7. STEP 5: SELECT AND APPLY DECISION METHODS

Once benefits have been identified, and where possible quantified, it is necessary to convert this information into investment decisions. While there is an element of subjectivity in this process, it is best to establish a defensible, repeatable decision procedure where possible.

7.1 Alternative Views of Benefits

Depending on the project and the economic analysis tools employed, there are a number of different economic impact measures that can also be applied to the decision-making process. Since projects vary in size and cost, it’s important to find measures that allow for fair comparisons when considering funding decisions for large-scale freight projects. For example, the measure could be related to the cost, as reflected in an impact of dollars of income generated in the economy per million dollars of cost. As mentioned in Step 2, we expect all projects will produce at least 1) a dollar-based estimate of transportation cost savings (likely a combination of travel time and actual costs); and often also 2) a measure of national economic productivity, perhaps in terms of business output, increased trade, or gross domestic product (GDP). This second measure would capture second and third order economic effects not captured by the direct transportation cost savings. Therefore, decision metrics could include:

• Business-related transportation cost savings per $1 million of project costs;
• International trade per $1 million of projects; or
• Increased GDP per $1 million of projects.

For evaluating large-scale freight projects, and determining potential Federal funding contributions, it is essential to consider both economic benefits and costs. Typically, government agencies take a broad view of benefits to include the full range of public benefits. This economic evaluation framework is limited in a benefit/cost sense since it does not capture the full range of effects (e.g., environmental factors), many of which are very difficult to quantify. The concepts most relevant to this framework include various measures of economic impact. A measure such as economic cost savings per million of project costs (or similar) might be the most helpful metric to use when evaluating projects and comparing economic effects with other transportation, social, and environmental factors.

7.2 Benefit/Cost Calculation and Presentation

Benefit/cost analysis¹⁷ compares the present value of the benefits of an investment against the present value of the costs of a proposed investment. There are two fundamental results from performing a benefit/cost analysis: 1) net present value (NPV); and 2) benefit/cost ratio. The “Present Worth” of a project is commonly referred to as its NPV. The NPV of the project is obtained by summing the discounted benefits and costs for each year using a discount rate. Discounting is conducted to compare benefits and costs that typically occur over different timeframes for a single project. Generally, projects that attain an NPV > 0 are worth investing in – the benefits over time outweigh the costs over the life of the project.

The benefit/cost ratio is estimated simply by dividing the present value of benefits by the present value of costs. A benefit/cost ratio above 1.0 is consistent with a project that has a NPV > 0. A benefit/cost ratio of 1.0 represents the lowest value that should be considered for a transportation investment if no other nonmonetary factors are to be considered, and if there is no uncertainty in the analysis. These conditions never exist in reality.

Benefit/cost analysis (BCA) can be extended as a methodology to rank different projects, all of which may have NPV of greater than zero and, therefore, are theoretically worthwhile. In a capital-constrained situation, it is not possible to invest in every project with a positive NPV, and therefore a way to prioritize is required. The benefit/cost ratio is a measure of return on investment – “bang for the buck.”

When the objective of a study is a benefit/cost comparison for a single project, it is important to estimate the full range of benefits, including second- and third-stage benefits, associated with the project. When the objective of a study is to compare costs and benefits across existing or potential projects, it is more important to use consistent sets of benefits measures and methodologies, which can be some combination of first-, second, and third-stage benefits.

There are guidebooks that have been developed by modal agencies in the U.S. (FRA, FAA, and FHWA) that provide guidance on the application of benefit/cost analysis for rail, highway, and aviation investments. There are also several international guides and a new web-based guide (hosted by California Department of Transportation (Caltrans)) that spans all modes. These guides also discuss available benefit/cost tools. Discussion of further tools for benefit/cost analysis and available guides are contained in the Chapter 10 Toolbox.

7.3 Incidence and Equity of Benefits and Costs

For evaluating projects that span multiple government jurisdictions as well as public and private interests, there is an important need to consider how the costs and benefits are distributed among various categories of stakeholders. There are two approaches that can help to address this need.

Multimodal Benefit/Cost Analysis is a form of standard benefit/cost analysis in which the benefits and the costs are accounted separately for each mode. That approach can allow for distinction between passenger and freight travel benefits when transportation facilities are shared by both groups. It can also assist in distinguishing benefits associated with privately owned modal facilities (e.g., most rail facilities) from those associated with publicly owned modal facilities (e.g., most highway facilities). Systems such as TransDec (Transportation Decision Analysis Software) and TREDIS (Transportation Economic Development Impact System) accomplish these goals, as described in the Chapter 10 Toolbox. Both systems are also noteworthy for their ability to also cover accessibility and connectivity benefits and economic growth impacts as well as implications of cost savings for existing freight flow patterns.

The analysis framework laid out in this guide is designed to facilitate multimodal benefit/cost analysis of this type, as illustrated in Table 7.1.

Table 7.1 Example of Multimodal Benefit Accounting
(Net Present Value of Benefit Stream)

Multiple Criteria Appraisal (MCA) is most popular in Europe as a more comprehensive alternative to the use of BCA. It provides a means of considering the wider issues of qualitative and quantitative benefits and costs in a unified framework based on rating criteria and weighting systems. MCA relies on interpretation from analysts/stakeholders to value a wide range of expected benefits and costs. The additional issues can include considerations of progress towards policy goals relating to access, economic, environmental, international trade and distributional impacts. Examples of MCA systems are described in the Chapter 10 Toolbox.