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27 CHAPTER 3 Current Practices in Freight Investment Decision Making An important first step of this research was to develop a users, and other impacted parties. The following sections more detailed understanding of the processes used to evalu- describe the processes used by these stakeholder types in eval- ate freight investment decisions, how these processes differ uating freight investment decisions as well as the data and among various stakeholder types, and the data and tools used tools used to support them. to inform the process. This information was critical in help- ing to ensure that the Freight Evaluation Framework reflected 3.2 Decision Processes the types of benefits that are important to different stakehold- ers, how and when they are evaluated, and the strengths and This section presents an overview of the freight investment limitations of current practices. decision-making practices and techniques used by different stakeholder types throughout the country. Case studies are pro- vided for each stakeholder type to illustrate "real world" exam- 3.1 Case Study Approach ples of freight improvement decision processes and practices, as The research team reviewed all available material related to well as the tools used to calculate public and private benefits. the freight transportation decision-making process, paying particular attention to how public and private benefits are Infrastructure Provider assessed and incorporated, as well as the tools and models currently used to assess freight benefits or prioritize improve- As discussed, infrastructure providers develop, lease, main- ment projects. The researchers supplemented this informa- tain, or finance freight investments. The following case studies tion with in-person interviews with key players--from both describe the processes, data, and tools used by four infrastruc- public and private sectors--involved in the development, ture providers (Washington State DOT, the Bank of Montreal, evaluation, prioritization, financing, and implementation of the Burlington Northern Santa Fe [BNSF] Railway, and the Port freight improvement projects. These interviews, the locations of Portland [in Oregon]) to evaluate infrastructure investments. of which are shown in Figure 3.1 (available on the project webpage), focused on the following: Case Study--Washington State DOT Rail Investments The freight transportation decision-making process, particularly how the process differs between the public and Overview. Like many states, Washington has a history of private sectors (and among different public- and private- participating in the private rail system, particularly in those sector agencies/entities) and the key decision points along projects where benefits accrued to strong state industries such the way; and as agriculture. However, state participation has historically been Current practices used to evaluate freight investments, on a case-by-case basis, and until recently the state lacked a for- particularly how potential public and private benefits are mal policy that spelled out when and how public tax dollars calculated, how cost allocations are made, and how invest- should be invested in the rail system. ments are evaluated and prioritized. To address this situation, in 2005, the Washington State Leg- islature commissioned the Washington Statewide Rail Capacity As discussed in Chapter 2, freight projects can affect four and System Needs Study. One of the outcomes of the study was types of stakeholders: asset providers, service providers, end a systematic framework for evaluating freight and passenger

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28 Public Sector Ports and Port Authorities Private Figure 3.1. Interviews completed throughout the research process. rail improvement projects for potential state funding. Follow- weighted based on the relative importance of the priority. ing completion of the study, the legislature directed Wash- The six priorities are as follows, in order of importance: ington State DOT to develop and implement the framework Economic, safety, or environmental benefits of freight recommended in the study. movement by rail compared to other modes; Self-sustaining economic development that creates fam- Evaluation Process. Washington State DOT developed ily wage jobs; a statewide rail benefit/impact evaluation methodology (1) to Preservation of rail corridors that would otherwise be evaluate rail grant and loan applications. The methodology lost; consists of seven steps, as outlined and shown in Figure 3.2. Increased access to efficient and cost-effective transport to market for Washington's agricultural and industrial Application review/information gathering--Rail projects shippers; are initiated by the receipt of a completed grant or loan appli- Better integration within the regional, national, and cation from the project sponsor. Washington State DOT international freight transportation system; and can act as project sponsor when the Legislature directs that Mitigation of the impacts of increased rail traffic on a certain project be undertaken. local communities. Conduct a benefit/cost analysis--Following Washington Project management assessment--This tool is used to statute (RCW 47.76), freight rail projects seeking public determine the current status of the project, and the like- funding are required to conduct a benefit/cost analysis. If the lihood it will be completed on time and within budget. benefit/cost ratio is less than 1 (indicating that costs exceed Scores are based on factors such as project readiness, part- benefits), the evaluation is terminated and the project is not ner funding, budget, and schedule. considered further for state funding. If the benefit/cost ratio User benefit levels matrix--This matrix qualitatively appor- is greater than 1, the evaluation proceeds to the next steps. tions project costs and benefits to different user groups, Legislative priority matrix tool--This is a spreadsheet tool including the State, ports, trucking companies, shippers, developed to implement the Washington State Legislature's railroads, and local communities. For each benefit, the six priorities for the benefit/impact evaluation methodol- project evaluator determines the percentage benefit accru- ogy. Measures for each priority are assigned a numerical ing to each user. This can be used to inform decisions score between 4 (highly likely to satisfy the priority) and about cost allocation among different public- and private- -1 (has a negative impact on the benefit). The scores are sector partners.

