Transcript A Benefit-Cost Analysis Primer

Kevin Keller, PG, CGWP
HDR Engineering, Inc.
American Railway Development Association
American Railway Development Association
(ARDA)
Since 1906, ARDA has provided a forum for the North
American railroad community to meet and effect
positive change:
“The objectives of the Association are to foster the
industrial, real estate, natural resources, market
development activities and environmental concerns
of the North American railroads; and through the
advancement of ideas and education of its members
further promote the effectiveness of railway
development and related work.”
ARDA Membership
ARDA encourages membership from all classes of
railroads throughout North America. Members also
include professionals from other associations, agencies,
and railroad service partners that have a direct effect on
rail business today. ARDA’s membership variety provides
a wide perspective on issues facing the railroad industry
in the 21st Century.
www.amraildev.com
Why Require a BCA?
 President’s commitment to data-driven decision-
making
 Requirement from TIGER I and II
 No funding for projects for which C > B
 Value of BCA in project selection
 BCA quality matters more than size of the B/C ratio
 Focus your analysis on how it demonstrates need for
your project
USDOT Definition
“A benefit-cost analysis attempts to measure
the dollar value of the benefits and the costs
of a specific project to all the members of society on a
net present value basis.”
USDOT Requirement
“DOT expects to identify and report on
the benefits of the projects that it funds
with TIGER Discretionary Grants. To
this end, DOT will request that
recipients of TIGER Discretionary
Grants cooperate in Departmental efforts
to collect and report on information
related to the benefits produced by the
projects that receive TIGER
Discretionary Grants.”
Benefits
“The benefits that DOT reports on may include the following: (1) Improved condition of
existing transportation facilities and systems; (2) improved economic
competitiveness in the form of reduced travel time, less traffic congestion, improved
trip reliability, fewer vehicle miles traveled, or lower vehicle operating costs; (3) longterm growth in employment, production or other high-value economic activity; (4)
improved livability of communities across the United States through expansion of
transportation options, efficiency, and reliability; (5) improved energy efficiency,
reduced dependence on oil and reduced greenhouse gas emissions; (6) reduced adverse
impacts of transportation on the natural environment; (7) reduced number, rate and
consequences of surface transportation-related crashes, injuries and fatalities; (8)
greater use of technology and innovative approaches to transportation funding and
project delivery; (9) greater collaboration with state and local governments, other
public entities, private entities, nonprofit entities, or other nontraditional partners; (10)
greater integration of transportation decision making with decision making by
other public agencies with similar public service objectives; or (11) any other benefits
claimed in the project’s benefit-cost analysis.”
So What is a Benefit-Cost Analysis?
 BCA is distinct from:
 Financial analysis
 Economic impact analysis
 Costs and benefits refer to changes in welfare
 Are people made better off by the proposal
“...an analysis which quantifies in monetary terms as many of the costs and
benefits of a proposal as feasible, including items for which the market does
not provide a satisfactory measure of economic value.”
UK Treasury (2003), Appraisal and Evaluation in Central Government
Benefit-Cost Analysis Basics
 What is the purpose of the BCA?
 Benefit Cost Analysis measures the creation or erosion of
real economic value
 “Value” denotes welfare or quality of life
 TIGER III project selection & BCA
 BCA quality matters more than size of the B/C ratio
 Focus your analysis on how it demonstrates need for your
project
Basic Requirements
 Project Summary
 Base case (“no-build”)
 Project description
 Justification and impact on long-term outcomes
 Affected population(s)
 Expected economic benefits
 Alternatives
 Monetized estimates of benefits & costs
 Year-by-year stream of benefits and costs
 Discounted to present value (3% & 7%)
 Replicable methodology
 Demonstrate Independent Utility
CORE BCA Principles
i.
Costs & benefits estimated on incremental basis
against realistic baseline (generally not status quo)
ii.
Reasonable alternatives considered and evaluated
 e.g., smaller scale and more focused projects
iii. Costs & benefits expressed in monetary terms
(constant dollars) and estimated over project’s useful
life
iv. Discounting
 i.e., OMB Guidance for TIGER
v. Summation of benefits & costs, and estimation of NPV
BCA vs EIA
 Economic Impact Analysis (EIA) focuses on local
benefits – JOBS CREATED
 Ignores costs to other localities
 Includes transfer payments as “impacts”
 Payrolls, tax revenues, real estate investments
 BCA focuses on national benefits (including local)
 Nets out costs to other areas

