Guide for Conducting Benefit-Cost Analyses of Multimodal, Multijurisdictional Freight Corridor Investments (2017)

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

1 This guidebook explains how to conduct multimodal, multijurisdictional benefit-cost analy- ses (BCAs). The material presented here is based on detailed literature reviews and an assess- ment of the state of the practice. For a full discussion of underlying concepts and the supporting literature, please consult the full technical report for the project, NCFRP Project 46. Who Benefits from this Guidebook? This guidebook is intended to serve as a resource for multiple audiences including: • Intermediate and advanced analysts who have the responsibility of planning, analyzing, or evaluating benefits and costs of freight transportation investments; understanding multi- modality; and presenting the results of these analyses to decision makers, either in response to grant funding opportunities such as those available under Fixing America Surface Trans- portation Act (FAST) or special corridor studies for projects in freight plans. This class of analysts may benefit from the discussion of: – Different types of databases. – Progression of the BCA or evolution of BCA at different stages in the project development process. – Development of BCA for different stakeholders such as departments of transportation, private sector, or investment banks. – The multiple account reporting process. • Decision makers engaged in the development of multimodal freight projects such as: – Port authorities. – Metropolitan planning organizations. – State departments of transportation, agencies/governments. – Multistate and/or megaregion coalitions that plan transportation needs. • Federal agencies (e.g., FHWA, FRA, Maritime Administration, or FAA) that have developed modal guidance. • Emerging analysts such as students in related fields. For the beginners, the document provides a single resource with multiple data sources that they can use to develop multimodal BCAs. How to Use this Guidebook This guidebook can help right-sizing BCA in identifying how BCA can support multiple stages of investment decision-making: • Vetting multimodal concepts at an early stage (for instance, as part of corridor planning strategies). Conceptual analysis can help inform this process. Introduction

2 Guide for Conducting Benefit-Cost Analyses of Multimodal, Multijurisdictional Freight Corridor Investments • Comparing alternatives for a single project, as is typical in a feasibility BCA (for instance, major investment studies alternatives analysis) or in early stage analysis. • Prioritization of projects based on criteria developed in this guidebook rather than simply relying on benefit-cost ratios that are not always appropriate. • Establishing project viability from an investment analysis perspective. Proactive decision-making relying on methods like BCA requires that agencies have cred- ible models for future demand forecasts that allow multimodal freight analysis of predominant modes in their regions (e.g., truck-auto interactions, truck-port-airport-rail interactions) since most freight moves multimodally. These movements are vital to regional, state, and national economic health even if in some cases they may be associated with negative impacts. Along with a good quality evaluation process, agencies require data, clear communication, and a confident implementation process in order to earn the buy-in of stakeholders for scoping multimodal freight investments. This guidebook gives decision-makers, practitioners, and stakeholders an actionable cook- book and a reference for multimodal freight investment BCA, data sources, and tools. To help practitioners get started, the guide is presented in a “how to” format relying on discrete steps that are accompanied with realistic and recent examples, checklists of dos and don’ts, and sup- porting worksheets. What Is a Multimodal BCA? What Is a Multijurisdictional BCA? Multimodal BCA Multimodal, as the name implies, involves freight corridors where cargo will likely be moved by more than one mode—truck, ship, rail, or air. Multimodal does address modes in silos. In alternatives analysis, a project is examined for selection from competing modal alternatives. In the context of design connectivity, the evaluation includes freight projects that rely on different modes (referring to the cargo that travels on different modes) or projects that allow cargo to make those modal connections. One example is intermodal container movements. The container leaves a ship, is loaded on a truck, and is transported to an intermodal yard. There, the container is loaded onto a railcar and shipped either to the final destination or to another railyard, which then connects to the local distribution system by truck. A BCA is an analytical framework used to evaluate public investment decisions including transportation investments. BCA is defined as a collection of methods and rules for assessing the social costs and benefits of alternative public policies. It promotes efficiency by identify- ing the set of feasible projects that would yield the largest positive net benefits to society. The willingness of people to pay to gain or avoid policy impacts is the guiding principle for mea- suring benefits. Opportunity cost is the guiding principle for measuring costs. BCA requires that appropriate shadow prices be derived when policies have effects beyond those that can be taken into account as changes of prices or quantities in undistorted markets (1). It provides a consistent basis for evaluating investments based on their expected consequences but it relies on the development of a reasonable counterfactual alternative to facilitate incremental analysis and provide decision rules. Yet another useful way to define BCA is as a structured, quantitative, data-driven methodol- ogy designed to help decision-makers determine whether to implement an initiative, commit to an investment, or pursue an alternate investment. To that end, BCA captures the one-time,