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29 No Application Gather Information Using Review Application Standard Application Fail Terminate Conduct Cost/Benefit Analysis Evaluation Pass Use Legislative Priority Matrix Tool Use Project Management Assessment Tool Use User Benefit Levels Matrix Compile Information Document Scores Develop Summary, Including Qualitative Analysis and Recommendation Figure 3.2. Washington State DOT freight rail decision-making process. Compile information/document scores--Using informa- The shipper savings are treated as pure private benefits that tion derived from the benefit-cost analysis, Legislative Pri- would be paid for by the private sector. All other benefit types ority Matrix, Project Management Assessment, User Benefit (e.g., increases in employment, taxes, and output, as well as Levels Matrix, and any other relevant information, the eval- reductions in freight impacts such as road maintenance costs) uator generates an overall project score and documents how are treated as public-sector benefits that would be paid for by all factors were evaluated. the public sector. Develop summary report and recommendations--Taking all available information into consideration, the evaluator Case Study--Bank of Montreal Financial Group writes a summary report and makes a formal recommenda- tion about whether to fund the project. Overview. Established in 1817, the Bank of Montreal (BMO) is Canada's oldest and fifth largest bank (by deposits). Benefit Estimation. The benefit/cost analysis utilizes the The bank played a major role in the development of the coun- Statewide Rail Benefit/Cost Calculator, a sketch planning tool try and financed the first transcontinental railway in the that estimates the public and private benefits of rail investments 1880s. BMO has over 900 branches in Canada. Although the to the citizens and businesses of Washington State. Unlike official legal corporate head office is in Montreal, the chair- many rail evaluation tools, the calculator does not rely on rail man, president, and most senior division executives work simulation modeling tools and extensive data that must be out of the company's Toronto headquarters. The bank is obtained from the railroads. Rather, it provides quantitative a member of BMO Financial Group, the 10th largest diver- estimates of benefits based on documented standards, research, sified financial services provider in North America with and common practice. The method can therefore be used as a total assets of $361 billion (U.S.) and 37,000 employees (as basis for allocating project costs between private firms (such as of January 31, 2009). shippers, receivers, and railroads) and the public sector. The The company has three primary client groups that serve following three main types of benefits are included: different markets. Transportation and economic benefits; 1. Personal and Commercial Client Group focuses on retail Economic impacts; and banking and life insurance. Retail banking in the United External impacts. States is represented by Harris Bank, headquartered in Chicago; Table 3.1 describes the benefits in more detail, including 2. Investment Banking Group (operated as BMO Capital information on how they are measured. Markets); and

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30 Table 3.1. Benefit categories included in Washington State DOT's benefit/cost calculator. Benefit/Cost Measurement of Benefit/Cost Reduced Maintenance Costs Based on expected number of rail carloads versus semis and the weight of the shipments Reduction in Shipper Costs (for Shipments Comparison of the cost of shipping the goods via rail compared Originating in State) Freight Only to truck Reduction in Automobile Delays at Grade Value of motorist time (usually a function of average wages) Crossings multiplied by expected reduction in delay New or Retained Jobs Average wages for the region from the Bureau of Labor Statistics multiplied by an economic multiplier to gauge total impacts Tax Increases from Industrial Estimated assessed property value after project multiplied by Development property tax rate Safety Improvements Estimated money saved by not having to make highway safety improvements Environmental Benefits Total distance traveled by trucks diverted to rail multiplied by a standard environmental cost per mile Track Maintenance Estimated cost of track maintenance discounted to net present value Equipment Maintenance Estimated cost of equipment maintenance discounted to net present value Source: Washington State DOT, Freight Mobility Joint Report, Appendix A, Exhibit 8. 3. Private Client Group (BMO Nesbitt Burns), which focuses 1. Construction and start-up risk, and on wealth management. 