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4: GUIDE FOR ECONOMIC ANALYSIS
OF TRANSIT PROJECTS
OVERVIEW
This chapter explains the guiding principles and procedures that were used
in conducting economic analyses for the accompanying case studies of the
consequences of immobility. Drawing on the case studies for illustration, the guide
outlines the approach to economic analysis in enough detail for the average well-
informed person with some grounding in economic theory first to understand the
approach, and second to replicate the approach either for past, for ongoing, or for
future projects. The aim is to provide enough structure for finding and calculating
transit costs and benefits that no important costs or benefits will be overlooked or
underestimated. This process requires both creative imagination and economic
rigor.
There are a number of purposes for which economic analysis can be utilized.
Perhaps most importantly, the results of the economic analysis process described in
this chapter can be used by policy makers in making informed transit investment
decisions by comparing the transit benefits and costs of a specific proposed project.
For proposed projects where quantified benefits clearly outweigh the costs, the
economic analysis can be utilized to build support for budgets that provide sufficient
public transportation funding overall. The recommended steps for economic
analysis described below can be applied by transportation practitioners to:
.
\
Determine if a proposed transit mobility project has sufficient benefits to
justify the costs of the project. The methodology provides a means for
determining who is benefiting from a proposed project, and how those
benefits can be valued.
Evaluate ongoing projects to determine if a project has been successfi~1 in
economic terms. The practitioner can determine if proposed
modifications to a transit project would increase benefits relative to the
costs of the proposed changes.
Provide a basis for comparing alternative projects. For example, for a
local sales tax measure, the economic merits of a transit project that
improves mobility for the transportation disadvantaged can be compared
with the economic results of a highway investment.
Analyze the impacts of transit service reductions on the transportation
disadvantaged. The economic costs of such reductions can be compared
to cost benefits of the service cutbacks.
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Five sequential steps are recommended for these types of economic analysis,
as shown graphically in Figure 4-~.
Figure 4-1: Recommended Steps for Economic Analysis
Step 1
DESCRIBE PROJECT CHARACTERISTICS AND COSTS
1 . 1 1 _
Step 2 Step 3
SELECT ECONOMIC FEATURES, DETERMINE PROJECT PATRONAGE,
UPDATE UNIT COSTS IDENTIFY MOBILITY BENEFITS
Step 4
ESTIMATE EFFICIENCY BENEFITS OF PROJECT
1
. .
Step 5
CALCULATE AND INTERPRET ECONOMIC INDICES
In step 3, mobility benefits refer to benefits from transit trips that would not
be made without the availability of transit. Efficiency benefits, in step 4, result
from the shift of trips from automobiles to transit, which typically improves the
efficiency, safety, and environmental performance of the highway transportation
system. Each of these five steps is explained in turn below, and special terms are
defined in the accompanying glossary. Both the definitions and the steps of the
economic analysis process are adapted from the current US guidebook on
transportation user benefits(43) plus a recent comprehensive paper on the subject
by the Victoria Transport Policy Institute.~44)
STEP 1: DESCRIBE PROJECT CHARACTERISTICS AND COSTS
The principal items of information needed for initiating an economic analysis
of a transit improvement project are summarized below and discussed in turn.
Sponsor and purpose of project.
Implementation period and project lifetime.
Locations served and operating plan or plans.
Investment cost.
Annual maintenance and operating cost.
Alternatives to be considered.
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GLOSSARY OF KEY TERMS
Transit or bus operating costs The cost of implementing and operating a transit improvement, including
drivers' wages, vehicle operation and maintenance, managerial labor, and vehicle rental or depreciation.
User costs The sum of relevant transit and highway user costs on a specified improvement. Transit user
costs generally consist of fares, any costs of getting to a transit stop or terminal, and the value of time
accessing, waiting for, and riding on the transit vehicle. Highway user costs are the sum of vehicle
running costs, the mileage-related cost of owning a motor vehicle, and the value of travel time. User
benefits are usually net savings in user costs.
Mobility benefits Benefits from transit trips that would not be made without the availability of transit.
Efficiency benefits Benefits resulting from the shift of trips from automobiles or other modes to transit,
which typically improves the efficiency, safety, and environmental performance of the transportation
system.
Incremental or marginal costs The net change in dollar costs directly attributable to a given transit or
highway improvement, decision, or proposal compared with some other alternative, usually the existing
situation or "do nothing" alternative, but possibly some other, lower-cost alternative.
Analysis period or study period The number of years chosen for consideration and study of incremental
benefits and costs in an economic analysis. The year of implementation is usually designated year 0
(zero). The year operations commence is year 1, and subsequent years are year 2, year 3, etc.
Discount rate An annual percentage figure that represents the rate of interest that money invested in an
improvement could earn over the analysis period if invested in other opportunities (the opportunity cost of
capital), or not spent, or in the case of governments, not even raised in taxes or not borrowed.
Internal rate of return An interest rate that would return the estimated benefits of the project from
investment of the cost of the project.
Benept/cost ratio Present or annual value of project benefits divided by present or annual value of
project costs, recommended as the best single figure of economic merit for public transportation projects.
Net present value Present or annual value of benefits minus present or annual value of costs.
