CE 453 Lesson #40 Page 1/8

CE 453 Lesson #40 Page 1/8 ECONOMIC ANALYSIS

Reading Assignment 1. n/a

This document provides background on economic justification of highway facilities. Information on cost estimation (a required input to the decision making process) is given under separate cover.

From: FHWA’s Procedural Guidelines for Highway Feasibility Studies http://www.fhwa.dot.gov/hep10/corbor/feastudy.html valid date Sept. 1998

7. Economic justification

Economic justification is typically a baseline consideration and the most important element in a feasibility study. The economic justification for a facility or strategy has three general components: a benefit-cost analysis, non-monetary but quantifiable considerations, and, non-quantifiable consideration. All such components are discussed in the guidance from the Office of Management and Budget listed in attachment 2, entitled, "Annotations of Sources to be considered in Feasibility Studies". This attachment also contains notes on other guidelines, executive orders, reports, etc., that provide information helpful to analyzing the other components of the economic justification. Following is a brief summary of the most important points to keep in mind during the study of economic justification:

a. Benefit-cost analysis

Benefit-cost analysis has historically been a product of feasibility studies. For this, among other reasons, the benefit-cost analysis developed during a feasibility study may well attract more attention and produce more controversy than any other product of the study. Furthermore, the benefit-cost analysis is generally considered the most objective and credible product of such studies.

In essence, a benefit cost analysis is a calculation of the stream of both benefits and costs over the lifetime of the facility or strategy. Both benefits and costs are discounted based on their timing (e.g., today's certainty of having a dollar of benefits next year is worth less than actually having a dollar of benefits this year even if there is no inflation). In addition, both benefits and costs are adjusted for inflation, preferably by use of constant dollars.

The level of detail of the analysis should be appropriate to the importance of the category of benefit or cost considered. In typical FHWA funded benefit-cost analyses, the most important benefits are the monetary equivalent value of time savings to transportation users and the monetary equivalent value of the reduction in accidents, injuries and fatalities that would result from use of a new facility or implementation of a new strategy. CE 453 Lesson #40 Page 2/8 ECONOMIC ANALYSIS Substantial scrutiny should be given to accurate estimation of time savings and accident reduction with more scrutiny applied to whichever of them is the larger in terms of dollar benefits. Similarly, the most important costs are typically the construction cost and associated stream of maintenance and operational costs.

The issue of accounting for local and regional economic development benefits has sometimes resulted in contention within the context of feasibility studies. Typically, development benefits are essentially equivalent to a transfer payment. That is, forecasted local economic growth in the vicinity of a new transportation facility is growth that would have occurred elsewhere if the transportation facility would have occurred elsewhere. In such cases, the development benefits should not be considered in the benefit-cost calculation. Similarly, in the case of the economic impact of the construction of a new transportation facility, the jobs, etc., associated with such construction should not be considered in the benefit-cost calculation since such jobs, etc., would have occurred elsewhere if construction had occurred elsewhere.

In some cases, for example, where a facility is to be reconstructed while in operation, appropriate consideration should be given to estimating the traffic management costs and the delay and other costs to facility users.

In those cases where the total discounted benefits are about equal to the total discounted costs, other considerations could be the deciding factor in determining economic justification. There are two types of such considerations; those that are non-monetary but quantifiable and those that are not quantifiable.

b. Non-monetary but quantifiable considerations

To the extent possible, all impacts should be translated into monetary, dollar equivalent terms. Notwithstanding this, however, non-monetary, but quantifiable considerations can sometimes be an important part of the economic justification of a transportation facility or strategy. For example, construction of a transportation facility may lead to quantifiable improvement in access to an important education, medical or recreational facility. Similarly, such construction may lead to a quantifiable decrease in evacuation time required in the event of a disaster, etc.

c. Non-quantifiable considerations

To the extent possible, all impacts that can not be stated in dollars should be quantified in other understandable measures. Notwithstanding this, however, non-quantifiable considerations can also sometimes be an important part of the economic justification of a transportation facility or strategy. For example, construction of a transportation facility may lead to improved stability of the local economy or support a well considered locally funded comprehensive development plan, etc.

d. Base case and sensitivity analysis CE 453 Lesson #40 Page 3/8 ECONOMIC ANALYSIS Feasibility studies, by nature, provide imprecise results; therefore, it is vital to present the information in a manner that allows readers to understand exactly what is being assumed as the base condition, and how the final results would be affected by variations in such assumptions. This is accomplished by performing various sensitivity tests and comparing the results with those based on the various assumptions for the base condition.