2. Revenue risk from operations. BMO Capital Markets provides corporate, institutional, Construction and startup risk depends on how sound the and government clients access to equity and debt underwrit- planning is for a project, the severity of environmental impacts, ing, corporate lending and project financing, merger and and the degree of support or opposition from environmental acquisitions advisory services, merchant banking, securitiza- groups, elected officials, and other stakeholders. In public- tion, treasury management, market risk management, debt private partnerships, investors are typically leery of greenfield and equity research, and institutional sales and trading. projects that are in the early stages of development. Projects that already have received environmental approval and that Evaluation Process. Investment banks, such as BMO have been fully designed present significantly less start-up risk. Capital Markets, have become an important element in the From an investor's standpoint, projects built under design- financing of freight improvement projects, and government build authority are often viewed as having less start-up risk agencies increasingly recognize that in order to attract private because a firm price of the project is known early. capital to a project, there must be a payoff for private-sector In general, the private sector sees lower risk in purchasing investors. The private-sector organizations, such as invest- an existing asset, such as an existing toll bridge, as opposed to ment banks, carriers, shippers, terminals, etc., are frequently a project that is still in the planning stages. For example, in courted by public agencies because of their expertise in busi- 2005, a consortium of Cintra Concesiones de Infraestructuras ness and in financing large projects. The public sector wants de Transporte S.A. and Macquarie Infrastructure Group pur- the private-sector partners to pledge capital and to take on chased the 7.8-mile Chicago Skyway for $1.83 billion, which some of the risks that have traditionally been absorbed by the was 63 times earnings before interest, taxes, depreciation, and public sector. Given limitations in funding from local, state, amortization (EBITDA). The consortium has a 99-year lease. and federal grants, the public sector often seeks private-sector Revenue risk is far more troubling, because of the uncertain- capital in order to complete a project. ties in long-term demand for the service provided. For exam- BMO, like all infrastructure investors, is concerned about ple, when a toll road is built, will drivers shun the new roadway the following two types of risk: in order to avoid the toll? Are there alternatives to using the

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31 new facility? Will recessions dampen the demand for the serv- by a separate unit within the company and is the same regard- ice provided? less of project scale, location, or type. Benefits Assessment. BMO uses due diligence analysis 1. The Railroad Traffic Controller (RTC--as described ear- to answer several key questions related to proposed invest- lier, RTC is a model used by freight railroads for forecast- ments, all of which serve to better understand the risks of the ing and service planning purposes). The Modeling Group project. evaluates the project to calculate the likely capacity, velocity, and reliability improvements that would result What is the overall travel demand? BMO's technical advi- from project implementation. sors document or measure actual traffic conditions, using 2. The Strategic Group evaluates the project's expected out- traffic counts, synthetic travel demand models, and origin- comes against the railroad's strategic plan to determine destination studies. Investment-grade analysis typically how well the proposed improvement conforms to the involves origin-destination studies to demonstrate the real company's overall business goals. world potential for the project. 3. The Investment Activities Group determines the net How will that demand change over time? For projects in present value (NPV) of the project using a cost/benefit the early stages of development, existing forecasts by gov- analysis process. For some projects, this group determines ernment planning agencies are usually sufficient, although whether public-private partnership scenarios might be some review of potential concerns in growth forecasts is appropriate, and the degree to which these scenarios could often appropriate. At the investment-grade level, independ- impact financial viability. ent forecasts are typically developed. Analysts consider 4. The Capital Committee makes a final decision on whether the engines that drive the regional economy of a pro- to fund the project. posed project, as well as where within the region growth Figure 3.3 describes the issues evaluated within each step may occur--looking at constraints to growth and other of this process. internal competitive factors. Another key driver of future If the Investment Activities Group determines that a travel demand is changes to the transportation system. The public-private partnership is appropriate and/or would make overall goal of the due diligence analysis is to discover all committed, as well as planned or under-discussion projects, to evaluate their potential impact on future traffic. What share