Present value The translation of costs or benefits that occur in different time periods to a single
equivalent amount at a single instant, usually the beginning of year 1 of the analysis period, at the
specified discount rate.
Equivalent uniform annual value, or simply annual value The translation of costs or benefits into a series
of equal annual payments at the chosen discount rate for the project.
Compound interest factors Multipliers for determining present values and equivalent annual values from
annual or periodic cash flows, which can be found in any standard text for microeconomics or engineering
economy, the two academic disciplines that guide this type of economic analysis. Or, buy a pocket
financial calculator.
Sensitivity analysis An evaluation of alternative assumptions about the numbers in an economic analysis
that are most crucial or uncertain, to demonstrate what the effect will be on the economic merit of the
project.
Equity Substantially equivalent treatment of persons in the same circumstances, and appropriately
different treatment of persons in different circumstances.
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First, the sponsor: who all is paying for the project, and who is implementing
it? To what end or purpose? To the extent possible, the economic analysis should
measure benefits that are related closely to the purposes of the project. On the
other hand your inquiries could help clarify the purpose of the project in terms of
~ 7 ~
. ~ ~ ~ . . ~ . _. _ ~ 1 1 ~ ~ _ 1 _ 1__ _ ~ ~ _ ~ _~ 1 _
the benefits that you can measure, especially moolllty and emclency goals.
Next, how much time will be required to implement the project, if it's not
already begun? Then how many years of legal authorization or funding is assured?
Is the funding level, indexed to Inflation, or demand driven, and how is it likely to
change during the life of the project?
What does the operating plan call for in terms of urban, suburban, and rural
locations served, frequency or timing of service, speed or schedules, fares, capacity,
and any other important variables? If there is more than one plan (for example,
expanding capacity by either 10% or 15%), consider the plans in order of increasing
cost and what exactly any added features (in this example, the extra 5% capacity)
cost and produce, in revenues and benefits, so that each separable increment of cost
can be evaluated separately.
Does investment cost include the price of vehicles? If so, it is usually more
convenient to treat vehicle costs as annual depreciation or rental, hence part of
operating costs. Are there any non-transportation costs that should be considered?
For example, any relevant job training costs should be included in project costs if
the monetary benefits of jobs resulting from a new transit service are being
evaluated.
How should you document annual maintenance and operating cost?
Encourage the sponsoring agency to 1) fully disclose and carefully identify or
estimate all operating costs associated with particular projects, and 2) clearly
specify the proportion of total operating cost met by different funding sources, such
as fares, charter service revenues, business subscriptions or donations, and
government sources. This is especially important because only the government or
"public" cost of the project, net of fares and other commercial revenues, should be
counted as project costs. For future projects, you will of course have to rely entirely
on estimates of future costs and revenues. These estimates should be guided by
experience with similar projects, either by the sponsoring agency or elsewhere.
Lastly, to what alternatives should the project under study be compared?
Usually the alternative chosen for comparison with the primary alternative is the
status quo, appropriately called the "do nothing" alternative. One important
variation is comparison with a lower-cost and mutually exclusive alternative, with
which both the incremental costs and benefits of the primary alternative should be
compared. Another variation is to consider a higher-cost alternative that would
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have to be undertaken if the basic project is terminated. Then the difference
between the two costs is the saving or benefit from the project.
Table 4-l presents both information on the alternatives used in the case
studies and some key reference information about the economic analyses for the
case studies that is useful for understanding their similarities and differences. For
example, average trip length varied over a range of 5 to 40 miles; and the average
number of users for the service studied varied from 106 to 43,639. The setting of
the studies was diverse, with two rural, two suburban, and three urban locations.
Transit dependence (percentage of users whose only alternative was transit) was
only measured by surveys in the PDRTA and SEPTA case studies, where
respondents with no auto alternative were 71.~% and 63.3%, respectively. Similar
rates were suspected but not documented for the other case studies.
Table 4-1
Selected Case Study Data
Average
One-wayAverage DependenceComparison
Case StudyMilesUsersSettingPercentageAlternative
-
PDRTA, Myrtle Beach40380/dayRural71.1%Status quo
SEPTA Horsham Breeze19.3444/daySuburban63.3Status quo
MDTA Metropassn.a.3,492/mo.Urbann.a.Paratransit
OATS, Missouri5.925,298/yr.Ruraln.a.No OATS
MTA Immediate Needs5-1113,762/mo.Urbann.a.Status quo
Fremont travel trainingn. a.106/yr.Suburbann . a.Paratransit
AC Transit service cutsn a43 639/davUrbann.a.Status quo
n.a. = not available
The last column of Table 4-! shows what alternative was used for comparison'
with the system or prospect under study. In four cases, it was the status quo, or "do
nothing,' alternative--for PDRTA, Horsham Breeze, Immediate Needs, and AC
Transit service cuts. In other words, the benefits of the project stemmed from the
comparison between doing nothing and the existing transit system configuration.
In contrast, the MDTA Metropass and Fremont travel training case studies were
comparing the existing fixed route service (or training for its use, in Fremont's case)
with the alternative of serving the same population with more expensive
Paratransit service.
