Using Benefit-Cost Analysis for Evaluating Discretionary Transportation Infrastructure Investment

CFIRE MAFC 13October 2012

National Center for Freight & Infrastructure Research & Education Department of Civil and Environmental Engineering College of Engineering University of Wisconsin–Madison

Authors: Teresa Adams, PhD and Alex Marach University of Wisconsin–Madison Principal Investigator: Teresa Adams, PhD National Center for Freight & Infrastructure Research & Education University of Wisconsin–Madison

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Technical Report Documentation Page 1. Report No.

2. Government Accession No.

3. Recipient’s Catalog No. CFDA 20.701 5. Report Date October 2012

4. Title and Subtitle Benefit-Cost Analysis as a Transportation Project Evaluation Tool: A Framework Based on US DOT TIGER Grants

6. Performing Organization Code

7. Author/s Teresa M. Adams, PhD and Alex Marach

8. Performing Organization Report No. MAFC-13 10. Work Unit No. (TRAIS)

9. Performing Organization Name and Address

National Center for Freight and Infrastructure Research and Education (CFIRE) University of Wisconsin-Madison 1415 Engineering Drive, 2205 EH Madison, WI 53706

11. Contract or Grant No.

13. Type of Report and Period Covered

Final Report 09/11-05/12

12. Sponsoring Organization Name and Address Research and Innovative Technology Administration United States Department of Transportation 1200 New Jersey Ave, SE Washington, DC 20590

14. Sponsoring Agency Code

15. Supplementary Notes Project completed for the United States Department of Transportation by CFIRE and the MAFC. 16. Abstract This paper uses Transportation Investment Generating Economic Recovery (TIGER) grant requirements to as an example of using BCA as a project selection tool. TIGER as a program relies on benefit-cost analysis (BCA) as a selection criteria for grant recipients. Managers and analysts alike can use BCA guidance from the US DOT and the best practices of TIGER to create a more systematic and robust BCA. This guide applies a BCA framework to a TIGER grant application and uses it as the backbone for developing a compelling and competitive application. The guide follows a nine-step process for preparing a BCA and recommends where and how the results of each step should be incorporated into a TIGER grant application. The guide is informed by the long-term outcome criteria of TIGER, the BCA requirements of US DOT, and circulars on BCA by the Office of Management and Budget. The TIGER program provided funding for a variety of projects and its application requirements are a comprehensive example of what should be included in any infrastructure BCA. 17. Key Words Benefit-Cost Analysis, TIGER grant, Transportation, Investment

18. Distribution Statement No restrictions. This report is available through the Transportation Research Information Services of the National Transportation Library.

19. Security Classification (of this report) Unclassified

20. Security Classification (of this page) Unclassified

21. No. Of Pages 26

22. Price -0-

Form DOT F 1700.7 (8-72) Reproduction of form and completed page is authorized.

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Disclaimer The contents of this report reflect the views of the authors, who are responsible for the facts and the accuracy of the information presented herein. The contents do not necessarily reflect the official views of the University of Wisconsin-Madison.

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Executive Summary The US Department of Transportation (US DOT) recently announced the winners of the fourth round of Transportation Investment Generating Economic Recovery (TIGER) Grants. TIGER as a program relies on benefit-cost analysis (BCA) as a selection criteria for grant recipients. As such, TIGER provides an excellent example of using BCA to allocate project funds. Managers and analysts alike can use BCA guidance from the US DOT and the best practices of TIGER to create more robust and systematic BCA.

BCA provides a framework for quantifying and communicating the net benefits returned from a project or policy. BCA relies on alternatives being selected based on expected net benefits rather than purely on location, condition, or eligibility. To this end, the National Center for Freight and Infrastructure Research and Education (CFIRE) has compiled a BCA guide that supplements US DOT guidance and provides a framework for using BCA as a project selection tool.

This guide applies a BCA framework to a TIGER grant application and uses it as the backbone for developing a compelling and competitive application. The guide follows a nine-step process for preparing a BCA and recommends where and how the results of each step should be incorporated into a TIGER grant application. The guide is informed by the long-term outcome criteria of TIGER, the BCA requirements of US DOT, and circulars on BCA by the Office of Management and Budget. The TIGER program provided funding for a variety of projects and its application requirements are a comprehensive example of what should be included in any infrastructure BCA.

The guide first provides an overview of the TIGER grant selection criteria and applies them to both the TIGER application and the BCA. Following the selection criteria of TIGER, the guide explains the steps that applicants should consider when assessing the benefits and costs of their projects. Lastly, the guide provides links to resources from the TIGER Notice of Funding Availability (NOFA) as well as other resources that can be used to monetize impacts.

The guide is meant to be informative to both managers and analysts. For managers, the guide offers insight on what to look for when reviewing a BCA. For analysts the guide offers details on transforming a BCA to a competitive and compelling grant application.

Table of Contents Disclaimer ...................................................................................................................................................... I  

Executive Summary ..................................................................................................................................... V  

Introduction ................................................................................................................................................... 1  

The Application............................................................................................................................................. 2  

Project Description.................................................................................................................................... 3  

Project Parties ........................................................................................................................................... 4  

Grant Funds and Sources/Uses of Project Funds ...................................................................................... 4  

Selection Criteria....................................................................................................................................... 4  

Benefit-Cost Supplement .......................................................................................................................... 7  

Long-Term Outcomes ................................................................................................................................... 8  

State of Good Repair................................................................................................................................. 8  

Economic Competitiveness....................................................................................................................... 8  

Livability ................................................................................................................................................... 9  

Environmental Sustainability .................................................................................................................. 10  

Safety ...................................................................................................................................................... 11  

Secondary Criteria................................................................................................................................... 11  

Benefit-Cost Analysis ................................................................................................................................. 12  

9 Major Steps Benefit-Cost Analysis in General .................................................................................... 14  

1. Specify the set of alternative projects ............................................................................................. 14  

2. Decide whose benefits and costs count (standing).......................................................................... 15  

3. Identify the impact categories, catalogue them, and select measurement indicators...................... 15  

4. Predict the impacts quantitatively over the life of the project ........................................................ 16  

5. Monetize (attach dollar amounts to) all impacts ............................................................................. 17  

6. Discount benefits and costs to obtain present values ...................................................................... 18  

7. Compute the net present value of each alternative ......................................................................... 22  

8. Perform sensitivity analysis ............................................................................................................ 22  

9. Make a recommendation ................................................................................................................. 23  

Further Reading........................................................................................................................................... 24  

Recommended Websites from Notice of Funding .................................................................................. 24  

Data Sources ........................................................................................................................................... 24  

Appendix A ............................................................................................................................................. 25  

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Introduction The underlying theory of benefit-cost analysis (BCA) relies on economic principles as well as background knowledge in the measurement of program or policy effects. Considering that Transportation Investment Generating Economic Recovery (TIGER) grant applicants may not have the resources to research BCA, the US Department of Transportation (US DOT) published guidance on BCA. The National Center for Freight and Infrastructure Research and Education (CFIRE) has prepared this guide to supplement the US DOT BCA guidance to help applicants use the BCA as the backbone for a compelling and competitive TIGER application. Additionally, this guide in conjunction with US DOT’s BCA guidance and recommendations are applicable to transportation BCA outside of the TIGER program.

TIGER grants are highly competitive, both in terms of the number of applicants and total dollar figures requested. TIGER I & II had 2,400 applicants requesting a total of $76 billion, of which 126 received grants worth a total of $2.1 billion. TIGER III had a total of 828 applications requesting a total of $14.1 billion and funded 46 projects for a total of $527 million. 1 The latest round of TIGER grants garnered 703 applications for a total of $10.2 billion, of which 47 projects were funded for a total of $500 million. The success of TIGER relies on projects being judged on their benefits, not the proficiency of applicants at conducting BCA. Considering both the competition for TIGER funds and the key to its success, CFIRE chose to write a guide to increase the probability the best projects are selected for funding.