of the demand will use the toll facility at differ- 1. Determine Project Benefits ent toll rates? For toll projects, a number of analyses are Decision-Maker: RTC Modeling Group developed, including localized evaluation of willingness to Tools: RTC Model pay, whether people are familiar with tolling or not, incomes, Issues Evaluated: Capacity The additional number or weight of train cars that can be transported and types of trips being made along the proposed project. Velocity Travel time reductions Reliability Reduced travel time variability Case Study--Burlington Northern Santa Fe Railway 2. Evaluate Project Within Business Context Overview. BNSF is one of the largest railroads in the Decision-Maker: Strategic Group United States, with 32,000 route miles in the central and west- Tools: Strategic Plan Issues Evaluated: The project's congruity with the performance ern parts of the country. The railroad employs 40,000 people and market goals outlined in the strategic plan and owns 6,700 locomotives. At any given time, approxi- mately 220,000 rail cars are moving on the BNSF system. 3. Determine Net Present Value of Project Major commodities hauled include coal, grains, fertilizer, Decision-Maker: Investment Activities Group Tools: Cost-Benefit Analysis chemicals, forest products, minerals, metals, and consumer Issues Evaluated: Whether the Net Present Value of the project goods (which are most often shipped in intermodal con- warrants RR investment under various public funding scenarios tainers). The following sections describe how BNSF evalu- ates capacity improvement projects for funding within its 4. Final Investment Decision own capital program, as well as how it makes decisions Decision-Maker: Capital Committee Tools: Findings generated in prior steps about whether to enter into public-private partnerships to Issues Evaluated: All Capital Committee makes the final share the costs of capacity improvements. investment decision Evaluation Process. BNSF makes capacity investment Figure 3.3. BNSF investment evaluation decisions based on a four-step process. Each step is conducted process.

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32 a borderline capacity improvement more financially viable 1. Capacity improvements, for the railroad, BNSF employs a separate process, shown in 2. Reliability and velocity improvements, Figure 3.4, for finalizing public-private partnership opportu- 3. Opportunities to implement positive train control, and nities. This process starts between Steps 3 and 4 of the process 4. Increased rapport and understanding between BNSF and described in Figure 3.3, and includes planning, program- the public sector. ming, and implementation strategies both for BNSF and the public-sector partner(s). These benefits, their measurements, and the tools used to measure them are summarized in Table 3.2. Benefit Estimation. BNSF, like other railroads, typi- cally uses benefit/cost analysis to evaluate potential capacity improvement projects because BNSF considers NPV to be Case Study--Port of Portland, Oregon the single most important indicator of a potential project's Overview. Created by the Oregon Legislature in 1891, viability. The NPV is calculated over a 30-year timeframe, the Port of Portland now operates four airports, four marine and the railroad uses a standard discount rate across all pro- terminals, and four industrial parks in the Portland metro- posed projects so NPVs can be compared consistently across the politan area. The port also is charged with maintaining the network. Therefore, the process for selecting potential projects navigation channel on the lower Columbia and Willamette to be funded by BNSF's own capital improvement program is Rivers. The port is organized as a regional government, with relatively straightforward. Those projects that have a desirable a jurisdiction that includes Clackamas, Multnomah, and NPV and are consistent with the strategic goals of the railroad Washington Counties. It is governed by a nine-member com- are selected for completion; those that do not meet either of mission, members of which are appointed by the governor those criteria are not. and confirmed by the Oregon Senate. Board members serve The process is more nuanced when potential public- 4-year terms and may be reappointed. Day-to-day port oper- private partnership opportunities are evaluated because ations are handled by an executive director hired by the com- public funding can make some borderline projects (as evalu- mission, who oversees a staff of division directors for various ated by BNSF) more viable for completion if the public and business units, such as Marine and Industrial Development private benefits are commensurate with costs. When evaluating and Aviation. a public-private partnership project, there are four benefits that The Port of Portland directly employs about 800 people BNSF considers: and operates 24 hours a day, 7 days a week. Its transportation Source: BNSF, July 2007. Figure 3.4. BNSF public-private partnership evaluation process.