For example, a study may use a 7 percent discount rate as the base condition (current OMB policy). Other discount rates can and should be used in the sensitivity analysis, but the results must be compared to the results based on a 7 percent discount rate and not vice versa. That is, the results of the base case must be given more credence in the consideration of economic justification and more emphasis in the presentation than the results of any of the sensitivity analyses. CE 453 Lesson #40 Page 4/8 ECONOMIC ANALYSIS Attachment 2 - Annotations of Sources to be Considered in Feasibility Studies

1. Memo series entitled, "Information: Update of Value of Life and Injuries for Use in Preparing Economic Evaluations", dated March 15, 1994 and since then updated periodically by the Office of the Secretary of Transportation.

This memo and its attachments contain values for averted fatalities and injuries and a discussion of applicability. They are to be used within the Department of Transportation for regulatory and investment analysis.

2. National Cooperative Highway Research Program Report 342 entitled, "Primer on Transportation, Productivity and Economic Development".

This report discusses economic objectives, and explanation of analysis methodologies, examples of good practice and common errors and proper scoping of the base case, among other subjects.

3. Office of Management and Budget Circular No. A-94, Benefit-Cost Analysis of Federal Programs; Guidelines and Discounts

This circular contains discount rate policy applicable to use in the base case analysis during feasibility studies as well as an explanation of the principles of net present value, benefit/cost analysis, treatment of inflation and the treatment of uncertainty. Executive Order 12893 entitled, "Principles for Federal Infrastructure Investments" specifically identifies this circular as applicable to such principles.

4. A report published by the American Association of State Highway and Transportation Officials entitled, "A Manual on User Benefit Analysis of Highway and Bus-Transit Improvements, 1977".

This report contains values for the monetary equivalent of user time savings, accidents averted, injuries averted and fatalities averted. Such values such be updated for use in constant dollar analyses.

5. Executive Order 12893 of January 26, 1994, "Principles for Federal Infrastructure Investments"

This Presidential order requires Federal departments and agencies to implement plans consistent with the principles of: systematic analysis of expected benefits, inclusion of non monetary and non quantifiable costs and benefits, efficient management of infrastructure, private sector participation, encouragement of more effective State and local programs, etc.

6. Three reports prepared for the National Cooperative Highway Research Program: Project 7-12 entitled, "Microcomputer Evaluation of Highway User Benefits: Final Report, MicroBENCOST User's Manual and MicroBENCOST Program Documentation". CE 453 Lesson #40 Page 5/8 ECONOMIC ANALYSIS

MicroBENCOST is a computer program for analyzing benefits and costs of a wide range of highway improvements (e.g. capacity addition, pavement rehabilitation, bridge improvement, safety improvement). Essentially, this program incorporates existing practice regarding the organization and aggregation of costs and benefits into one compatible overall program. The final report contains summaries of studies of critical values used in analysis (e.g. value of time) and an extensive bibliography.

7. Memo entitled, "ACTION: Departmental Guidance for the Valuation of Travel Time in Economic Analysis, dated April 9, 1997 and to be updated by the Office of the Secretary of Transportation.

This memo and its attachments contain estimates for use in calculating the value of time saved or lost by individual transportation system users (it does not include the impact on vehicle operating costs or spoilage). They are to be used within the Department of Transportation for regulatory and investment analysis.

8. Software named, Surface Transportation Effeciency Analysis Model (STEAM).

This software assesses alternatives for Major Investment Study (MIS) type analysis in metropolitan areas.

Sources 1., and 7. are, as of the valid date of this file, available from: Peter Belenky at the Office of the Secretary of Transportation, Office of Policy. Call 202-366-5421.

Sources 3. and 5. are available from: the FHWA Intermodal and Statewide Programs Division web site.

Source 2. is available from:

Transportation Research Board National Research Council 2101 Constitution Avenue, N.W. Washington, D.C. 20418 202 334 3213

Source 4. is available from:

American Association of State Highway and Transportation Officials 444 North Capitol Street Washington, D.C. 20001 202 624 5800

Source 6. is available from: CE 453 Lesson #40 Page 6/8 ECONOMIC ANALYSIS

McTrans 512 Weil Hall PO Box 116585 Gainesville, FL 32611-2083 904 392 0378 (voice) 904 392 3224 (fax) 904 392 3225 (BBS) 1 800 226 1013 (MSG) [email protected] (e-mail)

Source 8. is available at:

http://www.ota.fhwa.dot.gov/steam

EXAMPLE This document provides a sample cost estimate for a small project in Sac County. It is clear and easy to read. Your cost estimate will contain more detail.