This guide serves as a supplement to the fiscal year 2012 TIGER Notice of Funding Availability2 (NOFA) and the BCA resource guide3 made available by US DOT. This guide was prepared based on best practices for conducting a BCA, a critical review of published TIGER BCAs, BCA resources, and the primary author’s experience on the TIGER I economic review team.

The scope of this guide includes the TIGER application, completing a BCA, and presenting BCA in a grant application. This guide contains two parts: The first part focuses on the long-term outcomes of TIGER and the specific impacts that might be quantified as benefits. The long-term outcomes in the NOFA are essential to both the BCA and the application. The US DOT clearly states in the NOFA that a failure to demonstrate a minimum impact on the desired long-term outcomes of the nation will result in a refusal of funding.4 Additionally, the long-term outcomes highlight many of the impacts of a infrastructure project and are valuable when considering the impacts of a proposed project. The second part of this guide outlines the format, presentation, and steps for preparing a BCA.

1 "Huge Demand for TIGER Grants Highlights Need for More Transportation Investments." Press Release. Department of Transportation, 15 Nov. 2011. Web. 22 Feb. 2012. <http://www.dot.gov/affairs/2011/dot14811.html>. 2 “Department of Transportation’s National Infrastructure Investments Under the Full-Year Continuing Appropriations, 2012; and Request for Comments” Federal Register 20 (1-31-2012): 4871. <http://www.dot.gov/tiger/docs/fy12_tiger_nofa.pdf> 3 "TIGER Benefit-Cost Analysis (BCA) Resource Guide." United States Department of Transportation, 1 Feb. 2012. Web. 24 Sept. 2012. <http://www.dot.gov/tiger/docs/tiger-12_bca-resourceGuide.pdf>. 4 “Department of Transportation’s National Infrastructure Investments Under the Full-Year Continuing Appropriations, 2012; and Request for Comments”

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The Application The TIGER NOFA provides a general outline of the TIGER grant application that is split into seven different parts:

1. Project Description 2. Project Parties 3. Grant Funds and Sources/Uses of Project Funds 4. Selection Criteria

a. Long-Term Outcomes i. State of Good Repair

ii. Economic Competitiveness iii. Livability iv. Sustainability v. Safety

b. Job Creation & Near-Term Economic Activity c. Innovation d. Partnership e. Results of Benefit-Cost Analysis

5. Project Readiness and NEPA 6. Federal Wage Rate Certification 7. To the extent relevant, the final page of the application should describe any material changes that

were made to the pre-application form.

The general outline of the application makes the information provided by applicants uniform and easier for reviewers to analyze and rate. This guide will address parts one through four as they directly relate to BCA. Additionally, this guide will provide an overview of what is needed in the BCA supplement included as a supporting document for the TIGER application. Parts one through three display the need and outline the parties paying for the proposed project, four directly addresses each selection criteria to argue for the project being completed, and the BCA and the included supplement underlies the entire application. The four parts are directly connected and should be consistent. In fact, after completing the BCA, applicants should have nearly all the information needed to complete the application. The BCA is not an additional appendix to the application: it is the application. As such, this guide relates BCA to the application and displays how to turn a quality BCA into a TIGER application.

In order to give applicants the best chance of success, we emphasize two themes throughout this guide: consistency and transparency. Applicants need to ensure than any claim that they write in the project description or selection criteria sections of the application are quantitatively or qualitatively analyzed in the BCA. Similarly, applicants need to be transparent in all calculations of benefits and costs. Without transparency, the reviewers of the TIGER grant application have no basis for determining if the analysis is accurate. The burden of proof lies on the applicant to prove the validity of their assertions and the value of their project.

Table 1 displays the chronological ordering of the parts of a TIGER application and gives a brief description. Applicants should think of the application beginning broadly and then becoming much more focused and explicit about details as it moves from the project description to the selection criteria.

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Table 1: Parts of TIGER Grant Application

Parts of a TIGER Grant Application

Purpose

Project Description Explain the current transportation system and explain how the project will change its functionality. Should provide the background and performance metrics for the application to build upon.

Project Parties Who is receiving the grant and what other parties are involved in the project (local, state, private).

Grant Funds and Sources/Uses of Project Funds

Amount of money requested, total cost of project, other funding sources, and percentage break-up of funding sources.

Selection Criteria Explains how the project accomplishes long-term outcomes and reports the BCA results.

Project Description The project description section of the TIGER grant application should provide an overview of the current state of the infrastructure system and place the project in this context. Maps that display the system and proposed project are good aides to explain the how the project relates to the current infrastructure. In addition to explaining the project in more technical terms, applicants should use performance metrics to explain the need for the project. More explanation will be provided about the effects in the BCA section, but showing how the project will positively change the infrastructure system is crucial. The goal should be to provide an overview of the project and establish why it is needed and how it addresses the current infrastructure challenges. Keep in mind that anything not stated by applicants is unknown by the reader. Assume that the reader is completely unfamiliar with the infrastructure system and needs a systematic overview of its functionality.

The project description section should give the reviewers a good idea of both the project and the status quo. The status quo is the current state of the infrastructure system going forward only undergoing routine maintenance. It is important to accurately define the status quo because any performance improvement in the functionality of the system can be counted as a benefit and anything that becomes worse is counted as a cost. Applicants should take the time to thoroughly lay out and provide performance statistics on the status quo because it is a valuable frame of reference for the rest of the application and BCA. Consider an application for the expansion of a highway. If the applicant did not properly explain the status quo and explain a congestion problem the reader would be forced to assume that congestion benefits of the project are unfounded. Furthermore, the project description section of the report should explain how transportation will be more efficient, safer, environmentally sustainable, as well as explain other effects of the project.

The project description will also provide the reference point that reviewers will use to assess whether applicants are truly counting a benefit or if they have mistakenly counted a transfer payment. Transfer payments are the shift of benefits from one area to another without an efficiency gain. A project attracting business from another part of the country with no increase in efficiency imposes a cost to the area that lost the business and a benefit to the area that gained the business. BCA does not count transfers because the costs and benefits cancel each other. Similarly, in the most basic sense the payment of a wage is not a

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benefit because it is a cost to the payer of the wage and a benefit to the wage earner. Therefore, applicants cannot count the wages paid as a benefit to workers because it is simply a transfer of project funds to private sector workers. Conversely, if a worker is unemployed or underemployed, the increased efficiency of their work can be counted as a benefit.

Port projects, perhaps more than other projects, have to demonstrate that new traffic is more than a transfer and actually is an efficiency gain compared to the status quo. Applicants have to explain what is being moved and how their port is affecting other ports in the region. If traffic is diverted from another port the gain is most likely minimal because the only benefit is the gain in efficiency. Most importantly, clearly stating the relationship between ports and the goods that are transported will give reviewers the knowledge they need to come to their own conclusion.

In general, think about answering this question: What challenge does the infrastructure address and how will it accomplish its goal? Next, who uses the infrastructure currently and how will that change after the project? Then, where did the increased demand come from and what gains in efficiency can be counted? The project description section should answer these questions for the reviewers so that they can use that information to judge the conclusions of the BCA. Applicants need to give the reviewers a complete picture of the status quo. The status quo provides the context for the project to be completed. Important metrics for the status quo are future required maintenance, annual accidents, future congestion, traffic demand, and the general reliability of the infrastructure system now and in the future. Think of this section as conveying the current state and displaying the need for infrastructure improvements.

Similarly, the benefits and costs of the project are compared to the status quo, so taking the time to compile the current data on the infrastructure system and future needs will be valuable for conducting the BCA. Applicants should show how the project will affect key indicators of the infrastructure system and the future costs of maintenance.

