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48 Economic demand estimation and forecasting--Eco- may include insurance, permitting, design, and construction, nomic demand estimation is a statistical tool that allows for among others. Table 3.7 outlines the general types of risks that determining the level of demand for a service or good are accounted for and the parties that may take responsibility. based on a host of independent variables. Variables to Each conceived risk should be collected and quantified in a forecast a dependent variable such as truck volume may detailed risk matrix as shown in Table 3.8. The basic elements include local demographics, fuel prices, tolls, regulations, may include and local shocks and events. Such a forecast exercise may generate the revenue and cost factors that may feed into a An explicit explanation of the risk event or scenario accom- financial analysis model. panied by logical and achievable remedies and solutions, Technical advisory--In the case of private concession- A rating of the potential of the occurrence of such a risk, aires, a technical advisor may review documentation and The party primarily responsible for the risk, and perform on-site inspections of physical infrastructure and Percent share of the risk by party along with the dollar facilities in order to understand the state-of-good-repair value of the cost. standards, which in turn contribute to the overall under- standing of costs associated with maintenance, rehabilita- As a part of evaluating investments, a common practice is to tion, and replacement. By thoroughly reviewing all factors develop forecasts, which carry an obvious degree of uncertainty. related to operations and maintenance, costs can be opti- Risks can be technical and financial, including cost over- mized. The quantitative product of a technical advisory runs and benefit shortfalls. Monte Carlo methods can be used exercise may include a thoroughly developed cost model to simulate the various sources of uncertainty that affect the that feeds into the private party's financial model. outcome of projects, with respect to costs or benefits, and cal- Financial model--A financial model combines the eco- culate an average expected value for the given possible values of nomic and technical aspects for developing a baseline sce- the components. Risk analysis involves the following steps: nario, which provides measures of the feasibility and health of a project. A key indicator from the financial model is the Identification of the key input variables that affect the internal rate of return (IRR), which is the discount rate that baseline forecasts, sets the NPV of all cash flows equal to zero. It is a common Definition of the probability distributions around each key measure for investments that may produce multiple cash variable, flows over a period. As such, it can be found not only for Definition of the sensitivity functions for each variable, equal, periodic investments but for any series of invest- and ments and returns. This makes IRR an attractive approach Running iterations of the model to determine the average in the private sector. However, this method is problematic, outcome. because it assumes that all of the intermediate cash flows can be discounted/reinvested at the IRR. This is particu- 3.5 Data and Tools Summary larly unrealistic when the IRR is very high. This method also is sensitive to the sequencing and timing of invest- Table 3.9 provides a summary of the utility of existing data ments and returns.(2) and tools to estimate the benefits most important to different freight investment stakeholders at different project scales (local/site, statewide/regional, and multistate/national). Risk Evaluation Tools Understanding risks associated with a project involves eval- Key Issues and Challenges of Existing Data uating design and construction, market risk, operation and and Tools maintenance risk, financing risk, insurance, and termination risk. The private sector often is interested in understanding the Existing evaluation tools have limitations that hinder uncertainty that surrounds forecasts and projects. A number their ability to fully assess freight investment benefits. of tools can be consulted to address these risks, including a risk There are a number of issues that limit the effectiveness of allocation matrix and due diligence financial and technical existing evaluation tools in assessing benefits across all freight risk analysis through statistical means. investment and stakeholder types. For instance, the reliability When engaging in public-private partnerships, a common measures used for public investments, which are calculated practice is to develop a risk allocation matrix that clearly out- by the transportation efficiency tools described above, often lines categorical risks and the responsibilities of each party. do not do justice to freight investments. The reliability meas- Risks are allocated and quantified to clearly describe the various ures embedded within these tools often use average measures scenarios, costs, and responsibilities involved. Areas of concern of delay and, as a result, can miss that sometimes an addi-

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49 Table 3.7. Types of risks and risk allocations. Risk Private Public Legislative Sharing within defined parameters Major responsibility (Existing and Future) Acquisition and Sharing within defined parameters, Major responsibility Environmental with public-sector assistance Permitting and Planning Sharing within defined parameters Major responsibility Design and Construction Major responsibility Operation and Maintenance Major responsibility Sharing within defined parameters Financing Major responsibility Termination Major responsibility, unless demonstrably caused by public Insurance Major responsibility Sharing based on availability of commercial rates Force Majeure Sharing based on event and Sharing based on event and availability of insurance availability of insurance Source: Halcrow, Inc. Table 3.8. General template of risks. Inputs Input Overall Risk Characteristics Category of Risk Risk Type Description Event/Scenario Being Addressed Party Primarily Bearing Risk - Party 1 Risk Share Y% - Party 2 Risk Share X% Risk Value (in USD) Dollar Value - Annualized Value at Risk ($k/yr) Dollar Value Optional Additional Risk Controls Remedies and Proposed Solutions - Party Best Able to Direct Mitigation Party X - Effect of Additional Risk Controls on Level of Risk High, Medium, Low - Residual Risk Percentage - Annualized Residual Value at Risk ($k/yr) Dollar Value - Basis for Risk Allocation Unit of Measure Party-Specific Risks Party 1 Percent Share of Risk - Pre-Mitigation Risk Dollar Value - Post-Mitigation Risk Dollar Value Party 2 Percent Share of Risk - Pre-Mitigation Risk Dollar Value - Post-Mitigation Risk Dollar Value Source: Halcrow, Inc.