Introduction 3 recurring costs and benefits associated with multiple investments that compete with one another for constrained financial resources and presents these costs and benefits in a standardized frame- work that facilitates the evaluation and comparison of multiple alternatives. A multimodal project, BCA considers the strengths and weaknesses of projects that help move freight by different modes. This can occur by comparing different modal solutions to achieve an end goal or by evaluating connectivity linkages between modes. This can occur for planned new facilities aimed at improving modal connectivity or for planned new facilities or improvements aimed at optimizing existing multimodal movements or allowing modal shifts. Multijurisdictional BCA Freight movements are, for the most part (but not always), geographically multijurisdic- tional. Cargo crosses many jurisdictions because the integral purpose of freight is to con- nect markets—those who supply the goods (production markets) to those who consume the goods (demand markets). Freight is, therefore, rarely ever constrained by jurisdictional boundaries, such as state and metropolitan planning organization (MPO) lines. Instead, freight movement corridors connect supply chains across the nation and are served by multiple modes. Examples of multijurisdictional projects include: • Intrastate projects, such as metropolitan projects within one state that span more than one MPO boundary. • Interstate projects such as megaregion infrastructure projects that span more than one state. • Projects that are local in terms of the constructed infrastructure but that may be multijurisdic- tional in their area of effect. These project locations are typically nodes—ports, inland ports/ dry ports, intermodal terminals, and distribution hubs—rather than line-haul highway, rail, or pipeline networks. A multijurisdictional project BCA considers the strengths and weaknesses of projects that help move freight through different geographic jurisdictions or projects that have partners from different jurisdictional entities. Guiding Principles for Multimodal, Multijurisdictional BCAs Origins of Guiding Principles This guidebook is based on 11 guiding principles for multimodal, multijurisdictional BCAs: • Principles 1–7 are the core original principles of BCAs that have been well articulated by Griffin (2). These principles have their roots in the Principles and Guidelines (P&G) adopted by the Water Resources Council for water projects. • More recently, Farrow and Zerbe (3) emphasized principles 8–11 as foundational principles of BCA and its ability to be fine-tuned and customized based on context. These are vital for multimodal and multijurisdictional BCA. List of Guiding Principles Table 1 discusses these principles and their implications and challenges for multimodal, multijurisdictional project BCAs.

