Engineering Economic Analysis Practices for Highway Investment (2012)

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To paraphrase a recent study in performance management: Although the bureaucratic ten- dency in government is often to avoid doing something wrong, economic analyses can demon- strate that public agencies actually do something right. This synthesis has looked at how U.S. transportation agencies have applied engineering economics—benefit–cost analyses and simi- lar procedures—to decisions on highway investments. Although benefit–cost calculations are often regarded as methods of project appraisal, occurring early in planning and design, experi- ence shows that these methods have been successfully and productively applied throughout the project life cycle. Most U.S. state departments of transportation (DOTs) actually conduct economic analyses for at least certain types of highway investments. Past research suggests that the most widely used applications of economic methods occur when considering invest- ments in pavement and bridge preservation (a practice correlated with economic algorithms in pavement and bridge management systems), safety improvements (considering the social costs potentially avoided by reducing fatalities, injuries, and property damage resulting from collisions), and major projects on trunk lines and in urban areas. What the findings of this synthesis have demonstrated, however, is that more broad-based applications of engineering economic analyses are conducted by agencies that are conversant in economic concepts and methods to a greater than average degree. These agencies have developed a level of profi- ciency that enables them to integrate economic analyses throughout their daily operations. Agencies that successfully apply engineering economic analyses across their business processes strive to develop and maintain the tools and capabilities to perform these analyses effectively, but in a practical, common-sense way. These tools and capabilities include effec- tive guidance and executive support, staff knowledge and skills, financial and administra- tive resources, the incorporation of appropriate analytic methods within business processes, effective data collection and analysis, accessible information technology systems, and sup- porting institutional relationships with other organizations. The perspective is fundamentally one of incorporating economic analyses within the normal, routine business processes that an agency must perform to do its job effectively, rather than one of viewing economic analyses as additional, somewhat isolated, adjuncts to other activities. Executives in these agencies value economic information on proposed highway investments. Their managers and staff work diligently to develop and maintain the capabilities needed to provide this information for key business and decision processes. Case examples have been critical to developing the findings of this synthesis. Several mech- anisms were used to identify candidate agencies: a literature review, presentations at confer- ence committee meetings, interviews with topic panel members and other industry experts, and a screening survey. The screening survey questionnaire was sent to state DOT represen- tatives on AASHTO’s Standing Committee on Highways, with copies to each state DOT’s Research Advisory Committee member, and a corresponding questionnaire to each state’s FHWA division office. Responses were received from 17 state DOTs and 8 FHWA division offices. For two states, responses were received from both the DOT and the FHWA division office; these were combined to produce a single response for each state, resulting in 23 unique state responses. Of these 23 responses, 20 states reported using engineering economic analyses, whereas 3 described themselves as not using such analyses. The 20 affirmatively responding states were considered as candidates for case examples; the 3 states that responded negatively Summary EnginEEring Economic analySiS PracticES for HigHway invEStmEnt

2 provided reasons why their state highway agency did not use economic analysis on a routine basis. The survey results were used solely as a screening device to identify candidates for case examples and to obtain background information on usage patterns. The synthesis survey results were consistent with previous research and with findings of other study surveys. The survey data, together with findings from the other sources identified previously, resulted in the selec- tion of nine categories of case examples illustrating 12 distinct economic analyses. The case examples cover the following stages of project and program development and delivery: • Planning: a case example of Critical Interstate Facilities owned and operated by the Port Authority of New York and New Jersey, with a supporting economic analysis of maritime shipping to the Port of New York and New Jersey performed by the U.S. Army Corps of Engineers; and a case example in Mobility Planning by the Washington State DOT. • Programming and Budgeting: two case examples illustrating methods used by the Washington State DOT for Mobility Programming and Safety Programming; one example by Caltrans for Bridge Programming and Permitting, including environmental permitting issues; and a case illustrating methodological development for Economics- Based Tradeoff Analysis by the New York State DOT. • Resource Allocation Following Budget Approval: the New York State DOT case example on Economics-Based Tradeoff Analysis could apply at this stage as well. • Project Design and Development: this aspect of project delivery is addressed by the Pavement Type Selection case example, which compares practices of two state DOTs (Colorado and California); and by the Value Engineering case example, which likewise compares practices of two state DOTs (California and Florida). • Project Construction Options: this aspect of project delivery considers different con- struction or design-plus-construction options, which are considered in the Acceleration of Project Delivery case developed with the Minnesota DOT. The case examples illustrate not only the application of engineering economic methods to various decisions in highway investment, but also the particular practices used by agencies in building such analyses; for example, compiling data, selecting a discount rate, accounting for risk or uncertainty in estimates, and defining alternatives. The case examples represent a vari- ety of program areas (e.g., preservation, mobility, and safety), stages of the decision process (e.g., planning and programming), and levels of the system analyzed (e.g., link or project, cor- ridor, program, and network). Viewed individually, the case examples show how engineering knowledge and a need to understand the impacts of particular decisions can be organized within a practical economic framework. Viewed collectively, however, the case examples begin to reveal characteristics that are held in common among agencies successfully applying engineer- ing economic practices across a wide range of applications. Several characteristics differentiate agencies that are conversant in economic methods, involv- ing aspects of an agency’s makeup and its approach to solving transportation problems and needs: • The influence of organizational champions and culture; • A level of knowledge, proficiency, and comfort regarding use of economic methods; • A tighter integration of business and decision processes that make economic analyses a part of routine business rather than a distinct, somewhat isolated task; • The willingness to be creative in defining alternative solutions, and to innovate in devis- ing the methods and measures of analysis; • The fact that upper management asks for and uses the results of economic analyses in its decision making; • The availability of information technology to support not only the economic analyses but also important steps such as diagnosing problems, defining realistic alternatives, and displaying results;