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33 Table 3.2. Benefits weighed by BNSF when considering a public-private partnership. Benefit Measurement of Benefit Tools Used Capacity Improvements The impact of the proposed project on RTC Simulation Model the capacity of the BNSF network Reliability and Velocity Improvements Improvements in travel time, RTC Simulation Model reliability, and average train speed Opportunities to Implement Positive Expanded use of positive train control N/A Train Control Technology technologies across the network Increased Rapport and Understanding Enhancing the relationship between the N/A between BNSF and the Public Sector railroad and government agencies infrastructure and real estate assets are worth about $1.6 bil- project objectives, fixed assets created, and any alterna- lion, and generate about $250 million in revenue each year. tives that exist for the project; Indirectly, port operations support over 33,000 jobs with Cash flow and financial analysis, which describes $1.92 billion in employee earnings, and generate more than the projected cash flow associated with the project and $180 million in property taxes in the region. financial indicators, such as NPV, modified inter- nal rate of return (MIRR), and discounted payback Evaluation Process. The Port of Portland relies on the period; following two planning documents to guide its investment Authorization Form, which combines the financial decisions: information summary with an engineering estimate and approvals from different port managers; and The Port Transportation Improvement Plan (P-TIP) Project Setup Form, which compiles all of the above serves as the long-range, multimodal planning document and includes organizational information for the project, for the port and is updated annually. The purpose of the such as the personnel required to complete it and when plan is to organize transportation improvement needs on they would be needed. port property into one place; its goal is to maintain the strategic advantage of Portland's transportation system Benefit Estimation. Once the Project Setup Form is by meeting the surface transportation access needs of complete, port staff rank the project using two indices and a businesses and passengers. The key objectives of the P- project status classification, which are shown in Table 3.3. TIP are the following: Although these indices and project classification schemes are To identify the surface transportation needs of the port helpful for organizing possible projects, they are not the pri- over a 5-, 10-, and 20-year timeframe; and mary determinant in prioritizing projects. Rather, the process To develop a long-range vision of the financial im- to select projects for the 5-year capital plan uses the indices and plications of transportation system investments, to classification system to organize the projects into an easy-to- be integrated into the 5-year capital plan (described understand framework. Once they are organized, the following below). steps are taken: The Five-Year Capital Plan is used to implement the strate- gies identified within the P-TIP. It serves as a 5-year capital The quantitative merit of the project is evaluated using the improvement plan for the port. Any project that benefits Primavera Prosight tool. the port and is expected to cost more than $5,000 must be A series of teams and commissions discuss available projects, included in the 5-year capital plan. Projects appearing in the consider the preliminary quantitative benefits of the proj- Capital Project Plan go through a rigorous evaluation ects, and prioritize them into the 5-year capital plan. A sub- process. The first step is for the project sponsor to fill out a team is responsible for putting together the project Project Setup Form, which consists of the following four budgets and estimating their costs and benefits. Once the elements: preliminary list is put together, the subteam brings it to the Scope and justification, which includes a description of port directors for approval. Finally, the list is put in front the project, its justification, and why it currently is impor- of the port commission for discussion, possible alteration, tant, as well as business impacts and risk identification, and approval.

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34 Table 3.3. Port of Portland project evaluation and ranking tools. Rankings Description Priority Index High Projects that are critical to meet legal, regulatory, and customer contractual commitments and that the port already has approved Medium Projects that address the specific business plan of the department and are needed to maintain and build the port's assets Low Projects that are discretionary in nature and are not vital to maintain the health of the organization Category Index Category 1 Legal/regulatory/contractual/mandate Category 2 Maintenance/replacement Category 3 Business development (discretionary) Category 4 Indirect benefit to the port (benefits to the community or region) Project Status Open Projects that are approved for expenditure Candidate Yes Projects that have resources devoted to them to develop their business case Candidate No Projects that are primarily theoretical, with no business case or quantitative data to support them Service Provider Watco has developed a separate process to assess capital improvement and growth projects. Typically, this process starts As discussed earlier, service providers provide transporta- at the regional marketing manager level, when projects are iden- tion or logistics services for freight shipments. The following tified and brought to the attention of the general manager and case studies describe the processes, data, and tools used by a regional analyst. This analyst proceeds to populate and run a Watco Companies (focused on its shortline rail operations) return on investment (ROI) model to assess the financial wor- to evaluate infrastructure investments. thiness of the project. This tool first considers the various costs to the railroad that will be caused by the project, and then com- Case Study--Watco Companies pares them to a series of financial performance indicators. If the project makes it past this first analysis, it is brought Overview. Watco Companies, Inc. is an integrated to the regional controller. If approved regionally, it is put in transportation service provider, offering services, including front of the executive team, which is composed of the Watco transload and intermodal services, property management, Companies management team, including the CEO, presi- switching services, and railroad service. Currently, Watco Com- dent, CFO, COO, etc. The management team is then respon- panies also owns and operates 20 railroads, comprising some sible for prioritizing the projects and creating a list of projects 3,500 miles of shortline railroad track in 17 different states. that are feasible within the yearly capital budget. Evaluation Process. Watco railroad operations conduct Benefit Assessment. To help guide maintenance and oper- different processes to evaluate maintenance and operational ational investments and to calculate the track risk ratio, Watco projects and capital improvements and growth projects. For railroad created and uses a Track Risk Analysis tool, which has maintenance and operations improvements, Watco assesses three primary impacts: the status of the railroad system as a whole, as well as every link within the system. This effort results in an average rating of the 1. Traffic (i.e., the capacity of the system, and flow of traffic system as a whole, as well as a "risk ratio" for each individual over it); link. The system risk analysis process allows the railroad to 2. Safety, including derailments, injuries, and experience of highlight problematic or potentially problematic segments, staff; and and identify portions of the system that require maintenance 3. Commodities, including the type of commodity being car- or operational improvements. The analysis is performed at ried (i.e., hazardous material [hazmat], special needs com- least twice a year, although Watco prefers to perform it on a modities), as well as the value of the commodity, and the quarterly basis, if possible. value of the equipment being used to haul the commodity.