Project Parties The project parties section of the application is a listing of who is receiving the grant and the other parties involved in the project. TIGER values partnerships and the project parties section of the application will directly speak to applicants partnering with the private sector, local, state, and/or federal actors to complete the project.

Grant Funds and Sources/Uses of Project Funds The grant funds section of the report will build upon project parties section and quantify the contributions of all parties. Additionally, applicants will state the amount that the TIGER application is requesting and the total amount of the project. Applicants need to note whether funds have been committed and where each contributor’s funds will be used. Applicants should also include the percentages of the total project of each contributor. A pie graph is a simple but effective means to convey the distribution of payments for a project.

Selection Criteria The selection criteria portion of the TIGER application should build upon the three previous sections, especially the project description. The selection criterion directly addresses the long-term outcomes, job creation and near-term economic activity, innovation, partnership, and the results of the BCA. Also, applicants should quantify any claims that were made in the project description portion of the application. The goal is to prove the worth of the project in terms of TIGER grant requirements. The selection criteria should provide the aggregate quantities of the important benefit categories and a brief discussion of the estimates used in calculating the benefits. For instance, if a project will reduce idling time on a section of highway applicants should include the amount of time spent in the current system and compare the

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estimate of idle time after the project. A detailed explanation of any factors used or the source of data will be discussed in the BCA supplement.

Table 2: Summary of Benefits Table

Long-Term Outcomes Alternative 1

3% Discount Rate ($2011)

Alternative 2

3% Discount Rate ($2011)

Livability

Accessibility

Property Value Increases

Economic competitiveness

Travel Time Savings

Operating Cost Savings

Energy Security Benefits

Safety

Value of Prevented Accidents

State of Good Repair

Long-term Replacement

Maintenance & Repair savings

Reduced VMT

Environmental sustainability

Reduced emissions

Total

Applicants must include a table similar to Table 2 to give reviewers a quick and easy place to find the total benefits for each long-term outcome.5 The benefits listed under the long-term outcomes are only provided as examples of possible benefits for each criterion. Applicants may have different benefits listed than those in Table 2. Also, there may be impacts that fit into multiple categories, but applicants should only count the benefits in one long-term outcome category. The point is that each long-term outcome should be discussed and quantified in the BCA results section of the application and reported in the selection criteria.

5 “Department of Transportation’s National Infrastructure Investments Under the Full-Year Continuing Appropriations, 2012; and Request for Comments” pg. 4877.

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Similarly, applicants should overview the projects impacts on job creation and near-term economic activity, innovation, and partnership. The job creation and near-term economic activity criteria focuses on projects quickly creating and preserving jobs through the project. Additionally, jobs that are created in economically distressed areas will be given priority.6 Lastly, innovation and partnership are fairly self-explanatory and will vary project-to-project. Ultimately, US DOT wants to see that the applicant has buy-in from users and innovative solution from designers.

Table 3: Summary of Benefits and Costs

7% Scenario ($2011)

Variable LCV non-LCV Difference

Cost of Extra Tractors 1,960,377,587   1,982,551,520   $22,173,933  

Total Trailer Cost $418,239,683   $413,752,044   $(4,487,639)  

Construction Cost of breakdown areas 7,635,899   $-­‐   $(7,635,899)  

Total LCV driver Training Cost $364,845   $-­‐   $(364,845)  

Total Driver labor $6,938,968,769   $7,002,014,888   $63,046,120  

Total Emissions $1,823,809,980   $1,842,280,027   $18,470,047  

Tractor and Trailer Wear and Tear $1,851,821,133   $1,868,646,420   $16,825,286  

Total Cost of Cargo Breakdown $87,316,388     $(87,316,388)  

Total Maintenance Cost of Breakdown Areas $95,687   $-­‐   $(95,687)  

Total Oil Externalities $860,078,493   $868,741,194   $8,662,702  

Total Fuel Costs $8,088,737,394   $8,170,207,075   $81,469,681  

NPV $22,037,445,858   $22,148,193,169   $110,747,310  

CFIRE conducted a BCA of Longer-Combination Vehicles (LCV) on the Ohio Turnpike; Table 3 summarizes these findings. Applicants should include a similar table that lays out the benefits and cost categories for the reviewers to see the impacts of the whole project in one table. The calculations can be included later in the analysis, but the results should be reported in the benefit-cost results section of the selection criteria. Furthermore, including a table such as Table 3 shows the final conclusion of the project. Similarly, applicants should present the outcome of the analysis by stating the net present value of the alternatives.

6 Ibid pg. 4866

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Benefit-Cost Supplement Finally, the benefit-cost supplement details the calculations used to analyze performance metrics of the status quo and alternatives. Also, applicants need to explicitly explain the method of monetizing all available impacts for the proposed projects. It is important that applicants do not make claims that are not supported by the BCA. For instance, if applicants claim that their project will positively affect livability then must directly state why they have come to that conclusion. The supplement provides additional detail about the process, assumptions, and data used in conducting the BCA. The TIGER application has a 30 page limit. Therefore, applicants are allowed additional supplements to explain the reasoning for assumptions, give details about the numbers used, and explicitly show calculations. Applicants should include as much detail as is possible in the selection criteria section to convince the reader of their estimate of costs and benefits.

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Long-Term Outcomes The TIGER long-term outcomes serve as a list of required impact categories for the project. Furthermore, the long-term outcomes provide an initial guide to applicants trying to identifying the benefits of the proposed project. As such, this guide will begin by providing an overview of the long-term outcomes and then directly relate each to BCA. Each of the long-term outcomes needs to be addressed in the selection criteria section and quantitatively or qualitatively analyzed by the BCA. Again, the point is consistency between stated impacts and the BCA.

State of Good Repair The TIGER NOFA explicitly says in the state of good repair section,

“The application should include any quantifiable metrics of the facility or system’s current condition and performance and, to the extent possible, projected condition and performance, with an explanation of how the project will improve the facility or system’s condition, performance and/or long-term cost structure, including calculations of avoided operations and maintenance costs and associated delays.”7

To meet the state of good repair criteria, applicants need to address three areas: how the project addresses current infrastructure conditions, how it ensures future efficiency, and how the asset will be managed to ensure longevity.8

First, it is important to demonstrate how the project addresses the existing infrastructure condition. The project needs to be consistent with the current infrastructure. There must be a need for the project. Data on congestion in the present and future will provide strong evidence for justifying the project. Applicants should build upon the picture started in the project description to ensure the reader understands the current infrastructure system.

Second, applicants should explain how the project ensures future efficiency of the transportation system. Applicants should discuss the ramifications for the infrastructure system in the event that the project does not get funded. Estimates of the future demand of the system will be very valuable for this subset of the state of good repair criteria. Also, applicants should utilize estimates of congestion or average speed to show how the status quo will lead to decreased efficiency for transporting goods, labor, and materials.

Lastly, applicants should describe how future costs of the project will be financed and how asset management techniques will be used to ensure the longevity of the project. Essentially applicants need to show that they have thought through the future costs of the project and have a plan for effectively managing the facility.

The state of good repair criteria relates to BCA by comparing the future maintenance of the status quo to the future maintenance costs of the proposed project. Also, comparing congestion under the status quo to the congestion after the proposed project is easily transferred to BCA.

Economic Competitiveness  The economic competitiveness long-term outcome is judged on whether the project will aid in the economic competitiveness of the US in the medium- to long-term. The NOFA notes that there is a focus

7 “Department of Transportation’s National Infrastructure Investments Under the Full-Year Continuing Appropriations, 2012; and Request for Comments” pg. 4867. 8 Ibid pg. 4866-4867.