The existing OATS system was compared with an alternative without OATS,
in which some passengers switched to rides in autos, usually with others; some
switched to riding other, more expensive Paratransit substitutes for essential OATS
service; and many trips, called "missing," were simply not made. The OATS
economic analysis was the most complex modeling of the comparison alternative
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undertaken in these case studies, while MDTA and Fremont travel training were
the simplest, with the others in between.
STEP 2: SELECT ECONOMIC FEATURES, UPDATE UNIT COSTS
The economic features of the study that need determination are:
The length of the analysis or study period.
The discount rate.
Treatment of inflation, risk, and uncertainty.
Choice of present value or equivalent annual value.
Fifteen years is recommended as the usual analysis period for transit
projects, based on the maximum prospective life of buses before replacement.
Highway project study periods should be keyed to the length of the traffic
projections, usually 20 to 26 years. Rail and other major transit construction
projects could base their study periods on the expected useful life of the resulting
facility if traffic projections are available that far out. Normally a single year,
called the study year, is designated for detailed projections or modeling of project
· me 1 ~ ~
. ~ _ ~ ~
outcomes. then tne study year outcomes are expanded or converted to equivalent
annual values--see below--to represent the results over the entire analysis period.
The recommended discount rate is 4%, to represent the long-term average
cost of capital with no allowance for inflation or risk.
Because inflation is ignored in the recommended discount rate, any future
costs or benefits should be priced at current rates. Because risk is ignored, any
unusually risky projections of costs or benefits should adopt one of three strategies:
1) specify a range of possible outcomes rather than only the average or most-likely
value, or 2) specify a higher acceptable threshold value for the economic index (for
example, a minimum benefit/cost ratio of at least 2.0 rather than 1.0), or 3) include
a sensitivity analysis that reveals the effects of possible variations in the underlying
assumptions. A sensitivity analysis is usually preferred, as it provides the reader
with quantitative information that he or she can use to assess the effects of a
specified range of uncertainty. For example, see the last section of the economic
analysis for the OATS case study.
Usually it is more convenient in transit studies to convert all costs and
benefits to equivalent annual costs or benefits, because they almost all originate as
annual amounts anyway. The main exceptions would be vehicle acquisition costs,
which can readily be restated as average annual depreciation or rental charges. For
projects of short duration, such as the five-year Fremont travel training study,
present value can be a logical choice.
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Note that vehicle costs have been ignored in these case studies, for two
reasons. First, vehicle costs are relatively minor on an annual basis, typically
around 10% of full operating costs. Second, the cost of vehicles is sometimes
difficult to relate to individual projects through a transit agency's accounting
system because vehicle costs are not usually included in the operating budgets.
And, in the taxi voucher and bus coupon distribution activities of the Immediate
Needs program, vehicle costs are not even relevant.
Updating unit cost factors is a routine but important part of economic
analysis. Any users of the factors in this report should either consult a current
source for the prices or utilize the ratio of relevant price indexes in the year of their
study compared with the index for the specified year for the cost factor. A summary
of illustrative cost factors, most of them used in the case studies, is presented in
Table 4-2.
Table 4-2
Illustrative Unit Cost Factors
Item (& Case Stuily) Value
1. Automobile operating &
ownership costs (OATS)
2. Value of travel time (AC
Transit & OATS)
3. Average annual cost of one
suburban parking lot space
(Horsham Breeze)
4. Average Medicare costs for:
Hospital stay
Skilled nursing stay
Ambulance trip
(Immediate Needs)
5. Average cost of nsit to doctor by $84
Medicare patients (OATS)
6. Job training costs per student
hour (Immediate Needs)
$.41/mile
$.31/mile
$264
$13,296
$2,240
$117
$11
Year
1997
1997
1997
1996
1996
1996
1996
1993
1997
Source
ALA, Your Driving Costs, adjusted
to a 10-year vehicle life.~45)
Same source, adjusted further to
delete time-related costs(46)
Current US minimum wage
KPMG, Commuter Choice
Initiative, June 1996, p. 36
Medicare State Summary,
1996, Health Care Financing
Division, Office of Information
Services, Enterprise Data-Based
Group, Division of Information
Distribution
Dr. Gregg Meyer, New England J.
of Medicine, 12/18/97, p. 1819
Telephone poll of selected job
training providers in Los Anaeles
For item 1, auto operating and ownership costs, the higher cost of $.41/mile is
the total estimated cost of owning and operating a motor vehicle. This figure is
appropriate for transit-dependent riders who have given up their car to ride transit--
or vice versa, who would have to buy a car or another car if they stopped riding
transit. The second, lower cost factor of $.31/mile(47) is appropriate for transit
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riders who have a car that they could use, because that cost factor includes only
mileage-dependent costs, as explained in footnote 46. Please note that:
The 1997 IRS allowance of $.31/mile for business travel on income tax
returns coincides with the lower cost factor, whether fortuitously or
intentionally.
These cost factors are about four to six times the typical cost of about
$.07/mile for fuel that is misperceived by many drivers as their total cost of
. .
c .rlvmg.
The average cost per vehicle mile of parking and tolls should be added to
these figures if local data are available for such costs.