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35 Each of these factors is weighted to allow Watco to focus Evaluation Process. Clearly, every G&E client is different investments on high-density lines, or on lines that handle spe- and has different needs--the site location requirements of a cific (or higher-revenue) commodities. It is important to note cookie manufacturer are much different than those of a call cen- that safety is weighted higher than the other two impacts when ter or other service-related industry. However, the "big three" creating a ratio for each link. One of Watco's core beliefs is that elements that G&E considers when advising clients are labor, it should operate with injury and derailment rates that are transportation access, and tax structure. Regardless of business lower than average. In addition, they have found that lowering type, however, clients are interested in being located close to the rate of injuries and derailments is a significant cost savings the Interstate System, and rail access and service are becom- to the company. ing increasingly important. The specific evaluation process is As discussed, Watco uses an ROI model to assess capital described in Figure 3.5 and is guided by the following three improvement and growth projects. The costs and financial per- principles: formance measures considered within this tool are summarized in Table 3.4. Understand client needs--As described, each client has dif- ferent locational needs, depending on factors like distance End User from distribution points, current and future markets, shelf life of products, locations of key suppliers, and even poten- As described earlier, end users include both shippers/ tial workforce/labor pool turnover. For instance, some consignees, as well as end customers for finished goods. clients will only locate in areas that have a population greater Although these stakeholders are critical in influencing freight than 50,000. In other areas, relative location to key markets demand, previous research efforts have not fully documented is critical. Still others like to locate close to suppliers (cookie the process they employ when making freight investment manufacturers close to grain suppliers, for instance). The decisions and what role they play in the process. The follow- first step G&E makes is to develop a detailed understanding ing sections describe the processes used by two end users-- of client needs and requirements. a commercial site selection firm and a major shipper--in Conduct locational analysis--Using the information evaluating freight investments. collected in Step 1, G&E will conduct a locational analy- sis, which helps identify the most desirable location for Case Study--Grubb & Ellis Strategic expansion/relocation. Several elements are taken into Consulting Group account, including: Demographics, such as workforce availability, education Background. The Grubb & Ellis Strategic Consulting levels, commuting times, etc. Data to guide this element Group (G&E) provides business location services, expansion are derived from Claritas, a proprietary data set that takes or relocation analyses, and advice on optimal locations for 2000 Census data, updates it (to current year), and pro- businesses (both goods dependent and service-related). The vides disaggregated information on a variety of demo- group is not involved in real estate transactions. However, graphic areas. they provide strategic advice to businesses, including manufac- Average wages/cost of living, which is used to paint a turing businesses, that could lead to transactions in the future. picture of potential cost structure for labor. In effect, they provide the planning function in advance of a Transportation, specifically travel time (to key distribu- transportation infrastructure investment. tion points, shippers, etc.). G&E uses drive-time software Table 3.4. Costs and financial performance indicators considered in the Watco ROI model/tool. Costs Financial Performance Indicators Additional Equipment Needed for New Infrastructure/Service Additional cash flow Jobs Created or Lost Timeframe to pay back investment Additional Crew Times Needed Revenue Additional Fuel Usage and Costs Performance economic value added* Additional Maintenance Costs Construction Costs * Economic Value Added (EVA) represents a more accurate accounting of profit, and can be calculated as [net profit] [opportunity cost].