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on how the project reduces the cost to transport exports. Similarly, the NOFA highlights that priority will be given to projects that increase the productivity of Economically Distressed Areas.9

Applicants should highlight the time and operating cost savings for shippers and commuters. Time and cost savings increases the mobility of workers and goods, thereby allowing the economy to allocate workers and goods more efficiently. Economic competitiveness can be described by identifying the businesses in the area that would benefit from the project and how the project would improve the international competitiveness of these businesses. It may also be valid to consider whether the project will make transportation of goods and people flow with greater consistency and if so what affect that consistency will have on business and labor. One example of consistency affecting efficiency and competitiveness is improvements to travel time reliability of the resulting system that would support just-in-time production methods and thus decrease costs. Statistics like buffer time, travel time, average speed, percentage of freight traffic, and flow queue length can give readers an idea about the current state of the transportation system.

Also, consider efficiency gains in the cost of transportation. Projects may cause goods to shift from a high-cost transportation mode to a lower-cost mode, thereby reducing operating costs and increasing efficiency. Consider an intermodal yard that allows for more goods to be shipped by rail or water. If this modal shift results in a decrease in truck miles on the road or decreases the cost of transportation, the applicant can consider those benefits as aiding in the economic competitiveness of the United States. A modal shift is not considered transfer if there are efficiency gains, but only the gains in efficiency are benefits.

Essentially, every portion of the economic competitiveness criteria will be calculated and monetized in the BCA section of the application. For instance, changes in travel time translate to time savings, decreased emissions, and fuel savings. Also, modal shifts may increase the efficiency of the transportation system and transportation costs, both of which are benefits counted in BCA.

Livability The TIGER NOFA splits livability into four subcategories, 1) user mobility, 2) modal connectivity, 3) aiding in the mobility of disadvantaged groups, and 4) the effect of the project on land use. Subcategories one and two of the livability criteria lend themselves to be quantitatively measured. Applicants can use the change in travel time and congestion metrics to describe and quantify livability. Also, in most cases the project will include the number of vehicle miles affected as well as the number of new trips that are induced by the project. It is important to not count time savings twice because it could be used to show an impact on economic competitiveness and livability. A single impact such as travel time can show an improvement in multiple long-term outcomes, but are only counted once in the BCA.

Applicants should try and address all of the livability criteria and if possible use the six criteria that were developed by the US DOT, HUD, and EPA.10 The description will be qualitative in general, but applicants should try and estimate quantitative metrics. Variables such as intermodal connections, the quantity of trips, or connected recreation facilities will increase the credibility of a qualitative claim.

Applicants may describe qualitatively how the project will improve connectivity to other transportation modes. For instance, if the construction of a new bus terminal connects train and bus routes, applicants can point to induced demand for train and bus trips taking cars off the road. Thus reducing congestion and increasing modal choices.

9 “Department of Transportation’s National Infrastructure Investments Under the Full-Year Continuing Appropriations, 2012; and Request for Comments” pg. 4867. 10 "DOT Secretary Ray LaHood, HUD Secretary Shaun Donovan and EPA Administrator Lisa Jackson Announce Interagency Partnership for Sustainable Communities." Office of Public Affairs. United States Department of Transportation, 16 June 2009. Web. 24 Sept. 2012. <http://www.dot.gov/affairs/2009/dot8009.htm>.

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In contrast, the third and fourth subcategories for livability are far more qualitative and are difficult to monetize. Applicants can count increases in property values as a benefit if the addition of the project increases the value of land. Conversely if the value of land is projected to decrease then applicants need to count the reduction as a cost. Changes in property value are only counted once and are not yearly costs or benefits. Also applicants cannot count increased property tax revenue as a benefit because it is a transfer from property owners to the government.

Due to the qualitative nature of the third and fourth subcategories it is difficult to provide guidance on how to measure the effects. Therefore this guide lists the subcategories directly from the NOFA for applicants to use.

“(3) will improve accessibility and transport services for economically disadvantaged populations, non-drivers, senior citizens, and persons with disabilities, or will make goods, commodities, and services more readily available to these groups; and/or

(4) is the result of a planning process which coordinated transportation and land-use planning decisions and encouraged community participation in the process. Livability improvements may include projects for new or improved biking and walking infrastructure. Particular attention will be paid to the degree to which such projects contribute significantly to broader traveler mobility through intermodal connections, enhanced job commuting options, or improved connections between residential and commercial areas. Projects that appear designed primarily as isolated recreational facilities and do not enhance traveler mobility as described above will not be funded.”11

An example of some impacts for the third and fourth subcategories of the livability can be viewed through the extension of the Chicago Redline.12 Even though this example explains impacts on livability, applicants should, when possible provide estimates of new ridership, maps of the affected area, possible rider demographics, person-miles traveled etc.

Environmental Sustainability  The environmental sustainability criteria are straightforward and easily translated into the calculations of a BCA. There are four interrelated subcategories, 1) improve energy efficiency, 2) reduce dependence on oil, 3) reduce emissions, and 4) mitigate adverse environmental impacts.

Subcategories one, two, and three are directly applicable to most projects, but will probably be measured with different methods. Energy efficiency can be displayed by decreased idling time for trucks, increased average speed, or diversion of freight from truck traffic to rail or water. Similarly the use of more efficient freight transportation methods will affect fuel use per ton-mile which can be compared to the status quo to show positive impacts. Similarly, efficiency gains will contribute to reducing the dependence on oil if the original transport method was petroleum-based. Oak Ridge National Laboratory (ORNL) conducted a study that found a reduction in the consumption of a barrel of oil is worth from $7.82-$33.96 ($2007).13 The US DOT used ORNL’s work to estimate that the reduction in a gallon of gasoline is worth $0.186-$0.808 ($2007) with the most likely value being $0.467 per gallon saved.14 Displaying a reduction in petroleum consumption will speak to the third criteria and using ORNL’s research will help monetize this impact.

11 “Department of Transportation’s National Infrastructure Investments Under the Full-Year Continuing Appropriations, 2012; and Request for Comments” pg. 4867 12 "Red Line Extension Project." Chicago Transit Authority, n.d. Web. 24 Sept. 2012. <http://www.transitchicago.com/Redeis/purposeneed.aspx>. 13 Leiby, Paul N. "Estimating the Energy Security Benefits of Reduced U.S. Oil Imports." Oak Ridge National Laboratory, 28 Feb. 2007. Web. 19 June 2012. <http://www.epa.gov/oms/renewablefuels/ornl-tm-2007-028.pdf>. 14"Corporate Average Fuel Economy for MY 2012-MY 2016 Passenger Cars and Light Trucks." Office of Regulatory Analysis and Evaluation National Center for Statistics and Analysis. N.p., Mar. 2010. Web. 25 June 2012.

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Emissions reduction is tied to increased efficiency, but emissions could be increased if the reduction in costs induces more travel or freight shipments. This guide recommends the use of EPA’s MOVES2010a15 to estimate the change in emissions. Monetizing emissions is difficult depending on the amount of data the applicant has on the project. The difficulty in calculating emissions is the applicant has to know the composition of the vehicles using project. For example if the proposed project will increase capacity to decrease congestion there may be a reduction in emissions through decreased idling. The emission reduction of any project will depend on the distribution of the age, type, and fuel source of the vehicles. Some roadways have high amounts of heavy duty trucks which burn much more fuel while idling than cars and thus have higher emissions savings after the project. Also, emissions factors vary significantly depending on the age of the vehicles because the standards for trucks and cars have changed significantly over time. So here again having some idea about the type and age distribution of the fleet is helpful.

The fourth subcategory of mitigation of adverse environmental impacts will likely be entirely construction-specific and will make use of the NEPA assessment that is required for the project.