Includes only productivity increases resulting from job
creation, increases in property values
Defining Projects for Appraisal:
Concept of “Independent Utility”
• Parts or phases with “independent utility”: i) are Eligible
Projects, and ii) satisfy selection criteria
• Implications for BCA: does part/phase funded by TIGER has
independent utility?
– YES: benefits & costs of part/phase only
– NO: benefits & costs of entire project (or entire portion
with independent utility)
• In all cases:
– benefits & costs must be related to same
– no “leverage”
Time Horizon
“Both benefits and costs must be estimated for each year
after work on the project is begun and for a period of
time at least 20 years in the future (or the project’s
useful life, whichever is shorter), and these streams of
annual benefits and costs must be discounted to the
present using an appropriate discount rate, so that a
present value of the stream of benefits and a present
value of the stream of costs is calculated.”
Focus on Project Selection Criteria
 Primary Selection Criteria
 Long-Term Outcomes
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
State of good repair
Economic competitiveness
Livability
Environmental sustainability
Safety
 Job Creation and Near-Term Economic Activity
 Secondary Selection Criteria
 Innovation
 Partnership
Benefits –Livability
 Livability benefits are often associated with:
 Accessibility for Improved access to jobs, amenities
 Accessibility for disadvantaged communities
 Land use changes linked to transportation
 Transit and bicycle-pedestrian improvements
 Affordability (transportation, housing)
 At least show ridership/usership
 Try to estimate value per user
 Increases in property values may indicate value
Benefits –Economic Competitiveness
 Benefits in this category typically include:
 Lower operating costs
 Travel time savings
 Savings to passengers, carriers, and shippers
 Improvements in reliability
 Take care in estimating:
 Job creation benefits (focus on productivity increases)
 Omit multiplier effects
 Can include increases in labor and land productivity - But
avoid double-counting
Benefits –Safety
 Safety benefits are typically associated with reducing
fatalities, injuries, crash costs, and hazmat releases
 Benefits should be based on good crash data and valid
analysis of cause
 Recommended input values for injuries, property
damage, and other data are available in USDOT TIGER
NOFA
Benefits –State of Good Repair
 State of Good Repair benefits can include:
 Reducing long-term maintenance and repair costs (life-cycle
costs)
 Travel time savings (from preventing closures of facilities,
lack of speed and weight restrictions)
 Other user benefits from better pavement, improved safety
 Need to consider benefits and costs of alternatives
 Replacement vs. rehabilitation
 Risk analysis
Benefits –Sustainability
 Environmental sustainability benefits are typically
from reduced emissions
 Greenhouse gases (e.g., CO2)
 SOx
 NOx
 Particulate matter (PM)
 Volatile organic compounds (VOC)
 Recommended values are available in NOFA
Mapping Benefit Metrics into Long-Term Outcome Criteria
BENEFIT-COST ANALYSIS
CATEGORIES OF BENEFIT
LONG-TERM OUTCOME CRITERIA
State of Good
Repair
Economic
Competitiveness
Savings in Facility and Equipment O&M
√
√
Savings in Users’ Vehicle Operating Cost
√
√
Livability
Savings in Travel Time
√
√
Improvements in Travel Time Reliability
√
√
Economies of Agglomeration
and Increased Land Value
√
√
Budgetary Savings to Low-Income Users
√
Reductions in Environmental Emissions
√
Accident Cost Savings
√
Sustainability
Safety
√
√
Selecting Input Values
 Wherever possible use recommendations provided in
NOFA, including:
Variable
Recommended Source
Discount rate
OMB Circular A-94
Value of time
US DOT Guidance
Value of life and injuries
US DOT Guidance
Crash costs
NHTSA CAFE 2011 RIA
Criteria pollutant
emissions
NHTSA CAFE 2011 RIA
Social cost of carbon
Interagency Working Group Guidance
Transparency at every level
Input XQ1
Input XQ2
Input XQ3
Input XV1
Intermediate
Output YQ1
Input XQ4
Intermediate
Output YV1
Intermediate
Output YQ2
Input XQ5
Input XV2
Input XV3
Quantity
Component
YQ
(Units)
Value
Component
YV
($ per Unit)
Product
Metric Y
($)
Distribution of Benefits & Costs
“Applicants must clearly identify which population will be affected by any
particular benefit.” (p. 38735)
Options
How is it Measured?
Data Sources
Comments
Distribution
of benefits
and costs by
population
group
Estimation of benefits and
costs accruing to specific
groups based on
information collected
through user surveys or
location data (e.g., place of
residency, work, etc.).
Assessment may also be
qualitative, using a severity
scale.
User Surveys; U.S.
Census Bureau,
American
Community Survey;
Local Housing
Authorities
Detailed data available for
assessing distribution based
on current demographic and
socio-economic
characteristics. Forecast
likely to be sketchy for some
groups.
Distribution
of benefits
and costs by
geography
Estimation of benefits and
costs based on where they
occur; or where trips
originate; or where trips
terminate. Assessment may
also be qualitative, using a
severity scale.
Transportation
Models; U.S. Census
Bureau, American
Community Survey;
Local Housing
Authorities
Detailed data on O/D and
trip making available from
travel demand models.
Exact location of effects may
be difficult to assess and/or
forecast for some metrics.
Costs
 Provide costs from all sources (local, State, other Federal grants,
private)
 Direct capital costs: construction, design, land acquisition
 Beyond capital costs:

O&M, rehabilitation, life-cycle costs
 External costs: noise, congestion, pollutants
 Cost to users during project construction: increased delay, vehicle
operating costs
 Costs of whole project should be compared with benefits of
whole project (no “leveraging”)
 Or, if TIGER funds only a part of a project, you can compare costs
and benefits for TIGER-funded portion only
 But only if that portion has independent utility
Dealing with Uncertainty
“Applicants should (…) discuss any uncertainties associated with the estimates.” (p.
38738). “A ‘very useful’ economic analysis provides sensitivity analysis to show how
changes in key assumptions affect the outcome of the analysis.” (p. 38733)
 Sensitivity or “elasticity” analysis:
 change value of assumptions
and model parameters one at
a time and report impact on
BCA metrics
Change in Parameter Value
New
NPV
Change
in NPV
New B/C
Ratio
25% of Full
Appreciation Value
-$51.0
-174%
0.72
50% of Full
Appreciation Value
$1.8
-97%
1.03
75% of Full
Appreciation Value
$54.6
-20%
1.34
30% Reduction in
Recommended Value
$64.2
-6%
1.38
20% Increase in
Recommended Value
$71.3
+4%
1.44
50% Reduction in the
Number of Low Income Riders
$65.4
-4%
1.39
100% Increase in the Number
of Low Income Riders
$74.5
+9%
1.46
EIA Low Case
Scenario (-38%)
$67.2
-2%
1.40
EIA High Case
Scenario (+45%)
$70.0
+2%
1.43
About 10% Reduction
in Labor Cost
$77.1
+13%
1.49
Capital Cost Estimate
25% Reduction
$98.4
+44%
1.73
Annual O&M Cost
Estimate
25% Reduction
$80.7
+18%
1.54
Parameters
Economic Development
Benefits
Value of Time
 identify critical variables
 discuss “robustness” of BCA
 Ideally applied through
Low Income Ridership
Fuel Costs
transportation model as well
Shadow Pricing of Labor
Presenting BCA Outcomes
“Benefits should be presented, whenever possible, in a tabular form showing
benefits and costs in each year for the useful life of the project.” (p. 38725)
“ (…) applicants should include qualitative discussion of the categories of
benefits and costs that they were not able to quantify (…)” (page 38725)
• We are typically providing a 2 to 5 page summary for inclusion
in the application and a technical appendix with supporting
information.
Job Creation & Near-Term Economic Activity
 Two approaches to estimating job creation:
 CEA May 2009 memorandum

$92,000 of government spending creates 1 job-year

64% direct and indirect; 36% induced
 Input / Output model

IMPLAN, calibrated for study area
 Quarter-by-quarter projections of job-hours
 Job creation should not be included as benefits in
BCA
 “Shadow pricing” of labor costs may be considered
CBA Project Rating
 CBAs are reviewed and rated by US DOT Review team
 Very Useful
 Useful
 Marginally Useful
 Not Useful
BCA - Lessons Learned
 ALWAYS document and provide reliable sources for
data and calculations
 Be realistic in assumptions and estimates
 Qualitative discussion helps supplement
understanding for difficult-to-measure benefits &
costs
 Consider the viewpoint of objective reviewers
 Are estimates plausible and reasonable?
 Focus on overall evaluative process, not just the B/C
ratio
Parting Words…
 BCA is an opportunity to objectively demonstrate the
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need for your project
Highlight benefits that are well-documented and align
well with program’s selection criteria
Don’t forget about true costs of the project
Document, document, document
Be realistic in your assumptions and estimates