For item 2, the value of travel time, higher values than $5.15/hour can be
used if there is evidence that the average income levels of your transit riders would
justify the increase. Significant benefits attributable to travel time valuation should
generally be identified separately in the summary of project costs and benefits. The
value of travel time is not an economic cost for people who are not losing work time
and wages due to their travel time, but repeated studies have shown that in their
choices of modes and routes, travelers behave as if they value travel time at some
fraction of their average hourly income; 80% is a representative figure for highway
travelers.~48)
Transit riders' value of travel time depends on the level of comfort and
convenience provided. For example, if bus or other transit travel is comfortable,
riders will be willing to spend from 30% to 100% longer on a transit trip than if they
were driving alone, the higher figure representing the alternative to driving in
congested peak-period conditions.(49) This is equivalent to experiencing benefits of
$1.80 to $7.80 an hour for transit trips with the same travel time by auto, if travel
time is valued at $12/hour.
The other illustrative emit cost factors are less widely used, but should be
self-explanatory. Table 4-4, in step 4, also presents several factors for estimating
the value of efficiency benefits.
STEP 3: DETERMINE PROJECT PATRONAGE, IDENTIFY MOBILITY
BENEFITS
Patronage--the number of riders using the service day by day and month by
month throughout the study period--is usually available directly from transit
agency records and on-board surveys for past projects, and from use estimates for
prospective projects. In some cases, you may have to translate available data (such
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as transit tickets and vouchers distributed--see economic analysis for MTA
Immediate Needs case study) into patronage or conduct your own survey of current
usage. In other cases, monthly or seasonal variations in patronage may need to be
modeled in deriving annual patronage counts (see economic analysis for PDRTA, for
example).
A key twin question for the economic analysis comes next, which can require
more effort to answer than all of the other steps combined: how and by how much
do patrons or other beneficiaries actually benefit, in dollars and cents, from the
project? It has already been proposed that benefits be divided for convenience into
two categories, to distinguish between those arising from trips that would not be
taken without transit service (mobility benefits) and those arising from trips by
passengers shifted from automobiles (efficiency benefits). In this step 3 are
presented examples of both types, with a detailed explanation of efficiency benefits
reserved for step 4.
In some cases, mobility and efficiency benefit data can be derived or inferred
from information available in transit agency records. This was true for three of the
seven case study economic analyses: Fremont travel training, OATS, and Metro-
Dade Transit Agency. In the other four cases--AC Transit service reductions,
PDRTA bus service to Myrtle Beach, MTA Immediate Needs program in :Los
Angeles, and the Horsham Breeze--transit passenger surveys were designed,
pretested, administered, and analyzed to obtain the needed benefit information.
Readers can consult those four case studies for accounts of the surveys and survey
results. Detailed guidelines recommended for surveys of user benefits are provided at
the end of this chapter.
Table 4-3 shows the type of benefits documented for each case study, using
the broad mobility and efficiency categories as the first level of discrimination. The
three types of mobility benefits identified are described below the tabulation.
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Table 4-3
Illustrative Benefits
(thousands of dollars)
Annual Mobility Benefits
Annual Efficienev Benefits
23 $34
service cuts
Job
Benefits
$2,116
Case Study
PDRTA, Myrtle
Beach
Horsham Breeze 1,506
MDTA
Metropass
MTA Immediate 5,066 $4,552
Needs
OATS, Missouri 1,652 3,272 362
Fremont travel
training
AC Transit (8,900)
Medical
Benefits
Shop., parking User
Other Benefits Benefits
Social
Program
So
Employer
or
Provider
C
$61 $2,177
$7,619
4,333
2,542
6
(39,200)
1,563
7,619
13,951
5,588 523
46
13,939
52
4,759 (43,341)
Job benefits resulted from enabling formerly unemployed or underemployed
passengers to reach their job sites. Known costs of job training of passengers
for this purpose in the Immediate Needs program were first deducted from
these benefits. The negative benefits in the case of AC Transit were from job
losses due to the service cutbacks. For OATS job benefits include the value of
missing employment, business, and education trips.
Medical benefits resulted primarily from the avoided costs of more intensive
care, as by continuing to see one's own doctor, but also from being able to stay
mobile and thereby care for oneself at home, from getting bused to nutrition
programs, and from getting meals delivered at home. In the OATS case
study, the average Medicare cost of doctors' visits was used as an estimate of
the minimal value of missed trips to doctors in the absence of the OATS
service. Total medical benefits for OATS were the value of missed medical,
nutrition, and meal delivery tickets.
Shopping and other benefits stemmed from assigning an estimated value of
$4 per round-trip shopping journey (for 93% of the $362,000 total), and a
nominal $2 per recreational and "other" trip, to missing OATS trips of those
types.
One type of expected benefit, for savings in unemployment, welfare, and food
stamp payments, was estimated from survey results in the PDRTA case study to be
$313,000 annually. However, this saving in federal and state costs is offset by the
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loss to recipients of that same amount when they start working. Therefore, this
government saving is noted but not counted in total project benefits, even though it
seems counterintuitive to leave it out.
STEP 4: ESTIMATE EFFICIENCY BENEFITS OF PROJECT
Efficiency benefits accrue to highway users as a byproduct of the millions of
daily trips taken on transit vehicles, mainly through the resulting reductions in
vehicle miles driven on highways. The efficiency benefit estimates for the seven
case studies summarized in Table 4-3 are considered next.