Safety  Safety is an obvious concern for the proposed project. Applicants should compare the current number and types of crashes and then estimate how the project will affect safety. The safety criterion is concerned with the rate and severity of cashes. There may be a case where the projected number of crashes increases but are less severe and are therefore a benefit and an improvement to safety. The BCA resource guide16 provides values to monetize the accidents by severity and account for property damage.

The NOFA also notes that "elimination of highway/rail grade crossings, the protection of pipelines, or the prevention of unintended release of hazardous materials” should be noted. These are related to reducing exposure and safety risk by decreasing the probability of a high-cost accident.

Secondary Criteria The TIGER NOFA also includes secondary criteria of valuing projects that are innovative and include partnership. Public-private partnerships can show the reviewers that applicants have considered users of the proposed infrastructure and more importantly that these users may have a monetary interest in its success. The innovation and partnership secondary criteria are qualitative, but show the committee that you have done due diligence by consulting and getting buy-in from stakeholders. Applicants should note the size of the TIGER grant that is being requested and break out the proportion of the project that is funded by TIGER, by state and local government, and by the private sector. Noting the proportions that each group contributes to the entire project, applicants can better display the partnership involved in their project. An effective way to visually represent the payments of local, state, federal and private entities is through a pie chart or a TIGER grant to total money ratio. The idea is to show that the TIGER grant is helping fund the project and that other users will be contributing to the project.

15 "MOVES (Motor Vehicle Emission Simulator)." EPA. Environmental Protection Agency, 21 Sept. 2012. Web. 24 Sept. 2012. <http://www.epa.gov/otaq/models/moves/index.htm>. 16 "TIGER Benefit-Cost Analysis(BCA) Resource Guide." United States Department of Transportation, 1 Feb. 2012. Web. 24 Sept. 2012. <http://www.dot.gov/tiger/docs/tiger-12_bca-resourceGuide.pdf>.

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Benefit-Cost Analysis The benefit-cost analysis section of this guide provides more details on the general concepts, terms, and the application of BCA to TIGER grants. The guide will outline a nine step approach to completing a BCA taken from “Cost-Benefit Analysis Concepts and Practice.”17 Beyond the nine steps, this guide applies BCA to a transportation infrastructure context and implements the guidelines and recommendations of the TIGER NOFA and US DOT examples.

The BCA results are the analytical presentation of monetized claims made in the application. For example, if a project will reduce traffic related fatalities by 50 percent, the BCA results section reports the value over the life of the project. Additional information will be provided in the BCA supplement on how the safety impact was quantified, monetized, and discounted back to the present.

Similarly, the BCA should support the application completely. Any benefit that is claimed in the selection criteria must be explained in the BCA results section and in the supplement. Applicants should discuss even qualitative claims that may be difficult to quantify or monetize. For instance, if the project will qualitatively benefit livability, the applicant should discuss how they came to the conclusion that livability will be improved. After establishing that there are qualitative benefits to livability the applicant can discuss how the analysis likely understates the total monetized benefits of the project. Every analysis should include a discussion of the writer’s confidence in the point estimate of the benefits and how assumptions and qualitative benefits or costs potentially bias the result. Similarly, applicants should provide the plausible range of net benefits that takes into account the uncertainty inherent in the measurement of project impacts.

Note that the TIGER NOFA requires an executive summary that includes an impact matrix outlining all the benefits of the project. Table 4 displays the format the US DOT requires for the executive summary. Also, if the application is for multiple projects that are linked together by a common objective but have independent utility, the executive summary needs to include an impact matrix for each project. Also, the executive summary needs to include a breakdown of all funding according to payer. For example, the applicant will list the total price tag of the project and then breakout the expenditures of state, local, federal, and private contributors. Lastly, applicants must display the calculations of impacts in a table similar to Table 5. The executive summary should be the highlights of the analysis and must include these features.

17 Boardman, Anthony E., David H. Greenberg, David L. Weimer, and Aidan R. Vining. Cost-Benefit Analysis Concepts and Practics. 4th ed. New Jersey: Pearsons, 2011. Print.

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Table 4: Impact Matrix Current

Status/Baseline & Problems to be

Addressed

Change to Baseline/

Alternatives

Types of Impacts

Population Affected by Impacts

Economic Benefit

Summary of Results

Page Reference in BCA

Status Quo Proposed Project

What is Affected by the Project

Who is Affected and What Numbers

Monetize the Value of Impact

Estimated Benefits of the Impact

What Page Analysis is on

Source: Department of Transportation’s National Infrastructure Investments Under the Full-Year Continuing Appropriations, 2012; and Request for Comments” Federal Register 20 (1-31-2012): 4875.

Table 5: Impact Calculation Calendar

Year Project Year

Affected Drivers

Travel Time Saved

(hours)*

Total Value of Time Saved ($2008)**

Initial Costs ($2008)

Operation & Maintenance Costs ($2008)

Undiscounted Net Benefits

Discounted at 7%

2011 1 $38,500,000 6,000,000 $(44,500,000) $(41,588,785) 2012 2 80,000 1,040,000 $14,248,000 700,000 $13,548,000 $11,833,348 2013 3 95,000 1,235,000 $16,919,500 700,000 $16,219,500 $13,239,943 2014 4 100,000 1,300,000 $17,810,000 700,000 $17,110,000 $13,053,137 2015 5 102,000 1,326,000 $18,166,200 700,000 $17,466,200 $12,453,159 2016 6 109,000 1,417,000 $19,412,900 700,000 $18,712,900 $12,469,195

NPV $21,459,998 * Number of drivers times three minutes a day (3/60 hours) over 260 workdays ** Hours at $13.70 per hour ($2008) *** Includes costs from delays to users during construction Source: Department of Transportation’s National Infrastructure Investments Under the Full-Year Continuing Appropriations, 2012; and Request for Comments” Federal Register 20 (1-31-2012): 4876.

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9 Major Steps Benefit-Cost Analysis in General Before an applicant begins the process of preparing a BCA the unit of analysis needs to be specified. TIGER requires each part of a larger project that has independent utility to provide a separate presentation of costs and benefits.18 US DOT defines a project as having independent utility if the project could satisfy the selection criteria of TIGER. Therefore, applicants should start by thinking about the proposed project and see if it can be split into pieces that display independent utility. The requirement that projects be split up allows reviewers to potentially fund a piece of the proposed project rather than rejecting the whole proposal. If applicants are sure that there are additional benefits of implementing multiple projects beyond the sum of the each project’s independent benefits, then they should note these added benefits and total costs. For instance, a project that proposes TIGER funding for deepening a harbor and creating an intermodal yard at the harbor would have to be split into two BCAs. Completing both projects would probably have greater benefits than the addition of the two separate projects. Therefore, it is important to directly state the benefits from each individual project as well as the net benefits of completing both projects together. The following subsections describe each step of the BCA and the result that would be included in the TIGER application.

1. Specify the set of alternative projects The US DOT requires applicants to analyze the costs and benefits for a set of possible projects. For instance, if funds are for existing infrastructure, the alternatives to the project are unimproved but maintained current infrastructure, upgrades to current infrastructure, and replacement of the infrastructure with different alternatives. Applicants can draw on previously prepared highways, ports, and rail plans to inform their analysis. Conversely, new projects should be compared to continuing with the status quo. Also, the US DOT asks that applicants consider reasonable alternatives to the proposed project that are smaller and more focused.19

In order to complete a BCA the base case has to be analyzed to see how the project will impact the infrastructure system. The applicant should have a good idea of the problems that are associated with the current infrastructure (status quo). When choosing which alternatives to analyze, keep in mind the ability to transfer data and techniques from the analysis of the primary project. US DOT does not expect all alternatives be assessed, just those that are reasonable.