4 Guide for Conducting Benefit-Cost Analyses of Multimodal, Multijurisdictional Freight Corridor Investments No. Principle Description and Implications for Multimodal, Multijurisdictional Projects 1 Focus on aggregate benefits net of aggregate costs Projects are economically acceptable if aggregate benefits exceed aggregate costs. This is known as the compensation test. Due to its focus on aggregate decision criteria, this principle raises the possibility that benefits and costs will be unequally distributed. This principle relies on the Kaldor-Hicks efficiency criterion, which allows the separation of efficiency from equity. (See Appendix A). This principle raises issues for multijurisdictional projects because of the scale and the types of stakeholders involved (public and/or private). A comprehensive BCA should address distributional concerns. 2 Incremental approach Welfare changes should be determined based on the differences between conditions with and without the project (counterfactual project scenarios). These scenarios are not the same as before-and-after comparisons. Projections are needed for both scenarios (with and without the project) for benefits and costs. For multimodal projects, this principle requires a thorough examination of alternatives where individual projects with potentially different asset lives can be staged or bundled in different ways. Also, the commonly used no-build option is not always the without project scenario to adopt in the BCA. Other parties may respond to inaction in ways that need to be incorporated into the no-build scenario. 3 Choice of discount rate Project benefits (or cost savings) must be evaluated in constant dollars using discount rates that reflect social opportunity costs. The discount rates can be real or adjusted for inflation. 4 Benefit types Benefits should be evaluated from the perspective of the users of the facility; this includes not just the crew operating the vehicle, but also the shippers of the cargo and ancillary operators. Benefits are categorized as either producer surplus or consumer surplus. Surplus measures map efficiency benefits and are defined in Appendix A. Benefits should be valued based on willingness to pay principle whenever possible. The benefits that asset operators (e.g., vessels, tugs, rail, air, pipeline, and truck operators) receive are part of the producer surplus. The benefits that shippers receive are part of consumer surplus. The reduction in maintenance costs for a facility contribute to the producer surplus (for hire operators), as could an increase in revenues from tolls, fares, and access fees charged for facility use. Consumer and producer surplus and environmental and safety externalities are a full representation of benefits under perfectly competitive conditions in the freight sector or in the sectors using freight when transport cost changes are large. In such cases, additional indirect effects should be considered. 5 Discounting Discounting should be used for future benefits and costs. The discount rate is used to calculate decision metrics such as the net present value (NPV) and the benefit-cost ratio (BCR). 6 Disclosure Benefit measures and metrics that cannot be monetarily valued should be disclosed and their relevance discussed. 7 Transfers Zero-sum transfers of benefits should not be included in the overall BCA. While the aggregate focus on benefits (national and statewide) is important and relevant, this principle suggests that spatial transfers will occur when multiple geographies are impacted. Pecuniary transfers such as tolls and taxes can occur when multiple modes (and by default multiple parties) are involved. Addressing distributional concerns suggests accounting for those differences separately whether spatially, across user groups, or across stakeholder categories. In many cases, fuel taxes and tolls are considered zero sum transfers. In some multimodal, multijurisdictional projects with potential to induce demand, fuel taxes are not zero sum transfers. 8 BCA as an objective framework for discussion with decision-makers and subject to subsequent amendment BCA seeks to provide an objective framework for discussion, amendment, and decision support by focusing on outcomes. This principle implicitly recognizes that the objectives of multiple parties (public and private) are different and that BCAs should encompass all quantifiable outcomes—private, social, direct, and suitable indirect benefits. Tangible and intangible outcomes should be monetized to facilitate a holistic comparison. This principle emphasizes the need to: Include spillover benefits on affected parties for a fully valid BCA. Address all difficult-to-quantify or -monetize measures in the discussion, which should include efforts to measure or address them qualitatively outside of the BCA as a separate account. Recognize that a financial analysis or financial BCA is separate from an economic BCA. See Appendix A for a discussion of the difference. Recognize that a BCA can be amended as better information becomes available, emphasizing that a BCA can be an ongoing process accompanying other technical considerations. Provide an unbiased means of providing information to decision makers. Provide a clear understanding of alternative solutions and reveal unintended consequences. Table 1. Guiding principles for conducting bcas for multimodal, multijurisdictional projects.

Introduction 5 Seven Tenets to Address Challenges This guidebook and its attendant methodology were developed with these core principles and the characteristics of a multimodal project BCA in mind. Seven tenets flow from these core prin- ciples to address challenges in a multimodal, multijurisdictional BCA. These challenges include data imperfections; diversity of jurisdictional goals and objectives; ignoring equity and distribu- tional considerations and risk and uncertainty in the distribution of costs and benefits; improper treatment of transfers; a limited understanding of the role of BCA in statewide and metropolitan planning and design of projects; consideration of externalities in BCA; and a lack of understanding of higher order benefits and sometimes a lack of valuation measures. The seven tenets to address challenges indicate that the developer of the multimodal BCA should: 1. Recognize that a BCA can occur at any stage of the project development process, such as the conceptual, feasibility, or later procurement stage (i.e., an investment-grade study). 2. Integrate data sources, tools, and measures to deliver consistent, comparable metrics for the modes compared. A multimodal BCA relies on integrated assessment modeling since no one single tool or model can address nuances of all modes. 3. Consider all externalities in an accurate assessment of consumer and producer surplus determination. Externalities are defined as a situation in which actions of one agent or party impose a cost or benefit on another agent who is not party to that transaction. They can be real (entering directly into the production or utility functions of producers and consumers and also referred to as technical externalities), pecuniary (an effect of production that occurs on parties via prices), or network (effects on users of products or services in relation to other users). The framework should internalize externalities by addressing four key elements. These include (a) method to identify benefits/costs, (b) measurement of those benefits as metrics, (c) measurement of metrics in monetizable terms, and (d) addressing the uniqueness of included benefits—in other words, they should not be double counted. (Double counting 9 Transparency Transparency in the discussion of assumptions and methodology makes the BCA less of a black box and enhances its value. It enables the reader to critically evaluate the assumptions and methodologies that lead to the findings of the BCA and determine the validity of the analysis. Transparency also allows vetting of values and inputs by stakeholders on the costs side and on the benefits side. 10 Focus on context-sensitive and useful analysis Pursuit of a perfect analysis should not prevent the conduct of a useful analysis. A BCA should meet minimum acceptability criteria regarding objectivity and core principles. A methodology may be valid and useful even if it is data deficient or does not comply with all best practices. This principle is critical in this context of projects of different scales (geographic and budgetary), which may call for different levels of effort and analysis. Data may be difficult to compile in some freight contexts due to lack of models or other reasons. Incomplete knowledge or data deficiencies should be dealt with by taking appropriate measures for dealing with risk and uncertainty in the BCA in conceptual stages. For example, one could ask the question, “Even with generous assumptions, are benefits far less than costs?” Conversely, even with conservative assumptions, are benefits much greater than costs? In other words, does the analysis facilitate a clear and rational decision? 11 Proportionality principle for determining depth of BCA A BCA should conform to the proportionality principle, which states that the analytical effort should be proportional to the expected value of the information for making decisions. Factors determining the level of effort include: The scale of the project geographically. The budgetary scale. The significance of particular outcomes/benefits to the overall outcome. The number of markets, stakeholders, and modes impacted. No. Principle Description and Implications for Multimodal, Multijurisdictional Projects Table 1. (continued).