· Parking benefits valued at $23,000 annually in the Horsham Breeze case
study came from potential savings in avoiding the costs of providing parking
to employees who drove prior to implementation of the shuttle service.
.
.
User benefits, mainly from savings in transportation costs, were found for the
Horsham Breeze, Fremont travel training, and OATS case studies. The $39.2
million user loss for AC Transit was the result of added travel costs, chiefly
for taxis, necessitated by the transit service cuts. A sizable $4.3 million user
benefit for the Immediate Needs program represents the value of transit
tickets and taxi vouchers distributes} free by MTC to program participants.
Please note that any new fares paid by transit users in the project ureter study
represent added costs to users that need to be deducted from their benefits.
Social program savings from avoided paratransit expenses for three of the
case studies are listed as an efficiency benefit because they represent savings
to the social welfare agencies that would, in the absence of the service being
evaluated, have had to provide paratransit or other special transportation for
their clients at higher cost.
Employer benefits of $6l,000/year from improved access to the labor force
were estimated in the PDRTA case study as equivalent to the payments that
Myrtle Beach employers make to PDRTA for timely bus service to their sites.
Provider savings of two types were found. The first was savings to OATS of
$623,000 from the value of its dedicated volunteer labor force, which is
unlikely to be available to small, scattered transit and paratransit operators.
The second was savings of $4.S million to AC Transit as a result of their
service cutbacks.
The types of efficiency benefits just illustrated are repeated in the more
comprehensive list in Table 4-4, which includes typical current unit values for most
types of benefit. Examples have been provided above for benefit types ~ through 5
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from the case studies (parking, user, social program, employer, and provider
benefits). Benefit types 6, 7, and 8 (congestion delay reductions, reduced
environmental burden, and roadway related savings) tend to occur for transit
projects that aim to relieve peak-period traffic on highly congested roads. None of
the case study projects had this aim, but many transit projects do, especially in
high-traffic urban corridors.
Table 4-4
Types ~d Values of Efficiency Benefits
Type of Benefit Typical Unit Values
1. Parking benefits, from reduced parking
fees or more efficient use of land devoted
to parking.
2. User benefits, mainly from lower cost of
transit versus single-occupant autos.
3. Social program savings, from reduced or
avoided paratransit costs.
Employer benefits, from improved access
to labor force
Provider savings, from reduced
operating costs or donated services
Congestion delay reductions due to
removal of transit users' autos from
roads.
7.
Reduced environmental burden,
especially air and water pollution.
8. Roadway related savings, from decrease
in highway facility construction,
operating, and maintenance costs.
Parking fee estimates for rural areas, up to $1/day;
suburban areas, up to $2/day; cities, $3-4/day;
CBDs, $6-8/day. Average annual cost of 1
suburban space, $264 (see Table 4-2, item 3~.
Auto cost of $.31 or $.41/vehicle mile (from Table
4-2) versus fares for the transit service under
study.
Single-ride paratransit averaged $15/trip in Dade
County; $25 in Fremont, CA; and $19 in Missouri
(OATS) case studies.
Varies with local circumstances.
Varies with local circumstances.
$.10 to $.30/vehicle mile for peak-period congestion
conditions, depending on severity.
$.042/vehicle mile for air pollution + $.01 for water
pollution = $.052/vehicle mile.
$.05/vehicle mile shifted to transit in short term to
$.10 long term.
Sources: For #1, 6, 7, and 8, Todd Litman, op. cit.; for #2 and 3, this study (as noted in table)
In Table 4-4, the typical unit values shown can be used in the absence of local
information on the values for that benefit. For this purpose, as in Table 4-2 earlier,
the unit values should be updated as necessary from the 1997 values shown. For
the seven case studies, the typical unit values cited in Table 4-4 were used for
benefit types I, 2, and 3 (parking, user, and social program benefits). Benefit types
4 and 5 were calculated from local information.
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A recent study by Donald Camph(50) has examined a very similar list of
efficiency benefits on a national level, finding about $36 billion in total benefits
versus $15.4 billion for the public costs of transit in 1955. The resulting benefi~/cost
ratio of 2.3 makes a strong case for substantial funding of transit from highway filet
taxes, because efficiency benefits are returned principally to highway users or
taxpayers (in the cases of social program savings and provider savings, for
example). A complementary stucly by David Lewis and Michael (~(3onnert51) found
a mobility benefit for US transit riders of $34 billion in 1993, which is 2.2 times the
public cost of transit. In totaZ, accorct7ing to these two sources. national mohiZitv anal
^ ~· ~fin . ~7 7 - . · . 7 . rhea 7 .77. 77 ~
. . . . ~. . . . ~ , _
e~zc~ency Benefits otpuol~c transit are about ¢~/u billion annually, for an overall
benepl/cost ratio of 4.5 to 1.