In general, the first step of the BCA should look at both the problem and the causes of the problem to find viable solutions. For instance, if congestion on a roadway is an issue, the applicant should consider why the road is congested and what would impact the amount of congestion. This analytic technique is called framing. The framing of a problem directly affects the solutions that seem to logically fix the problem. If a problem is framed as an infrastructure system not having enough capacity, it would be logical to increase capacity. The same problem could be framed as too many cars or trucks on the road, which could be solved by increasing lanes, increasing freight infrastructure, or increasing access to public transportation. The point is that if applicants narrowly frame a problem they potentially miss other alternatives that may be more appropriate to fix the problem. Therefore, taking the time to substantively analyze the issue, its causes, and the possible solutions will ensure that the applicant is considering all possible alternatives. Similarly, applicants should do the BCA before writing the TIGER application, so that they do not choose a project that has fewer net benefits. Completing a quality BCA will make writing the application much easier because it fills in the selection criteria portion which is the most important.

18 “Department of Transportation’s National Infrastructure Investments Under the Full-Year Continuing Appropriations, 2012; and Request for Comments” pg. 4868 19Ibid pg. 4876

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Specifying the alternatives of the BCA should be covered in the project description section of the TIGER application. Applicants should discuss the alternatives analyzed, but the full explanation of the technical aspects should be included in the BCA results or in the BCA supplement.

2. Decide whose benefits and costs count (standing) The concept of standing denotes the population for which benefits and costs are counted. Given the national focus of TIGER, the most appropriate standing to take would be the costs and benefits to the whole nation. It is important to note that errors, double counting, and transfers are more likely when giving standing to the entire nation. For instance counting reduced shipping costs for a trucking company and then counting reduced consumer prices for those same goods is double counting. Counting the reduction in costs to the shipper double counts the whole benefit because the shipper then passes some of the cost reduction onto the consumer as lower prices.

Similarly, transfers are another possible error when conducting a BCA and even more of an issue when using national standing. A transfer is the movement of a benefit from one area to another without a gain in efficiency or the creation of additional value. For example, if an applicant proposes a new port but the ships and industry that use the port relocate from another port within the United States the ships and industry are a transfer of benefits. An industry moving away from an area is a cost and coming to a new area is a benefit, each cancelling the other out. If on the other hand, the industry is more productive because of its access to reliable transportation or can now use just-in-time production methods then the increase in efficiency can be counted. In practice there must be a benefit to the industry or they would not undergo moving costs, but the only benefit that can be counted is the efficiency gain. Conversely, if the project is able to attract business that was previously in a foreign country, all the benefits associated with that business can be counted because only firms and individuals in the US are given standing.

One exception to using national standing in the BCA for TIGER grants is emissions. Specifically, US DOT requires that applicants use global standing for greenhouse gas emissions because the effects of greenhouse gas emissions are felt throughout the world.

US DOT also notes that it is important to specify the population that will be affected by the project. Specifying the affected population will help note the type of benefits that should counted. For instance, a project that diverts highway freight to the waterways will have multiple affected populations. In this case there are benefits to freight transporters in time, reliability, and/or cost. Also, if the diversion of freight to alternative means reduces congestion on roadways, drivers are also an affected population that receives benefits from the project. Furthermore, the affected populations may extend out of the state if the diversion to other modes reduces congestion out of state.

Lastly, by stating the population, the applicant can display that their project complies with the US DOT’s livability assessment. If the affected population is in an economically distressed area, the project can demonstrate how it affects economic competitiveness.

Standing should be described in the selection criteria section of the report if the report affects livability and economic competitiveness criteria. Also, applicants should directly state that national standing is used in the BCA results section.

3. Identify the impact categories, catalogue them, and select measurement indicators In this portion of the BCA the goal is to identify what is being affected by the project. Applicants should use the long-term outcomes: state of good repair, economic competitiveness, livability, environmental sustainability, and safety. The difficulty in this step of the analysis is finding indicators that can be measured. Some examples of impact categories are time savings, emissions, noise reduction, crashes, vehicle operating costs, travel time reliability of the transportation system, etc. Measurement indicators

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for these impact categories include time, lives saved, accidents avoided, tons of pollution reduced, reduced maintenance, etc.

The applicant should consider how the proposed project affects both inputs and outputs. The inputs of a project are categories such as construction costs, construction time and the associated traffic delays, and maintenance costs. Conversely, the outputs are what the project changes as compared to the status quo.

In general, it may be helpful for applicants to trace out the project that they are proposing from start to finish and consider how the change will impact the rest of the system. BCA tries to be comprehensive in its estimation of the impacts of a project. Therefore, applicants should seriously consider how the project will affect surrounding areas and the larger transportation system.

This section of the BCA will be included in the selection criteria of the TIGER application. Applicants should include a table similar to Table 3 in the selection criteria section that direct states the long-term criteria and the impacts that the project has on each of them. Table 7 is an example of what applicants could use to provide an overview the impacts on the long-term criteria of the project.

Table 7: Long-Term Outcomes and Possible Benefit Categories

Long-Term Outcomes Types of Societal Benefits

Livability Accessibility Property Value Increases

Economic competitiveness Travel Time Savings Operating Cost Savings Energy Security Benefits

Safety Prevent Accidents

State of Good Repair Long-term Replacement Maintenance & Repair savings Reduced VMT

Environmental sustainability Reduced emissions

Source: “Department of Transportation’s National Infrastructure Investments Under the Full-Year Continuing Appropriations, 2012; and Request for Comments”

4. Predict the impacts quantitatively over the life of the project Predicting the impacts of a project over time is one of the most difficult and complex portions of BCA. As such, the US DOT recommends that applicants be forthcoming about the reasoning used to justify the indicators and conversions. Furthermore, the life of the project is defined as, “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).”20 According to US DOT, applicants must predict impacts at least 20 years into the future.21 Also if it is reasonable that the predicted value will change over time, then the impacts must also change. For example, if you believe that the number of cars on the road will increase over the life of the project, then the annual impacts should change accordingly.

20 “Department of Transportation’s National Infrastructure Investments Under the Full-Year Continuing Appropriations, 2012; and Request for Comments” pg. 4875 21 Email correspondence with Yuh Wen. U.S. DOT. 10/25/2011.

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The US DOT also mandates that all costs associated with a project be used in calculating the total costs. The impact of this requirement is that both the public and private funds must be shown in the analysis. If private costs are not counted projects with high private expenditure would artificially appear better than those without private funding with the same benefits. BCA tries to measure the efficiency of a program regardless of what organization is paying.

This section of the analysis is totally dependent on the project that is being proposed. It is important that applicants justify their prediction and properly state the assumptions used. Without the proper information, those reviewing the BCA cannot analyze the validity of the claims and will most likely assume that they are unreliable. Applicants should use data from the project’s location to predict the impacts. Using local data may not always be feasible because that data may not exist, but applicants should make use of whatever data they have to justify impact predictions. Also, there may be similar projects that have been done in the past that can estimate the projects impacts.

This section of the guide is made much easier if the applicant has thoroughly identified the impact categories and found indicators. By examining the impact categories, it is much easier for the applicant to systematically assess the effect of the project. For example, a road project that had impact categories of travel time, emissions, noise, safety, vehicle operating costs, and reliability of the transportation will give the applicant a concrete starting point. We suggest beginning with questions on the impact categories, such as how the project will affect each category and whether the value is positive or negative. By starting at a very basic level, the applicant can begin to think of the effects slowly and systematically and break this large task into smaller more manageable pieces. Then consider what the ideal data would be to measure the effects on the impact categories and then compare that to what is available. Finally, consider ways to quantify impact categories that have little or no data. Determine whether other research on this topic is available or whether the state done other similar projects and analyzed the result.

Be explicit about how each impact was calculated and why certain numbers were used. Applicants may want to include some information in the BCA results section of the report and place step-by-step calculations in the BCA supplement of the application. Applicants should explain the impact of the project on the long-term outcomes and explain how those impacts will change over time. Lastly, the impacts on the transportation system of the project could also be included in the project description section of the application to show the system wide effect of the project.

