A Benefit-Cost Analysis Primer

1. A Benefit-Cost Analysis Primer Kevin Keller, PG, CGWP HDR Engineering, Inc. American Railway Development Association

2. American Railway Development Association (ARDA) Since 1906, ARDA has provided a forum for the North American railroad community to meet and effect positive change: “The objectives of the Association are to foster the industrial, real estate, natural resources, market development activities and environmental concerns of the North American railroads; and through the advancement of ideas and education of its members further promote the effectiveness of railway development and related work.”

3. ARDA Membership ARDA encourages membership from all classes of railroads throughout North America. Members also include professionals from other associations, agencies, and railroad service partners that have a direct effect on rail business today. ARDA’s membership variety provides a wide perspective on issues facing the railroad industry in the 21st Century. www.amraildev.com

4. Why Require a BCA? • President’s commitment to data-driven decision-making • Requirement from TIGER I and II • No funding for projects for which C > B • Value of BCA in project selection • BCA quality matters more than size of the B/C ratio • Focus your analysis on how it demonstrates need for your project

5. USDOT Definition “A benefit-cost analysis attempts to measure the dollar value of the benefits and the costs of a specific project to all the members of society on a net present value basis.”

6. USDOT Requirement “DOT expects to identify and report on the benefits of the projects that it funds with TIGER Discretionary Grants. To this end, DOT will request that recipients of TIGER Discretionary Grants cooperate in Departmental efforts to collect and report on information related to the benefits produced by the projects that receive TIGER Discretionary Grants.”

7. Benefits “The benefits that DOT reports on may include the following: (1) Improved condition of existing transportation facilities and systems; (2) improved economic competitiveness in the form of reduced travel time, less traffic congestion, improved trip reliability, fewer vehicle miles traveled, or lower vehicle operating costs; (3) long-term growth in employment, production or other high-value economic activity; (4) improved livability of communities across the United States through expansion of transportation options, efficiency, and reliability; (5) improved energy efficiency, reduced dependence on oil and reduced greenhouse gas emissions; (6) reduced adverse impacts of transportation on the natural environment; (7) reduced number, rate and consequences of surface transportation-related crashes, injuries and fatalities; (8) greater use of technology and innovative approaches to transportation funding and project delivery; (9) greater collaboration with state and local governments, other public entities, private entities, nonprofit entities, or other nontraditional partners; (10) greater integration of transportation decision making with decision making by other public agencies with similar public service objectives; or (11) any other benefits claimed in the project’s benefit-cost analysis.”

8. So What is a Benefit-Cost Analysis? • BCA is distinct from: • Financial analysis • Economic impact analysis • Costs and benefits refer to changes in welfare • Are people made better off by the proposal “...an analysis which quantifies in monetary terms as many of the costs and benefits of a proposal as feasible, including items for which the market does not provide a satisfactory measure of economic value.” UK Treasury (2003), Appraisal and Evaluation in Central Government

9. Benefit-Cost Analysis Basics • What is the purpose of the BCA? • Benefit Cost Analysis measures the creation or erosion of real economic value • “Value” denotes welfare or quality of life • TIGER III project selection & BCA • BCA quality matters more than size of the B/C ratio • Focus your analysis on how it demonstrates need for your project

10. Basic Requirements • Project Summary • Base case (“no-build”) • Project description • Justification and impact on long-term outcomes • Affected population(s) • Expected economic benefits • Alternatives • Monetized estimates of benefits & costs • Year-by-year stream of benefits and costs • Discounted to present value (3% & 7%) • Replicable methodology • Demonstrate Independent Utility

11. CORE BCA Principles • Costs & benefits estimated on incremental basis against realistic baseline (generally not status quo) • Reasonable alternatives considered and evaluated • e.g., smaller scale and more focused projects • Costs & benefits expressed in monetary terms (constant dollars) and estimated over project’s useful life • Discounting • i.e., OMB Guidance for TIGER • Summation of benefits & costs, and estimation of NPV

12. BCA vs EIA • Economic Impact Analysis (EIA) focuses on local benefits – JOBS CREATED • Ignores costs to other localities • Includes transfer payments as “impacts” • Payrolls, tax revenues, real estate investments • BCA focuses on national benefits (including local) • Nets out costs to other areas • Includes only productivity increases resulting from job creation, increases in property values

13. Defining Projects for Appraisal:Concept of “Independent Utility” • Parts or phases with “independent utility”: i) are Eligible Projects, and ii) satisfy selection criteria • Implications for BCA: does part/phase funded by TIGER has independent utility? • YES: benefits & costs of part/phase only • NO: benefits & costs of entire project (or entire portion with independent utility) • In all cases: • benefits & costs must be related to same • no “leverage”

14. Time Horizon “Both benefits and costs must be estimated for each year after work on the project is begun and for a period of time at least 20 years in the future (or the project’s useful life, whichever is shorter), and these streams of annual benefits and costs must be discounted to the present using an appropriate discount rate, so that a present value of the stream of benefits and a present value of the stream of costs is calculated.”