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50 Table 3.9. Adequacy of existing data and tools to measure benefit types (by stakeholder). Stakeholder Types Asset Service End Other Impacted Benefit Type Benefit Scale Provider Provider User Party Capital Costs Local/Site Statewide/Regional Multistate/National Maintenance Costs Local/Site Statewide/Regional Multistate/National Operating Costs Local/Site Statewide/Regional Multistate/National Capacity Local/Site Statewide/Regional Multistate/National Loss/Damage Local/Site Statewide/Regional Multistate/National Scheduling/Reliability Local/Site Statewide/Regional Multistate/National Business Productivity Local/Site Statewide/Regional Multistate/National Tax Revenue Local/Site Statewide/Regional Multistate/National Economic Local/Site Development Statewide/Regional Multistate/National Environmental Local/Site Quality Statewide/Regional Multistate/National Data/Tools Adequate Data/Tools Inadequate Data/Tools Not Required for This Stakeholdder tional minute or two of delay for freight causes a "missed day" must be addressed, often under alternative scenarios of capac- or a "missed shipment," resulting in impacts that are much ity enhancement (i.e., added sidings for meets and overtakes, larger than the additional minute would imply. double-tracking, general track upgrades to permit higher In addition, these tools do not effectively integrate com- speeds, traffic control improvements). Existing evaluation plex freight and passenger shared use issues and implications, tools do not effectively manage these and other types of shared particularly for rail investments. Although freight and pas- use issues and impacts. senger shared use is a given on the highway system, passenger Finally, the tools available for use by public-sector agencies needs often drive public-sector highway investment decisions often rely on data that are proprietary to private-sector service and few existing tools assign any difference in time or cost providers. When evaluating rail projects, for instance, these savings associated with empty versus full trucks, or differences tools need detailed information on volumes, commodity types, by type of commodity being carried--factors that are signifi- track speeds, and operational strategies. In addition, these mod- cant when assessing public and private benefits. In order to els rely on an accurate, validated network replication--with all arrive at an agreement for shared use on the rail system, the of the appropriate attributes--in order to provide useful infor- operational impacts of both passenger and freight interests mation and outputs. As a result, many public-sector agencies

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51 cannot effectively utilize these tools, making it challenging to for evaluating cross-jurisdictional benefits and impacts with develop independent assessments of potential benefits for use which all levels and types of stakeholders are comfortable. In in public-private partnerships, negotiations with carriers, or the addition, the institutional arrangements to facilitate multistate support of freight-specific investment decisions. analysis and investment decision-making do not yet exist, mak- Assessing multijurisdictional benefits is difficult. ing it difficult for such regional improvement projects to move It remains difficult to determine how costs, risks, and ben- beyond the planning stage. efits should be shared among different public-sector partici- There is no single analytical tool that is useful to all pants. This is particularly true for nationally or regionally of the participants in the freight investment decision- significant infrastructure investments, which often involve a making process. number of federal, state, regional, and local agencies, author- Differences in the types of benefits assessed by different ities, and entities. types of freight investment stakeholders, as well as differences There are some limited examples of multijurisdictional tools in when these benefits are assessed within the decision-making or processes that could be used to evaluate multijurisdictional process, naturally result in a number of different tools to sup- tradeoffs and benefits. The I-95 Corridor Coalition's ICAT tool, port the freight investment decisions of different stakeholders. for example, is an effort to consolidate and standardize existing There does not exist a single analytical tool to meet the benefit transportation data, offering a single source of information to assessment needs of the full array of public and private freight guide multistate transportation planning efforts. In addition, stakeholders. In addition, there is no common framework or there are a number of regional economic models (described set of coefficients and measures that allow for an apples-to- previously) that are useful in identifying the regional economic apples comparison of projects among different stakeholders. impacts and benefits associated with freight system improve- Each stakeholder uses its own, independent analysis of poten- ments. However, there does not yet exist a common framework tial projects using its own measures.