STEP 5: CALCULATE AND INTERPRET ECONOMIC INDICES
An economic index is the culmination of an economic analysis, the single
measure that summarizes for the reader the economic value of a project, first in
relation to its own internal costs, and second in relation to other projects, which can
be either variations of the examined project in scale or approach, or entirely
separate enterprises. There are three principal indices to choose from:
Internal rate of return
Net annual benefits (benefits minus costs)
Benefi~/cost ratio
The internal rate of return is an interest rate that would earn the estimated
benefits of the project from investment of the cost of the project, assuming
reinvestment of all interim benefits (until the final study year) at the internal rate
of return for the project. This may be a tenable assumption for private sector
projects where a business actually has such opportunities for reinvestment, but it is
unrealistic for public sector projects where, as proposed in Step 2 of this analysis
process, the preferred annual discount rate is 4%.
Net annual benefits, or benefits minus costs, reveal the total excess value
created by a project. They are therefore useful in comparing the overall value to
society of different projects or project portfolios. However, net annual benefits
should not be used as a criterion for project seZectrion, because choosing projects with
the highest net annual benefit first may exhaust the budget with costly projects
that have a lower return per dollar than the set chosen in order of highest payoff
first--in other words, in ogler of declining benefit/cost ratios, the highest ratio first,
then the next highest, and so forth. For this reason, the ratio of benefits to costs is
recommended as the primary economic index, with two cautions:
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If projects contain mutually exclusive alternatives, each increment of cost
should be evaluated separately on the basis of that increment's
benefi~/cost ratio.
Other than economic criteria may dictate the final choice of projects.
To illustrate these two principals, if a new transit service to area A costing
$100,000/year in public funding and offering benefits of $400,000/year has the
option of increasing its initial service levels by $100,000/year with added benefits of
$200,000 (incremental B/C ratio of 2.0, total B/C ratio of 3.0) versus starting an
ir~deperz~ent service to area B for the same $100,000 with benefits of $250,000 (B/C
ratio of 2.5), it is perhaps obvious that the economic preference would be for
enlarging the service to Area B. because only the incremental B/C ratio of 2.0 is
relevant ire deciding how to spend the added $100,000.
Now let's switch the assumptions and find that service to area B has benefits
of only $200,000 while the increase in service to area A would bring benefits of
$300,000, a substantial excess over the service to area B. Then the economic
criterion favors area A, but the transit agency's decision may still go to starting
area B service, based on the principle of equity--treating clients in similar
circumstances similarly. Other noneconomic considerations that may influence
project selection include the competence of the transit agency to undertake a
project, assurance of continued funding availability, environmental benignity, and
public acceptance.
Benefi~/cost ratios also have the advantage of familiarity in public sector
economic analysis, especially in transportation studies where the economic
standard that project benefits should at least equal project costs (a benefit/cost ratio
of 1.0 or more) is well accepted. The California State Department of Transportation
has long required that benefit/cost ratios be calculated for all highway construction
projects included in the State Transportation Improvement Plan, and projects with
a ratio of less than I.0 would have to be extraordinarily attractive in some other
way to gain approval.
Transit projects are often more complex to evaluate than highway projects,
because they can include such a diversity of beneficiaries and the benefits in transit
studies are not as predictable or easily defined as they are in the standard traffic
stream of vehicles on highways. Nevertheless, when the studies are properly
conducted, the relative economic merits of transit projects can validly and usefully be
compared with the economic results of highway investments via benefit/cost ratios.
These comparisons should be invited by transit operators in situations such as the
division of transportation taxes, because the benefit/cost ratios of transit
improvements are fiequently higher than those of highway projects, which are often
in the range of 1.0 to 2.0.
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Table 4-5 presents a summary of economic indices from the case studies that
can also be used to illustrate the preferred nature of benefit/cost ratios for project
comparison and selection. Projects are listed in order of declining benefit/cost
ratios. The Immediate Needs study, though fourth in the list, leads in net annual
benefits with $8.6 million. However, the total net annual benefits of the first three
projects, with higher benefit/cost ratios, is $9.4 million. These results demonstrate
that, based on economic criteria alone, if these first three projects were alternatives
to the Immediate Needs program, choosing them first on the basis of their
benefit/cost ratios would also maximize net annual benefits.
Table 4-5
Economic Indices for Case Studies
Thousands of Dollars
Annual Annual Benefit/Cost Net Annual
Case Study Benefits Costs Ratio (a/b) Benefits (a/b)
a b c c
PDRTA, Myrtle Beach
SEPTA Horsh~m Breeze
MDTA Metropass
MTA Immediate Needs
OATS, Missouri
Fremont travel training
AC Transit service cuts
$2,177
1,563
7,619
13,951
13,939
52
4,769
$79
213
1,580
6,400
6,009
27
48,100
27.4
7.3
4.8
2.6
2.3
1.9
0.1
$2,097
1,350
6,039
8,551
7,930
25
(43,341)
The economic criteria in Table 4-5 verify the substantial economic merits of
the projects evaluated, with one exception. The exception is the case study of AC
Transit service cuts that show only a 0.1 return on investment. Actually, the tables
are turned here somewhat, because the AC Transit investment cost consists of
sacrifices by transit riders, to bring the benefits of lower operating costs to AC
Transit. That only 1/10 of the amount sacrificed by riders was returned in lower
costs to AC Transit is unfortunate, but AC Transit knew of no less painful way to
eliminate their budget deficit. The AC Transit results are a powerful economic
argument for expanding rather than contracting urban transit bus service.
