1. INTRODUCTION

1.1 Background and Purpose of This Guide

International trade has grown rapidly over the past 20 years and is projected to increase dramatically by 2020, challenging the capacity of our nation’s transportation system to accommodate growing freight volumes. These challenges will be particularly severe at major trade gateways such as the Ports of Los Angeles and Long Beach, which handle over 40 percent of all of the containerized cargo that enter the United States and face projected growth in freight volumes of over 10 percent annually over the next decade.

The growth in trade with our North American Free Trade Agreement (NAFTA) partners is also stunning. Between 1997 and 2003, the value of merchandise traded with Mexico and Canada grew 32 percent, significantly faster than overall foreign trade, which grew by 27 percent during this time. The continuation of growth in foreign trade has resulted in record freight volumes each year, a trend that contributes to considerable congestion on our transportation system.

Beyond ports and border crossings, increasing freight flows have also begun to strain the nation’s inland surface transportation network. More trade has meant more trucks on highways and increasing traffic congestion in urban areas and in major Interstate trade corridors. Plus, increases in rail freight volumes have challenged the capacity and reliability of the U.S. freight rail system highlighting the issues faced by the rail sector, including insufficient returns on rail capital investments that have limited the ability of the industry to increase rail capacity. The trucking sector also faces a number of challenges, including constrained staging and rest areas and new regulations that restrict operations, such as changes to the hours-of-service rules.

When combined, these trends paint a worrisome picture for the state of the U.S. freight system. U.S. domestic freight tonnage is predicted to increase by 57 percent between 2000 and 2020, and if trends continue, growth in freight volumes will exceed increases in freight capacity for the foreseeable future, causing congestion throughout the surface transportation system and decreasing the reliability of freight shipment times. As congestion increases and reliability decrease, the transport and supply chain costs will go up, raising prices for U.S. consumers and lowering the competitiveness of U.S. businesses.

Ensuring sound investments in large-scale freight projects, therefore, is extremely important. The purpose of this guide is to provide a thorough economic analysis framework to assess the benefits and costs of potential freight investments. Application of this guide, and the analytical steps recommended, is intended to ensure that freight projects are appropriately considered in national, regional, and state decisions about the future of transportation system investments. In addition, the high costs of these projects emphasize the need for public/private partnerships to amass the funds necessary for their successful completion.

Although this guide recognizes the importance of other social and environmental effects, the focus is on economic effects and the secondary passenger benefits that often accrue due to freight projects. Given this emphasis, the guide covers topics such as:

• National scale of benefits – economic benefits from freight projects impact industry shippers and receivers across the country (and internationally), not just the location of a freight project;
• Public versus private benefits – when considering the potential for public/private partnerships, it is imperative to maintain a careful accounting of public and private benefits, which are particularly relevant to freight transportation; and
• Logistics and supply chain effects – measuring the economic impact of freight investments requires the analysis of benefits to shippers and receivers of freight in terms of both “first order” direct transportation effects, and “second order” logistics, distribution, supply chain, and broader economy-wide implications.

The core of the economic analysis framework for evaluating large-scale freight projects is a Five-Step Analysis process:

1. Identify the nature and transportation purpose of the project in terms of its intended impact on improving freight and nonfreight travel conditions. This is needed to ensure that those transportation effects and their consequences are properly evaluated.
2. Identify the nature of expected economic impacts in terms of the elements of the economy that feel they have a stake in seeing the project occur. This is needed to ensure that those economic effects and their consequences are also properly evaluated.
3. Apply transportation impact evaluation tools to assess the magnitude and nature of transportation system performance effects actually projected to impact shippers and carriers.
4. Apply economic impact evaluation tools to assess the magnitude and nature of economic effects actually projected to occur for elements of the economy that are either directly or indirectly affected by freight system costs and performance.
5. Apply decision support methods to identify the substantial positive and negative impacts of the project for the economy (at the local/state or national level).

The remainder of the guide provides extensive detail on all five of these steps, models and data to support economic and transportation analysis, and case studies that highlight the application of the five steps.

1.2 Emergence of Large-Scale Freight Projects

Large-scale freight projects are capital improvement projects that focus largely on improving the flow and capacity of moving goods, and typically cost between $100 million and several billion dollars. They may involve rail, roadway, air, or marine modes of travel. They can be right-of-way (or corridor) projects, such as new or expanded railroad lines, truck roadway routes, tunnels, or overpasses. They can also be terminal projects, such as expansion of airport freight facilities, marine port facilities, rail terminals, or intermodal truck/rail terminals.