6 Guide for Conducting Benefit-Cost Analyses of Multimodal, Multijurisdictional Freight Corridor Investments can occur when benefits are transferred from one party to another and then re-expressed or included a second time. This typically happens in the case of pecuniary externalities.) 4. Integrate distributional considerations (effects on different stakeholder, demographic groups, or affected community) into the BCA. 5. Examine transfers of benefits/costs, treatments of tolls/user charges, differentiation between an economic impact analysis (EIA) and a BCA, and higher order wider economic benefits (WEBs). 6. Integrate risk and uncertainty directly into the BCA since the quality of data inputs is impor- tant for the credibility of the BCA on both the cost and benefit sides. Multimodal and multijurisdictional projects may be faced with greater data related issues starting from costs to forecasting behavioral effects of improvements. 7. Maintain flexibility and practicality in implementation, while allowing room for research to expand to address gaps in areas relevant for advancing the multimodal freight BCA. What the Public Sector Decision-Maker Wishes to Know from BCA Whether a project is a private sector provided project or a public sector provided project, the public sector decision-maker perspectives are generally governed by a desire to understand the answers to two questions: • Does the project promote efficiency? • Does the project seem worthwhile from the perspective of the stakeholders/user groups or community represented by the decision-maker? The process framework discussed in the following sections provides answers to these questions. Process Framework Contents of the Rest of this Guidebook This guidebook presents a step-wise framework for conducting a multimodal, multijurisdic- tional BCA, accompanied by examples to illustrate the practical application of the steps. Each section ends with a discussion of best practices and common mistakes to avoid. These best practices are drawn from a comprehensive review of methodologies and guidelines drawn from domestic and international experience. Framework Stages The framework is divided into three stages according to the focus of the activities in each stage: • Planning, scoping, and forecast development. • Benefits estimation including environmental and safety externalities. • Preparing the BCA. Each stage has specific inputs and outputs. Figure 1, Figure 2, and Figure 3 illustrate: • The three general stages of any BCA, respectively, and the steps in each stage. • The types of inputs needed for each stage. • The expected outputs for each stage. Framework Steps and Tasks Within the three stages are 11 steps. Within each step are tasks that tend to relate to and influ- ence one another. Table 2 lists the 11 steps and their related tasks. While there are 11 discrete

Introduction 7 Project purpose Basic description of project Definition of costs Project study area Freight flows/commodity flows/truck flows (tonnage, commodity, and other attributes) Origin-destination patterns Analysis time periods Defined alternatives in multimodal context (build/no-build scenarios) BCA impact areas Assumptions associated with BCA (start, open, and analysis years) Benefit triggers and stakeholders STAGE 1: PLANNING, SCOPING, AND BENEFIT IDENTIFICATION Steps: 1. Define the project 2. Determine scope of analysis 3. Account for project costs 4. Identify benefit triggers and metrics Level of detail Stakeholders Jurisdictions Project classification Alternatives Flows by commodity, weight, and/or value for alternatives INPUTS OUTPUTS Figure 1. Stage 1 of the BCA: planning, scoping, and forecast development. Note: TEE = transportation economic efficiency Alternatives, project details Valuation First-order benefits Quantification of externalities Emission rates, crash rates, and history Higher-order benefits STAGE 2: FORECASTS, BENEFITS ESTIMATION INCLUDING ENVIRONMENTAL AND SAFETY EXTERNALITIES Steps: 5. Develop forecasts 6. Quantify and value applicable first-order public and private metrics and information needs 7. Analyze public externalities and information needs (safety and the environment) 8. Analyze higher-order quantifiable metrics Freight forecasts TEE user benefits Asset maintenance effects Asset utilization Reliability Safety metrics Other quantifiable externalities INPUTS OUTPUTS Figure 2. Stage 2 of the BCA: benefits estimation including environmental and safety externalities.