3 • The training of staff and provision of resources such as formal guidelines and websites on economic concepts and methods; and, perhaps most importantly; • The recognition that economic outcomes are an integral part of gauging highway system performance. A component of the study explored the benefits of economic analyses to an agency. These benefits were found in two broad categories. The first comprised the direct or tangible benefit of an economic result that demonstrates the value or merit of a highway investment. This value often represents a benefit received by road users or costs that are avoided by them and by the agency. Monetized benefits help in understanding the tradeoffs among competing highway investments. The second category is the indirect or intangible benefit of encour- aging a better decision process within the agency organization. Once a culture supporting economic analyses is established within the organization, these analyses provide incentives to identify all realistic alternatives to solve highway needs, maintain a focus on the purpose of the proposed investment and avoid unneeded additions of “nice to have” features to a project, avoid biases toward familiar or traditional solutions (such as particular pavement materials), and support these objectives through clear guidance and communication, backed by adequate resources to accomplish the analyses effectively. Although the case examples represent success stories, there are also impediments to the wider application of engineering economic analyses. Studies by the General Accountability Office and FHWA have identified challenges in two areas: the methods of analysis them- selves, and how these methods are applied by practitioners. With benefit–cost analysis as an example, the methodological problems include that the benefits are computed in the aggregate, without regard to who receives them; the monetization of benefits is not standardized, and researchers may disagree on given valuations; and existing models are unable to predict accu- rately certain key effects of transportation investments, such as resulting changes in land use, driver behavior, and diversion of traffic to alternate routes or modes. Challenges in the use of these models relate largely to human error, the lack of good data, complications resulting from how independent projects might be combined (or not combined) in the analysis, uncertainties in forecasting, and a tendency to overlook potentially critical elements of the analysis. A number of these latter types of problems were revealed in the 2009 FHWA review of TIGER (Transportation Investment Generating Economic Recovery) grant applications, which required an economic analysis of project submittals that were competing for funding. These findings were important, because the TIGER program has been proposed as a possible model of competitive, performance-based federal transportation funding in the future. The GAO has likewise reviewed the TIGER grant applications, and came to similar conclusions regarding the variable quality of the economic analysis submittals and limitations on their usefulness. The synthesis has proposed several recommendations for research to help correct prob- lems in existing models and deficiencies in current practice. Some of these are drawn from experience overseas, gained through a prior international scan, and the literature review conducted in this present study. Among the research recommendations are the desirability of improved skills in conducting economic analyses to reduce the human errors alluded to earlier. Possible mechanisms include training sessions, peer exchanges, webinars, and self- training tools, to name some candidates. Another recommendation, prompted by overseas research, is the conduct of ex-post or post-construction analyses of actual economic per- formance of an investment based on a completed, operational project. By comparing actual results with those that had been predicted during project appraisal, agencies can improve their methods, data, and assumptions used in economic analyses. This study recommends research to develop the structure and protocol of these post-construction analyses. Other research recommendations are included in the conclusions to this report.