financial model is compromised as a financial management tool or contract monitoring mechanism.