Nearly all large-scale freight projects are multimodal or intermodal projects such that they impact the movement of goods on more than one mode. All air freight and marine freight movements, for example, also involve interchanges to ground transportation (truck or rail) for pickup from shippers and delivery to recipients. In addition, a large share of rail freight movement also involves prior and/or subsequent movement by another mode of transportation, generally truck.

The need for major capital investment in large-scale freight transportation facilities has grown as a result of several trends that have accelerated in the past decade:

• Increasing international trade that focuses more import and export processing at major international air/sea gateways and truck/rail border crossings;
• Increasing growth of national and international scale industries and markets that expand average freight shipping distances;
• Increasing adoption of new production and logistics processes – including integrated supply chains, just-in-time scheduling, and dependence on overnight express shipping – all of which increases freight trip-making;
• Increasing consolidation among air, marine and rail transportation companies that focuses activity on a smaller number of terminal and interchange sites; and
• Increasing incidence of congestion delays due to capacity constraints and bottlenecks at various entry/access ports, terminals, freight distribution/sorting yards and intersections or bridges along freight routes.

These trends not only increase demand for large-scale projects, they also increase the potential economic development stakes involved in completion of such projects. That is because large-scale freight projects as described above can have major implications for business productivity, economic development, and business location and expansion decisions. That does not mean that all such projects have benefits justifying the investment, but it does mean that the potential magnitude of the benefits – as well as the costs – can be substantial. While the estimates of costs have been relatively straight forward, accurate and comprehensive, measurement of first order and higher order benefits has remained a major challenge. This makes it critical that appropriate methods be applied for evaluating public investments in such projects.

1.3 Challenges for Evaluating Large-Scale Projects

Local, state, and Federal transportation agencies have a responsibility to assess the relative advantages and costs of major public capital investments to ensure that funds are invested wisely. Nevertheless, large-scale freight projects have a series of distinguishing features that makes them particularly difficult to evaluate. They include the following:

• Large-scale freight projects typically have economic development (productivity, trade, jobs, and income) impacts that require public benefit consideration.
• Proposals for major freight facilities (and the highway or rail corridors serving them) often have national level significance based on the dispersed pattern of freight trip origins and destinations and involve costs of a geographic scale beyond the jurisdiction of local and state governments, thus indicating potential funding consideration at the Federal level.
• Most proposals for major freight projects involve multiple modes of travel. That complicates the analysis of capacity needs and benefits since there can be numerous alternative freight options across modes. It also complicates benefit/cost (B/C) comparison because some modes involve public roles for funding facilities and operating services, while others are more traditionally private.
• Most proposals for major freight projects have both public and private sector benefits and costs. That makes it particularly difficult to assess the size and incidence of benefits and funding responsibility burdens so that they can be allocated among private shippers/recipients, transportation providers and public sector agencies.

These challenges can only be met by the adoption of analysis methods that can 1) span multiple modes, 2) distinguish freight impacts from passenger travel impacts, 3) distinguish local or state impacts from national level impacts, and 4) distinguish private benefits from public benefits. While the Federal government has previously funded development of various benefit/cost evaluation methods designed specifically for highway, rail, aviation and marine projects, it has not had a process developed for fully evaluating the economic impacts and benefits of freight investment involving combinations of those modes. This guide seeks to address that need and to provide a consistent methodology for use in demonstrating the expected economic impacts of freight investments.

1.4 Federal-Level Interest and Goals

The benefits and costs of improving commuter traffic congestion typically remain confined within a single urban area. Freight transportation, however, usually involves many more long-haul trips from origins in one region to destinations in many others. For example, improving a freight bottleneck near a seaport handling substantial international trade can result in beneficiaries throughout the country (and even the rest of the world). Given the interstate scale of goods movement, the Federal government has a more compelling role to play in large-scale freight projects. This role is challenging for at least three reasons.

1. U.S. DOT is increasingly being asked to support large-scale freight projects and there are not well defined, objective criteria and methodologies in place for comparing and making choices among projects when limited funding is involved.
2. The Federal government has a unique capability and responsibility to provide some form of coordination, leadership, support, and guidance to local and state agencies.
3. Federal agencies strive to ensure that public investments provide economic benefits for all Americans and do not merely subsidize private sector profit-making or re-distribute benefits between competing regions.

The goal of this work, therefore, is to develop a general framework or process that can be applied to systematically evaluate the nature of economic benefits and costs and their incidence among various private and public sector interests. This framework can also provide an objective basis for evaluating the appropriateness of Federal-level involvement in such projects and defining the appropriate level of Federal funding. A rigorous framework can also serve as a decision tool for comparing investments in alternative projects. Finally, it can help define an equitable allocation of cost-bearing among public and private sector parties. For such a framework to succeed, it must provide consistent metrics for national as well as regional impacts, and across all relevant modes.