Preliminary Cost Estimate Roadway cross section The following cross section is used to estimate the quantities and the preliminary cost estimate for improvements that may be required for some of the alternatives. The cross section was presented in a telephone conversation between Mr. Smith and Mr. Don Hensen from the Sac County Engineer’s office. This study assumes that any roadway improvements will be completed according to county standards and the drainage will be carried in open ditches. This assumption does not imply that the county will be responsible for the cost of improvements.

80 Foot ROW (typ) 6' 22' 6'

3:1 8' 2:1

8" PCCP with earth shoulders

Figure 19 Typical Cross Section CE 453 Lesson #40 Page 7/8 ECONOMIC ANALYSIS

Cost estimate for each alternative The cost estimate was developed using figures from the Iowa Department of Transportation publication “Summary of Awarded Contract Prices for English and Metric Items”. The average unit price was used in the calculations.

 8 Portland Cement Concrete Pavement (Item code 2301-1083080):

(22.0) (100/sta.)  9ft2 /yd2 = 244.4 yd2 /sta.  245 yd2 / sta.

(245 yd2 / sta.) ($35.00 / yd2) = $8575 / sta.

Alternative Paving Costs Miles Stations Unit Costs Costs 16th Street / M65 1.5 79.2 $8575/sta. $679,140 5th Street / M54 0.5 26.4 8575/sta. 226,380 Taylor Avenue 2.0 105.6 8575/sta. 905,520 County N14 0.0 0 8575/sta. 0 Table 3: 8” Portland Cement Concrete Paving Estimate

 6 Shoulder Construction and Finishing (Item codes 2123-7450020 and 2123- 7450020):

$110.00 / sta. / 1 shoulder = $220.00 / sta. / 2 shoulders

Alternative Shouldering Costs Miles Stations Unit Costs Costs 16th Street / M65 1.5 79.2 $220/sta. $17,424 5th Street / M54 0.5 26.4 220/sta. 5808 Taylor Avenue 2.0 105.6 220/sta. 23,232 County N14 0.0 0 220/sta. 0

Table 4: 6’ Shoulder Construction and Finishing Estimate CE 453 Lesson #40 Page 8/8 ECONOMIC ANALYSIS  Right of Way acquisition

The ROW will be expanded from 66 to 80 in the areas where paving is required. This is an additional 14 of land. The cost of acquisition was derived from Mr. Smith’s telephone conversation with the Sac county assessor Mr. Bob Hawks. The land north of Sac City is generally considered to have a corn suitability index (CSI) value of 70. Farmland with this CSI is estimated to be worth $ 2000 per acre. This is not an appraised value it is only an estimate. The following calculations use $2000 per acre to establish the estimated cost of right of way for each of the alternatives.

(14.00 ft.) (100 ft./sta.)  (43,560 ft.2 /acre) = 0.3 acre / sta.

(0.3 acre / sta.)($2000 / acre) = $60 / sta.

Alternative Right of Way Costs Miles Stations Acres Costs 16th Street / M65 1.5 79.2 2.4 $4752 5th Street / M54 0 0 0 0 Taylor Avenue 2.0 105.6 3.2 6336 County N14 0 0 0 0

Table 5: Right of Way Acquisition

Preliminary cost estimate summary

The preliminary cost of improvements for each of the alternatives is shown in table 6. The table consists of the costs calculated for paving, shoulders, and right of way. Since this is a very preliminary cost estimate, a contingency factor is added to account for costs that are unknown at this time. Some examples of costs that are unknown at this time are drainage structures, utility relocations, and roadway grading. The contingency percent will decrease in the future as more detailed estimates are developed. The estimated costs do provide a viable assessment of the construction costs associated with each of the alternatives and can be used in the alternative analysis.

Alternative Preliminary Project Costs Paving Shoulders Right of Way 50% Total Contingency 16th Street / M65 $679,140 $17,424 $4752 $350,658 $1,051,974 5th Street / M54 226,380 5808 0 116,094 348,282 Taylor Avenue 905,520 23,232 6336 467,544 1,402,632 County N14 0 0 00 0 0 Table 6: Preliminary Project Costs