15. Focus on Project Selection Criteria • Primary Selection Criteria • Long-Term Outcomes • State of good repair • Economic competitiveness • Livability • Environmental sustainability • Safety • Job Creation and Near-Term Economic Activity • Secondary Selection Criteria • Innovation • Partnership

16. Benefits –Livability • Livability benefits are often associated with: • Accessibility for Improved access to jobs, amenities • Accessibility for disadvantaged communities • Land use changes linked to transportation • Transit and bicycle-pedestrian improvements • Affordability (transportation, housing) • At least show ridership/usership • Try to estimate value per user • Increases in property values may indicate value

17. Benefits –Economic Competitiveness • Benefits in this category typically include: • Lower operating costs • Travel time savings • Savings to passengers, carriers, and shippers • Improvements in reliability • Take care in estimating: • Job creation benefits (focus on productivity increases) • Omit multiplier effects • Can include increases in labor and land productivity - But avoid double-counting

18. Benefits –Safety • Safety benefits are typically associated with reducing fatalities, injuries, crash costs, and hazmat releases • Benefits should be based on good crash data and valid analysis of cause • Recommended input values for injuries, property damage, and other data are available in USDOT TIGER NOFA

19. Benefits –State of Good Repair • State of Good Repair benefits can include: • Reducing long-term maintenance and repair costs (life-cycle costs) • Travel time savings (from preventing closures of facilities, lack of speed and weight restrictions) • Other user benefits from better pavement, improved safety • Need to consider benefits and costs of alternatives • Replacement vs. rehabilitation • Risk analysis

20. Benefits –Sustainability • Environmental sustainability benefits are typically from reduced emissions • Greenhouse gases (e.g., CO2) • SOx • NOx • Particulate matter (PM) • Volatile organic compounds (VOC) • Recommended values are available in NOFA

21. Mapping Benefit Metrics into Long-Term Outcome Criteria

22. Selecting Input Values • Wherever possible use recommendations provided in NOFA, including:

23. Transparency at every level

24. Distribution of Benefits & Costs “Applicants must clearly identify which population will be affected by any particular benefit.” (p. 38735)

25. Costs • Provide costs from all sources (local, State, other Federal grants, private) • Direct capital costs: construction, design, land acquisition • Beyond capital costs: • O&M, rehabilitation, life-cycle costs • External costs: noise, congestion, pollutants • Cost to users during project construction: increased delay, vehicle operating costs • Costs of whole project should be compared with benefits of whole project (no “leveraging”) • Or, if TIGER funds only a part of a project, you can compare costs and benefits for TIGER-funded portion only • But only if that portion has independent utility

26. Dealing with Uncertainty “Applicants should (…) discuss any uncertainties associated with the estimates.” (p. 38738). “A ‘very useful’ economic analysis provides sensitivity analysis to show how changes in key assumptions affect the outcome of the analysis.” (p. 38733) • Sensitivity or “elasticity” analysis: • change value of assumptions and model parameters one at a time and report impact on BCA metrics • identify critical variables • discuss “robustness” of BCA • Ideally applied through transportation model as well

27. Presenting BCA Outcomes “Benefits should be presented, whenever possible, in a tabular form showing benefits and costs in each year for the useful life of the project.” (p. 38725) • “ (…) applicants should include qualitative discussion of the categories of benefitsand costs that they were not able to quantify (…)” (page 38725) • We are typically providing a 2 to 5 page summary for inclusion in the application and a technical appendix with supporting information.

28. Job Creation & Near-Term Economic Activity • Two approaches to estimating job creation: • CEA May 2009 memorandum • $92,000 of government spending creates 1 job-year • 64% direct and indirect; 36% induced • Input / Output model • IMPLAN, calibrated for study area • Quarter-by-quarter projections of job-hours • Job creation should not be included as benefits in BCA • “Shadow pricing” of labor costs may be considered

29. CBA Project Rating • CBAs are reviewed and rated by US DOT Review team • Very Useful • Useful • Marginally Useful • Not Useful

30. BCA - Lessons Learned • ALWAYS document and provide reliable sources for data and calculations • Be realistic in assumptions and estimates • Qualitative discussion helps supplement understanding for difficult-to-measure benefits & costs • Consider the viewpoint of objective reviewers • Are estimates plausible and reasonable? • Focus on overall evaluative process, not just the B/C ratio

31. Parting Words… • BCA is an opportunity to objectively demonstrate the need for your project • Highlight benefits that are well-documented and align well with program’s selection criteria • Don’t forget about true costs of the project • Document, document, document • Be realistic in your assumptions and estimates