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sufficient to pay for the costs of constructing, equipping and operating the line.Generally speaking, a potential new operator will compare the expected annualoperating surplus (fare revenues, less operating costs, less an allowance fordepreciation) with the capital investment to identify the financial return on thatinvestment. As a fully viable commercial project, the new line should generate afinancial internal rate of return of about 10% to 12% over an investment period of10-15 years. However, expected commercial returns contain an element to coverinflation which was specifically excluded from CTS-2 projections of costs andrevenues. Stripping out the inflation-coverage element, a reasonable financial returnfor an operator is probably in the range 4% to 8% in real terms.7.3.22 If a new rail line cannot be fully financially viable, some support will be required if itis to be built. This can come in a variety of ways. A desirable minimum financialcriterion, however, is that the operating surplus is at least positive; that is to say thatrevenues from passengers cover at least the costs of rail passenger operations androlling stock depreciation.Economic Evaluation7.3.23 While a project may not be financially viable as a commercial venture for a privateoperator, jt might have considerable advantages from the point of view of thecommunity as a whole. That is to say, taking into account the total economicresources consumed by all modes of travel and the overall savings in passengertravel'time, it may be more cost-effective for the community to construct a railwayrather than continue to rely on other modes of public transport services. In thiscase, and in the absence of full financial viability, it may then be worthwhile forGovernment to support the construction of new rail lines.7.3.24 The economic evaluation seeks to address this issue. The calculation is similar to thatfor financial viability but replacing fare revenues by estimated cost and time savingsover other modes of transport (identified in paragraphs 7.3.17 to 7.3.20 above) tojustify the project. For the purpose of CTS-2, an economic internal rate of return of4% in real terms over an operating period of 20 years is taken as the minimum foreconomic viability.Environmental Considerations7.3.25 Generally speaking, railways have considerable environmental advantages overroad-based public transport. In particular, by using electric power, railways reducethe air pollution associated with buses and taxis. However, elevated rail lines can bevisually intrusive and, of more concern, can be a significant source of noise.Limitations of Other Modes7.3.26 If public transport has to be dependent on road-based services, essentially buses,minibuses and taxis, there is a limit to the total passenger volumes that can becarried. This limit is set not so much by the road space required for moving vehiclesbut more by the requirements to set down and pick up passengers. A mass transitrailway can carry and deliver far higher volumes than road-based bus services. Thelimits to road-based public transport capacity are difficult to determine but can becrucial in determining the need for railways, especially in very dense urban centres.Implications for Other Public Transport Operators7.3.27 The Hong Kong public transport system is made up of a number of independent andprivately owned transport operators combined with two rail corporations (MTRCand KCRC) which are operating along commercial principles. While competitionbetween the operators is an important feature of Hong Kong public transport, thereis also Government coordination of their operations to obtain the best blend ofservices. This means that the impact of new rail lines on established routes andoperators must also be taken into account in the evaluation.125