It is also noteworthy that these highly favorable economic results came from
public transit systems that primarily serve the relatively poor, underemployed,
handicapped, and less mobile segments of society) whereas US transit as a whole
(which also shows a high ratio of benefits to costs) serves a broader range of wealth
and mobility in its clientele, especially on rail systems. This suggests that the
economic productivity of public transit is not very dependent on the income levels
served, and could greatly benefit the economy by farther appropriate expansion in
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low income areas Equally important are public policies that help to create more
equitable financing opportunities for public transit, such as the following(521:
.
Allow transit improvement and transportation demand management projects
to compete with highway projects for transportation funding, based on their
· ~
economic performance.
Base automobile insurance and state vehicle registration fees more on Virtual
miles driven.
Encourage employers to give equivalent financial benefits to non-drivers
when they offer free or subsidized parking to their employees.
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SURVEY GUIDELINES
(Referenced in Step 3)
1. Clearly define your survey objectives. A critical first step is determining the type of benefits on
which you would like to gather information. List the type of benefits you would like to quantify,
and determine the type of output you would like to have in order to conduct the analyses. This
will enable you to construct the survey instrument.
2. List the information to be included in the survey instrument. Typical information might include
the trip purpose, fare paid, trip distance and/or travel time enroute, the days of the week such a
trip is usually made, how such trips were made before this service existed (or how they would be
made without it), the time and cost that would be involved in alternative transportation, and any
other financial results of having to find alternative transportation, such as loss of income (at
what monthly wage level?) or shopping opportunities (at what average monthly cost?~. The effect
on unemployment or welfare payments is another type of financial effect that could be explored,
as is the effect on access to transportation for other types of trip purposes.
3. Convert the desired information into a questionnaire that is clear, simple, and as short as
possible. Examples of questions are contained in the sample questionnaires following each of the
four case studies that included rider surveys: AC Transit, PDRTA, MTA Immediate Needs, and
Horsham Breeze.
4. Define your survey sample. Will you be conducting a random sample or will you be conducting a
census of all users? If you are conducting a random sample, as a rule of thumb you should plan
on about 400 questionnaires to achieve a 95~o confidence level with a margin of error plus or
minus 5%. If you would like statistically valid results on subpopulations, you will need to collect
additional surveys; about 400 per subpopulation is a conservative estimate.
5. Decide on the method of distribution for the survey, based on the size and location of the target
survey population. Usually the simplest approach with the best return rate is an on-board
written questionnaire, completed and returned by the time riders exit the tree sit vehicle. Other
options with a lower response rate are a telephone or direct interview survey, or mailback
surveys. Account for the expected return rate in deciding how many surveys to distribute.
6. Conduct a pretest of the survey. Prepare a draft questionnaire, distribute copies with
instructions--ideally to at least No of the desired sample size--and collect the results.
7. Review the results of the pretest carefully for questions that respondents clearly did not
understand. For example, in the PDRTA survey, the pre-survey was not tested due to time
constraints. Respondents were asked: ~7Vhat time did you get on this bus?" and 'What time did
you get off this bus?" in order to quantify the average in-bus travel time from their origin to
destination. Although the question clearly asks about this bus, about 40~o of the respondents
answered the question for their bus to their destination and their return bus from their
destination to their home. The question was not understandable to respondents and needs some
rewording; for example, "For the trip you are making now, what time did you board the bus you
are on now?"
8. Plan for survey administration. This includes the survey date or dates, bus departure and
arrival times and/or bus run numbers, number of survey forms and survey workers needed over
what time period, written and oral training instructions, etc. Good organization, supervision,
and training of survey workers is very important.
9.
Collect and tabulate the survey results. For tabulation, use the statistics software package your
agency utilizes. Spreadsheets can also be utilized for data entry, but are a bit clumsy when it
comes to performing repeated or complex computations with the data.
10. Summarize the survey results in a short, easily understood text. Use tables or graphs as
necessary and preserve any important computations of benefits and costs.
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CHAPTER REFERENCES
(43) A Manual on User Benefit Analysis of Highway and Bus-Transit Improvements,
American Association of State Highway and Transportation Officials,
Washington, DC (19771.
(44) Litman,T., Defining and Quantifying Public Transit Benefits, Victoria
Transport Policy Institute, Victoria, BC, Canada (19971. Summarizes the
Institute's Transportation Cost Analysis, a compendium of transportation cost
and benefit estimating guidelines, which is also available as software for
transit and highway benefi~/cost studies.
(46) The AAA figures assume a four to six year vehicle life of 60,000 miles for an
"average" car, based on business reimbursement standards for employees in
late mode] cars, thereby overstating annual depreciation and other
"ownership" or time-related charges for the normal lifetimes of automobiles
(because ownership costs tend to decline with the age of a vehicle). Based
instead on a 10-year, 100,000 mile life for the 1977 cost of about $iS,000 for a
six-cylinder Ford Taurus (the close equivalent of AAA's average car) gives
annual depreciation of $l,800. The AAA finance charges add $307 when
spaced over 10 years rather than 4. Average AAA insurance costs of $847/year
and average license, registration, and tax costs of $216/year would likely
decline by at least 16%, to $720 and $~84, respectively, for a 10-year vehicle
life. This brings adjusted ownership costs to $3011/year, or $.301/mile, which
added to operating costs of $.108/mile ($.066 for gas & oil, $.028 for
maintenance, and $.014 for tires) = $.409 or $.41/mile. The unadjusted AAA
costs for an average car in 1997 are $.448 for motorists driving 15,000
miles/year for 4 years, and $.650 for a car driven 10,000 miles/year for six
years.