5. Monetize (attach dollar amounts to) all impacts Monetizing the impacts of a project is the process of converting both the market and non-market impacts into dollars. This portion is one of the trickiest in the entire analysis because many of the benefits are not actively traded in markets, such as safety gains. This being said, the US DOT provides guidance in the BCA resource guide for valuing many of the impacts that are difficult to monetize.

The US DOT notes that the factors used to monetize impacts should all be in real terms to ensure that the values are comparable.22 Costs or benefits expressed in real terms do not include inflation. For example, when determining the cost of concrete over the construction of the project a real estimate would have a cost per cubic yard that is not changed to reflect inflation in the future. Nominal values use expected inflation to adjust costs and benefits over the life of the project. This guide recommends that applicants use real dollars when estimating costs and benefits.

In differentiating nominal versus real dollars consider the price of gasoline in 1990 versus the price in 2010. Gas was on average $1.16 in 1990 and in 2010 the price was on average $2.78. At first glance gas in 1990 appears much cheaper than gas in 2010, but that may not be true. A dollar in 1990 bought much more than it did in 2010. Therefore we must convert 1990 dollars to 2010 dollars. After changing 1990

22 “Department of Transportation’s National Infrastructure Investments Under the Full-Year Continuing Appropriations, 2012; and Request for Comments” pg. 4878.

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dollars to 2010 we see that the real price in 2010 dollars for a gallon of gas in 1990 is $1.94. This may seem confusing, but think of it as $1.94 would be needed in 2010 to buy the same amount of goods that $1.16 bought in 1990. Now we can compare the price of gas in 2010 and the price of gas in 1990 because they are in the same dollars. Therefore, we can definitively say that gas was cheaper in 1990 than 2010, but not as cheap as it initially appeared. Similarly, applicants must use real dollars in the rest of the analysis. When figures are not denoted in real dollars they must be converted.

The important issue to consider when monetizing the impacts of a project is that all costs and benefits must be in the same units. In order to correct the difference between purchasing power the Consumer Price Index (CPI) is used to convert 1990 dollars to 2010 dollars. The first step in converting nominal dollars to the real dollars is to find the years of the data being used in the CPI table.23 In the example the average price of gasoline is in 1990 dollars and it needs to be in 2010 dollars. The column labeled annual average shows 1990 having a CPI of 130.7 and the data for 2010 having a CPI of 218.056.24 The calculation goes as follows:

The CPI for 2010 goes in the numerator because that is the unit that we want in the final calculation. After calculating the ratio of CPI prices the final step is to translate the data from 1990 into 2010 dollars. The calculation goes as follows:

CPI ratio x 1990 Price = 1.67 x $1.16 = $1.94 It is important to explicitly write what units are being used when calculating the costs and benefits of a program. The reviewers should not have to guess whether the dollar amounts are in real or nominal terms. The same goes for labeling units, applicants should carefully state the units of measure (i.e., per barrel, thousands of dollars, etc.).

The actual monetizing of impacts will be in the BCA supplement because it is mostly conversions. The important portions of this step that will be listed in the selection criteria are the factors used to monetize impacts. Therefore, applicants should make explicit notes about the monetizing factors used and the dollar years of the estimates.

6. Discount benefits and costs to obtain present values In order to compare benefits and costs, values have to be compared in the same time period. Therefore, the US DOT requires all BCAs to discount future costs and benefits back to the present. The US DOT mandates that a discount rate of 7 percent be used, but allows applicants to use a rate of 3 percent to show the effect that the discount rate has on the flow of benefits and costs.25 Both rates should be used and displayed in the report. As always, be explicit about what discount rate is being used in calculations.

The theory behind calculating a present value is that a real dollar in the future is worth less than a real dollar today because of investment potential and individual time preference. Time preference can be explained by considering whether you want $1,000 today or a year from now. Obviously people want money as soon as possible and they are typically paid in the form of interest to forgo consumption. Discounting is different than the calculation in the last step that put figures in the same dollar years. Discounting adjusts flows of benefits and costs in the future back to the present day because of time preference and investment opportunities rather than inflation.

23 "Consumer Price Index." Www.bls.gov. U.S. Department Of Labor Bureau of Labor Statistics, 14 Sept. 2012. Web. 24 Sept. 2012. <ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt>. 24 "Consumer Price Index." U.S. Department Of Labor Bureau of Labor Statistics, 17 Feb. 2012. Web. 22 Feb. 2012. 25 “Department of Transportation’s National Infrastructure Investments Under the Full-Year Continuing Appropriations, 2012; and Request for Comments” pg. 4878.

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Mathematically the equation for the present value of the benefits of a project is as follows,

1) 2)

Where PVB=present value of benefits, n=the number of years, Bt=benefits that occur during year t, s=discount rate, t=the year when Bt occurs, and sigma denotes the summation of all the values plugged into the equation from end of year 0 to end of year n. Costs are calculated using the same equation inserting the values for costs where benefits are used. Year 0 should be thought of as the moment the project begins, therefore any costs that occur upfront such as the payment of a construction contract do not need to be discounted and are equal to the initial payment. Conversely, if payments are made throughout the first year of the project then they need to be discounted with a t=1.

Steps to Discounting

1. Analyze the flow of benefits or costs

The first issue to consider when analyzing the flows of benefits and costs is to approximate the useful life of the project. DOT gives applicant guidance in the TIGER NOFA by saying, “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).”26 For this example we use 10 years, but the process is the same for 20 or more years.

The above project has costs of $500, $1500, $200, $100, $50, $50, $50, $50, $50, $50 for the corresponding year. Think of the benefits or costs accruing at the end of each year, meaning a bill is paid on the final day of the year. 2. Select the appropriate discount rate

The discount rate used will depend on what is being discounted and what the applicant is trying to show through the discounting process. Fortunately, both considerations for selecting a discount rate are stipulated by US DOT and OMB. US DOT follows OMB Circular A-94 that states the appropriate discount rate is 7 percent and applicants may use 3 percent for sensitivity analysis (which will be discussed later in the guide).27

3. Discount back to the present year

Table 8: Discounting Example

Year (A) Benefit (B) Calculation( )

Present Value (C)

1 500

$467.29

26 “Department of Transportation’s National Infrastructure Investments Under the Full-Year Continuing Appropriations, 2012; and Request for Comments” 27 Office of Management and Budget. (1992, October 29). MEMORANDUM FOR HEADS OF EXECUTIVE DEPARTMENTS AND ESTABLISHMENTS (OMB Circular A-94 Revised). Washington, DC. <http://www.whitehouse.gov/omb/circulars_a094>

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2 1500

$1310.16

3 200

$163.26

4 100

$76.29

5 50

$35.65

6 50

$33.32

7 50

$31.14

8 50

$29.10

9 50

$27.10

10 50

$25.42

Total $2227.92

4. Compute value of project at the end of the time horizon

When looking forward and analyzing the flows of benefits of a project, there may be a point where the values become increasingly uncertain based on future factors. For instance, the future of coal is very uncertain in the medium to long-term. If a harbor relies heavily on coal its future is also uncertain. In the case of the harbor, the applicant should analyze the flows of costs and benefits at least 20 years into the future and up to the point when the future demand becomes too uncertain to estimate. At this point the TIGER NOFA states a residual value may be used to value the remainder of the project. As defined in OMB circular A-94, “a property's residual value is an estimate of the price that the property could be sold for at the end of the period of the lease-purchase analysis, measured in discounted present value terms.”28 To apply OMB’s guidance to TIGER grants consider what the infrastructure improvement is worth when the applicant is no longer able to quantify benefits and costs. For instance, if the grant was used to buy additional buses for a city metro then the residual value would be the estimated resale value of just the new buses the last year of the analysis. This gets tricky with things like piers that are difficult to value separate from the rest of the harbor. In most cases equipment will have a residual value, but infrastructure

28 OMB Circular A-94 Revised

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will be analyzed until the end of its useful life. When a project is analyzed to the end of its useful life the residual value of the project is zero unless land was purchased. The residual value of the land would be discounted as a benefit equal to its projected value.