8 Guide for Conducting Benefit-Cost Analyses of Multimodal, Multijurisdictional Freight Corridor Investments steps in this guidebook, in practice, the distinctions between the steps can blur. Several steps may be developed in parallel, and several iterations of one or more steps may be needed to develop a meaningful BCA. The steps in this guidebook are designed to enable the analyst to break down a complex BCA into manageable tasks to develop a better business case and multimodal BCA. In some contexts, analysts are themselves involved in developing all the steps of the BCA and can control the interrelationships. In others, analysts may need to use outputs of forecasts developed by some other agency or party. Or, a third agency or party may be handling elements of Step 7 or elements of Step 9 for regulatory compliance. BCA parameters—discount rate Decision criteria Stakeholders from Stage 1 STAGE 3: PREPARING THE BCA Steps: 9. Conduct the BCA 10. Develop decision criteria and report BCA results 11. Evaluate and integrate risk and uncertainty BCA with NPV, BCR, internal rates of return, and other criteria Stakeholder matrix/ distributional analysis Reporting of BCA results INPUTS OUTPUTS Figure 3. Stage 3 of the BCA: preparing the BCA.

Introduction 9 Methodology Step Related Task(s) 1. Define the project 1.A. Define the type of facility/location to include 1.B. Develop options or alternatives 1.C. Determine the BCA impact area 1.D. Define the modes involved 2. Determine scope of analysis 2.A. Define approach for type of analysis 2.B. Identify public and private stakeholders 2.C. Identify the jurisdictions involved 2.D. Identify populations that will be impacted 2.E. Define the scope for modeling and informational needs 2.F. Determine service life of project(s) 3. Account for project costs 3.A. Identify lifetime costs specific to the project 3.B. Define analysis time frames and determine residual value parameters 3.C. Remove sunk costs 3.D. Adjust costs occurring at different time periods to a base period 3.E. Evaluate funding sources 4. Identify benefit triggers and metrics 4.A. Identify planning objectives to be met 4.B. Identify applicable direct and indirect benefit measures and metrics 4.C. Identify all applicable first-order TEE metrics 4.D. Collect and analyze freight flow data and attributes of major markets 5. Develop forecasts 5.A. Resolve issues related to transport forecasts for project alternatives 5.B. Apply appropriate models and data 5.C. Consider methodological assumptions in using Freight Analysis Framework (FAF), Waybill, and Transearch for line-haul networks—rail, waterways, and pipelines 5.D. Determine forecasting volumes and behavioral effects across scenarios and induced demand 6. Quantify and value applicable first- order public and private metrics and information needs 6.A. Quantify and value first-order TEE benefits 6.B. Value other direct metrics 6.C. Identify and access data sources for valuation 6.D. Examine models and sources for performance metrics and valuation measures, and quantify benefits 7. Analyze public externalities and information needs (safety and the environment) 7.A. Quantify externalities 7.B. Select metrics for valuation of externalities 7.C. Review federal funding guidelines for reporting of specific externalities 8. Analyze higher-order quantifiable metrics 8.A. Determine whether WEBs should be considered 8.B. Select WEBs to analyze 8.C. Perform valuation of WEBs 9. Conduct the BCA 9.A. Determine and apply appropriate discount rates 9.B. Employ best practices for treatment of transfers, tolls, and user charges 9.C. Address equity considerations 9.D. Perform benefit calculations 10 Develop decision criteria and report BCA results 10.A. Develop and employ final decision criteria 10.B. Report BCA results 11. Evaluate and integrate risk and uncertainty 11.A. Identify sources of uncertainty 11.B. Account for uncertainty 11.C. Address optimism bias 11.D. Rerun the BCA and update BCA results Table 2. Guiding framework for bca.