Such a framework cannot be a single, universal software model, as the range of considerations and depth of analysis can differ widely depending on the type of project. Rather, the framework needs to provide a checklist and structure for ensuring full consideration of all major issues, designed as a transparent process that can be acceptable to local project sponsors (and their transportation planners and consultants). In order to satisfy these objectives, this guide describes a range of different analysis tools, selected from a toolbox of available transportation and economic models that can be applied to estimate a consistent set of benefit and cost measures.

1.5 Cost and Impact Perspectives

The nature of economic costs and benefits generated from freight-oriented transportation investments differs from those of more traditional transportation improvements (such as highway, transit, or airport/airway projects) that primarily serve passengers and only secondarily serve freight. The main difference is that the primary benefits of freight-oriented projects explicitly apply to a complex chain of private-sector manufacturing, logistics, and distribution processes. A typical chain of impacts has the following five elements:

1. Carriers. Many of the impacts of freight investments on transportation system performance are first encountered by private sector freight carriers, and that will generate certain direct travel time, cost, reliability, and accessibility and/or safety benefits to those carriers.
2. Shippers. Insofar as there is competition among freight carriers within a mode or between modes, the impact on carrier performance and cost typically is passed onto their customers, the freight shippers. In a very real sense, the freight shippers (rather than the carriers) are the users of the freight transport system, for it is their freight movements that are the real beneficiaries of time savings and improved arrival time reliability.¹ Shippers can further benefit insofar as they can reconfigure the scale, scheduling, and characteristics of their business operations and logistics processes over the long run.
3. Industries and Markets. Clearly, changes in the business operations of freight shippers also affect the freight recipients, and can also change freight shipper-recipient patterns. That can have further consequences for the market pattern of production, distribution and sales of supply materials, intermediate goods, and final products for other businesses. These effects can occur locally, regionally, around the nation and beyond.
4. Nonfreight Impacts: Economic Development. The ultimate impact of more efficient or lower cost operations is on business productivity (affecting profitability), which leads to changes in activity patterns that impact job and income creation and their location patterns. This income and employment effect is a public benefit.
5. Other Public Impacts. Another impact of changes in freight flow patterns is on business operations, which in turn can affect demand for various public and private facilities. That can have direct effects on public infrastructure costs and indirect effects on the environment, as changes in freight flows and economic activity can also affect energy resources use and pollution emissions.

This guide focuses on Elements 1 to 4. This last element is noted, but is not evaluated in this guide, as environmental impacts related to large-scale transportation project investments have already been addressed in other studies.

There are three crucial consequences that follow as a result of this chain of impacts: One is the need to classify projects and apply appropriate methods for estimating transportation system performance impacts in a way that reflects the nature of those impacts. A second is the need to recognize the differing effects that can result for freight carriers, shippers, and other users. The third consequence is the need to assess ultimate benefits for economic development and other public benefits. Thus, the evaluation of large-scale freight projects must be comprehensive in encompassing the different types of impacts, the different types of affected parties, and long-term implications for the economy from the public perspective.

1.6 Structure of This Guide

This guidebook is intended for use by Federal, state, or local officials interested in systematically assessing the benefits and impacts of large-scale freight system investments. It lays out a general framework as a series of consistent steps that should be carried out to conduct economic benefit and impact analysis for any proposed project. It is designed first and foremost to ensure full consistency regardless of the combination of railroad, marine, aviation, or road transportation modes being affected. It is also designed to provide full transparency in the calculation of economic costs and benefits. The guide is organized into four parts:

1. Part 1 (Chapters 1 to 2) describes the general approach by defining the types of projects, information needs and results addressed by the analysis framework. The first chapter summarizes these factors, while the second chapter lays out the basic series of steps involved.
2. Part 2 (Chapters 3 to 7) walks users through each of the five steps involved in classifying the project, defining evaluation issues, applying transportation analysis methods, applying economic analysis methods, and applying decision methods. At each step, there are options for more or less detailed methods to be used, depending on the nature of the project.
3. Part 3 (Chapter 8) provides users with a case study that illustrates the nature of large-scale freight transportation projects in the real world and the challenges involved in evaluating their economic impacts. Appendix B includes additional case studies that illustrate transportation impact analysis and economic analysis techniques that will be useful in evaluating future projects (however, these case studies do not follow the framework laid out in this guidebook in its entirety).
4. Part 4 (Chapters 9 to 10) describes analysis forms and tools that can be applied in carrying out the five steps.
5. Appendices provide an analysis of how freight infrastructure investments impact supply chain practices and costs.