Net Financial Effect – the “Funding Gap”

For each scheme, we estimate the Net Financial Effect to the government, which we also call the “Funding Gap.” Usually this is a cost, but not always. Some of the GO Rail schemes, and the Union Pearson Express, show a positive financial return using a 5% public-sector discount rate.

For each scheme, we add up all the capital and operating costs, including any savings to the costs of running existing transit services, as well as the additional revenues that passengers will pay in fares. All of these are converted to a Net Present Value. The Net Financial Effect is the cost to the government over the long run of a new investment, which must be filled, usually with public funds.

While improved transit will benefit the economy, the benefits may be entirely offset if higher taxes make the region a more expensive place to live and work. Fares are a better way to pay for transit, provided they are set at a level that is not a serious deterrent to transit use. “Smarter fares,” made possible with smartcards, can maximize revenues while also maximizing ridership.

Overall, fares offset about 80% of operating costs on the TTC and GO networks,[1] but the performance of individual routes can vary widely. Some of the planned schemes will actually generate higher revenues than the net change in operating costs, in effect paying back some of the capital cost. But some will not, and some will even increase the operating subsidy required.

If decision makers choose the schemes that offer relatively good financial performance, Metrolinx’s limited resources can be stretched further, and there will be less need to raise additional funds to pay for transit.