The outcome of this step is that applicants will finally be able to fill in Table 9. This table is a quick glance at the outcomes of the project and the sum of the total benefits for each impact. Applicants may want to organize the table as shown below to display the project’s contributions to the long-term outcomes of TIGER.

Table 9: Table overview of BCA

This section of the report will be reported in the selection criteria of the application, but the calculations will be included in the BCA supplement.

Long-Term Outcomes Status Quo:

3% Discount Rate ($2011)

Alternative 1:

3% Discount Rate ($2011)

Livability

Accessibility

Property Value Increases

Economic competitiveness

Travel Time Savings

Operating Cost Savings

Energy Security Benefits

Safety

Prevent Accidents

State of Good Repair

Long-term Replacement

Maintenance & Repair savings

Reduced VMT

Environmental sustainability

Reduced emissions

Total

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7. Compute the net present value of each alternative Computing the net present value (NPV) is one of the easiest steps in BCA. The calculation goes as follows: take the present value of all the benefits (PVB) and subtract the present value of all the costs (PVC). The difference in PVB and PVC denotes the gains or losses in total benefits for the project. The general rule for BCA is a positive outcome shows that the project has efficiency gains and therefore is a possible option for implementation. Conversely, a negative value for NPV denotes a project that has efficiency losses associated with its implementation. The BCA’s decision rule only takes efficiency gains into account and leaves out a significant number of other valid considerations such as equity or the distribution of benefits.

The contribution of this step to the TIGER application is a single number that the reviewers can look at to see the estimated value of the project. Applicants will want to highlight the NPV of the project in the project description section of the application.

8. Perform sensitivity analysis Sensitivity analysis speaks directly to the difficulty in completing a BCA with certainty. Namely, some of the predictions of impacts are uncertain and some of the monetizing may also be uncertain. There are very few, if any, projects that reveal definitive values for BCA.

Sensitivity analysis shows reviewers the range of NPV for a BCA. For instance, if an infrastructure project saves drivers gasoline due to decreased idling times the analyst has to choose the prices of gas in the future. The price of gas in the future would be multiplied by the number of gallons saved over a year to equal the yearly total gas savings benefit to drivers. The Energy Information Administration (EIA) produces a guide to future prices called the Annual Energy Outlook (AEO) that forecasts various prices.

There is one matter that has to be further explored that relates to sensitivity analysis and that is what the future will look like. In the case of the AEO, there are 47 different cases that can be explored to see the effect on gas prices. Clearly, there is a range of values that the price of gas could have and therefore the gas savings could have. Sensitivity analysis presents this range and is explicit about the uncertainty of conducting a BCA.

In the case of gas prices, applicants may use the high and low oil price as an upper and lower bound for the benefits that result from saved gas. After altering the assumptions that applicants feel are most uncertain, it is helpful to add all the lower bound estimates to arrive at a lower bound for the entire project. Applicants should also add all the upper bound estimates to show the plausible range of benefits that a project could have. Sensitivity analysis gives reviewers a range of total benefits. Additionally, applicants can use both a 3 percent and 7 percent discount rate to show how the choice of discount rate affects the benefits of the project.

The calculations and the facts and figures that the calculations are based upon should be clearly stated in the BCA results portion of the report. The overall figures should be discussed in the project description when the applicant discusses NPV. Therefore, the NPV discussion should include the NPV of the upper bound, lower bound, and the figure that the applicant believes is most reliable.

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9. Make a recommendation Applicants should use this step to compare the NPV of the specified alternatives and discuss if there is an added benefit of having one project over another. For instance, one project may provide significantly higher benefits but it may have a range of possible benefits when changing some of the assumptions. This also provides another opportunity to convince the reviewers that the project is worthy of a TIGER grant. Also, applicants should note if they have split up their original proposal into two separate BCAs because the projects have independent utility. The point here is to highlight any added benefits of doing both projects as opposed to one single project. Projects may have additional benefits that extend beyond the summation of their individual benefits through interaction. The previous example of a port and intermodal yard was used to further explain this point. Applicants should include this section of the BCA in the vision portion of the application. The goal is to begin the application by highlighting the NPV of the proposed project and explain what is being analyzed and why the reviewers should read it.

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Further Reading

Recommended Websites from Notice of Funding Notice of Funding:

• http://www.dot.gov/tiger/docs/FY11_TIGER_IntNOFA.pdf

Office of Management and Budget Circulars on Preparing Analysis

• http://www.whitehouse.gov/omb/circulars_a094/ • http://www.whitehouse.gov/sites/default/files/omb/assets/omb/circulars/a004/a-4.pdf

Federal Highway Administration Guide to BCA

• http://www.fhwa.dot.gov/infrastructure/asstmgmt/primer05.cfm

Social Cost of Carbon Information

• http://www1.eere.energy.gov/buildings/appliance_standards/commercial/pdfs/sem_finalrule_appendix15a.pdf

Freight BCA Resources

• http://ops.fhwa.dot.gov/freight/documents/nontechdesciptfrmwrk.pdf o Non-technical paper

BLS Calculator

• http://146.142.4.24/cgi-bin/cpicalc.pl

Data Sources Transportation Figures and Statistics

• http://cta.ornl.gov/data/download30.shtml

o Table 4.1 and 4.2 for average mpg of cars and trucks by year

o Table 5.1 and 5.2 for single and combination truck MPG over time (Chapter 5)

Energy Security Benefits

• http://www.epa.gov/otaq/renewablefuels/ornl-tm-2007-028.pdf

o Table 1 for total benefits with confidence interval

Annual Energy Outlook

• http://www.eia.gov/forecasts/aeo/pdf/0383%282011%29.pdf

o Full Report

• http://www.eia.gov/oiaf/aeo/tablebrowser/#release=AEO2012&subject=3-AEO2012&table=12-AEO2012&region=0-0&cases=lp2012-d022112a,hp2012-d022112a,ref2012-d020112c

Generates table with price of gas, diesel, and other transportation fuels with the high and low oil price estimate and provides the reference case as a middle value.

• http://www.eia.gov/oiaf/aeo/tablebrowser/

o Table Browser for full report

25

Appendix A General Advice

1.) Carefully consider if job creation is a benefit

a. Though job creation is an important economic impact it is not a benefit for BCA and in most cases it is a transfer. Unless applicants can prove that the jobs are more productive while working for the TIGER proposal.

2.) No multipliers

a. Applicants should not count economic multipliers for the secondary effect of dollars spent as a benefit.29

3.) Explicitly state assumptions and calculations

4.) Label all graphs, tables, and figures appropriately

a. Units, dollar years, discount rates, etc.

5.) Read the TIGER Notice of Funding Availability

6.) Use DOT recommended statistics whenever possible

a. See http://www.dot.gov/tiger/application-resources.html#BCAG’

b. See http://www.dot.gov/tiger/docs/tiger-12_bca-resourceGuide.pdf

29 “Department of Transportation’s National Infrastructure Investments Under the Full-Year Continuing Appropriations, 2012; and Request for Comments” pg. 4878

26

CFIRE

University of Wisconsin-Madison Department of Civil and Environmental Engineering

1410 Engineering Drive, Room 270 Madison, WI 53706

Phone: 608-263-3175 Fax: 608-263-2512 cfire.wistrans.org

midamericafreight.org