(46) Time-related costs are deleted in order to obtain the cost per mile of driving a
car that is already owned. The time-related costs are finance charges ($3071;
license, registration, and taxes ($1511; and the time-related component of
depreciation. The estimated time-related component of depreciation is $569
calculated as 31.6% of annual depreciation of $1,800 (calculation of time-
related depreciation is based on RobleY Winfrey's approach and data in A
Manual on User Benefits Analysis of Highway arid Bus-Transit; Improvements,
op. cit., page 181~. The sum of these three deductions is $1,027, or $.103/mile
for 10,000 miles, and $.103 subtracted from the adjusted cost per mile of $.409
derived in the preceding footnote leaves $.306, rounded to $.31/mile in
Table 3-2.
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Note that although insurance is normally regarded as an ownership
cost, the insurance cost component of $762/year or $.076/mile that varies with
miles driven is left in this $.307/mile figure. That is because 1) the incidence
and associated costs of accidents are very dependent on the number of miles
driven--insurance rates even vary somewhat with miles driven; 2) many auto
accidents go unreported, or are uninsured, or result in costs below the
deductible amount; 3) insurance seldom compensates the substantial time lost
in settling claims and treating injuries; 4) even the reimbursed costs of motor
vehicle accidents are a real added social cost that should somehow be included
in comparisons of transit and automobile costs because transit travel is many
times safer than automobile travel as measured by accident rates or costs per
passenger mile; ant! 5) an insurance cost estimate of $.076/mile is well below
the estimated total cost of accidents of $.12/mile and within the currently
estimated range of $.037 to $.087/passenger mile for the safety benefits of
transit compared with autos (Litman, op. cit.~. If you disagree with this
reasoning, just 1) subtract insurance costs of $.076 from total costs of $.306 to
obtain $.230 or $.23/mile, and 2) remember to include separately the safety
benefits of transit if they are relevant to your study.
(47) More specifically, $0.31/mile would represent a reduction of 63.7% in the
annual AAA depreciation cost of $3,272 for 1997.
(48) Microcomputer Evaluation of Highway User Benefits, Final Report for NCHRP
Project 7-12, October 3l, 1993, p. A-48.
(49) Waters, W. The Value of Time Savings for the Economic Evaluation of
Highway Investments in British Columbia, British Columbia Ministry of
Transportation and Highways, Victoria, BC (March 1992) cited in Litman, op.
cit., p. 7.
(60) Caliph, D.H., Dollars and Sense: The Economic Case for Public Transportation
in America, for The Campaign for Efficient Passenger Transportation,
Washington, DC (July, 19971. Compared with the list in Table 3-4, Camph
adds one type of benefit, for the macroeconomic effects of of! importation cost
savings, and omits employer benefits and provider savings. Using averages of
the ranges of estimates calculated by Camph, $17 billion or about 47% of the
$36.2 billion in transit efficiency benefits came from item 7, congestion
benefits; $~.4 billion from item I, paring benefits; $3.6 billion Tom item 2;
$~.6 billion each from items 3 & 4; $~.5 billion from item S; $~.4 billion from
item 9; and $~.2 billion from of} importation cost savings.
(61) Lewis, D. and O'Conner, M., Economic Value of Affordable Mobility, Paper
971367, Transportation Research Board annual meeting, January, 1997. The
approach used by Lewis and O'Conner for estimating the mobility benefit is
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. -
called consumer surplus. This is the excess value created when the price of a
commodity, here a transit trip, is reduced and the demand for the product
increases accordingly. Consumer surplus is the slim of the value to users of
the commodity in excess of what they would be willing to pay for the
commodity. For example, as the price of a trip declines from $4 to $2, if
demand increases from 100 to 200 trips, a consumer surplus of ($4-$21/2 x 100
trips or $100 is created because all new riders except the last one would have
been willing to ride at a higher cost than $2 per trip--an average of $4-$2/2 or
$1 more. In theory, it would be possible to use consumer surplus for
estimating individual transit improvement benefits. However, substantial
information would be needed about the price elasticity of clemand for transit
(the percent change in trips divided by the percent change in prices), which
averages -0.3 but varies with the starting price of the transit service and the
income of the population served.
(52) Additional policies to promote equity for transit are espoused by the Victoria
Transport Policy Institute (Litman, op. cit.), which references the following
research results in support of the first two policies listed here: I) Least-Cost
Planning: Principles, Applications and Issues, US Department of
Transportation, (July 1995), and 2) "Distance Based Vehicle Insurance as a
TDM Strategy," Transportation Quarterly (Summer 19971.
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Representative terms from entire chapter:
transit service