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36 1. Location Analysis Interesting local or statewide incentives, even access Decision-Maker: Grubb & Ellis analysts improvements, usually are not deal makers or deal breakers. Tools: Logistics network analysis Instead, they are sweeteners. Most decisions are driven by the Issues Evaluated: Optimal location without regard to costs aforementioned big three (labor, transportation, and taxes); 2. Qualitative Community Analysis and are not appreciably influenced by incentive programs. Decision-Maker: Grubb & Ellis analysts Tools: Preferences and requirements for suitable locations, provided by clients Case Study--Large International Issues Evaluated: Vary according to client needs. Primary areas Shipper/Beneficial Cargo Owner of evaluation include: Labor Pool Availability, competition, labor laws, etc. Quality of Life/Business Cost of living, climate, crime, etc. Overview. This case study is based on discussions with an Accessibility/Logistics Distance from key locations, distance from potential employees, security, etc. interviewee that requested anonymity and will be referred to as Operating Environment Infrastructure, support services, market growth potential Beneficial Cargo Owner (BCO). The business model of BCO is to sell and ship its product to retailers within the United States 3. Community Cost Analysis and globally. Although BCO does some direct retailing, this Decision-Maker: Grubb & Ellis analysts only accounts for about 12% to 15% of its annual business. The Tools: Analysis of total operating costs in selected communities, associated with the following: vast majority is distributed/sold to retailers around the world, Wage rates and payroll expenses including almost 160 countries. BCO is responsible for the ship- Transportation Corporate income, property, and inventory taxes ment of about 60,000, 40-foot equivalent units (FEU) annually, Utilities and telecom Lease rates of which about one-half remain within the United States. State and local development incentives BCO is mostly involved in contract manufacturing, and min- Issues Evaluated: Overall operating costs in potential locations imizes its ownership of manufacturing or distribution facilities. 4. Delivered Costs Analysis The company believes that its core competencies are product Decision-Maker: Grubb & Ellis analysts development and marketing, and attempts to minimize the Tools: Pro-forma financial analysis based on operating costs in infrastructure or facilities that it owns or operates. However, the potential communities Issues Evaluated: Total delivered costs per unit for potential company does maintain two distribution centers in the United distribution centers located in each community States, which are located strategically close to large population 5. Final Decision centers/markets. Decision-Maker: Company Executives and Board of Directors Due to the multinational nature of this BCO, the decision- Tools: Delivered Cost Analysis prepared by Grubb & Ellis making process has been divided into four regions (Americas, Issues Evaluated: Total business costs in potential locations Asia/Pacific, Africa, and Europe), however, all responses and Figure 3.5. G&E site selection evaluation information contained in this section pertain to the supply process. chain and processes for the Americas. Evaluation Process. Most of the freight investment deci- called Freeway, although other options exist. G&E supple- sions made by this company involve changes or improve- ments this information with a variety of other sources. For ments to their supply chain--from source to delivery at the instance, some clients like to be close to major airports, so customer. BCO seeks to maximize the efficiency of its supply G&E collects data from trade groups, Bureau of Trans- chain and employs many logistics professionals who are ded- portation Statistics (BTS), and other public sources to icated to minimizing the time and costs of the international develop a comprehensive picture of transportation system and national supply chains. Given the size and complexity of performance in a region and at a particular site. this company's supply chains, there is not one, single evalua- Tax structure and utility costs, which are available from tion process that is used prior to making decisions. In fact, the local economic development agencies and other sources. company stresses the flexibility of its evaluation process to Utility service boundaries are important to know. Utility respond to the different types of investment decisions that costs can be difficult to obtain from areas without regu- may arise. However, there are certain steps that are generally lated utilities. included in the process, as follows: Other elements (depending on client), including crime rates, day care availability, number of restaurants, etc. All Tracking and monitoring supply chain performance-- this information is brought into a GIS system to show The tracking of supply chain performance currently is one locational preferences. of the BCO focus areas, and is growing steadily in sophis- Decide and negotiate--Following a pro forma financial tication. BCO recognizes that delays and unpredictable analysis, a location decision is made and negotiations begin. shipments have significant impacts on the inventory require-