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Framework and Tools for Estimating Benefits of Specific Freight Network Investments (2011)

Chapter: Chapter 2 - Key Issues to Address in Evaluating Freight Projects

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Suggested Citation:"Chapter 2 - Key Issues to Address in Evaluating Freight Projects." National Academies of Sciences, Engineering, and Medicine. 2011. Framework and Tools for Estimating Benefits of Specific Freight Network Investments. Washington, DC: The National Academies Press. doi: 10.17226/14600.
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Suggested Citation:"Chapter 2 - Key Issues to Address in Evaluating Freight Projects." National Academies of Sciences, Engineering, and Medicine. 2011. Framework and Tools for Estimating Benefits of Specific Freight Network Investments. Washington, DC: The National Academies Press. doi: 10.17226/14600.
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Suggested Citation:"Chapter 2 - Key Issues to Address in Evaluating Freight Projects." National Academies of Sciences, Engineering, and Medicine. 2011. Framework and Tools for Estimating Benefits of Specific Freight Network Investments. Washington, DC: The National Academies Press. doi: 10.17226/14600.
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Suggested Citation:"Chapter 2 - Key Issues to Address in Evaluating Freight Projects." National Academies of Sciences, Engineering, and Medicine. 2011. Framework and Tools for Estimating Benefits of Specific Freight Network Investments. Washington, DC: The National Academies Press. doi: 10.17226/14600.
×
Page 23
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Suggested Citation:"Chapter 2 - Key Issues to Address in Evaluating Freight Projects." National Academies of Sciences, Engineering, and Medicine. 2011. Framework and Tools for Estimating Benefits of Specific Freight Network Investments. Washington, DC: The National Academies Press. doi: 10.17226/14600.
×
Page 24
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Suggested Citation:"Chapter 2 - Key Issues to Address in Evaluating Freight Projects." National Academies of Sciences, Engineering, and Medicine. 2011. Framework and Tools for Estimating Benefits of Specific Freight Network Investments. Washington, DC: The National Academies Press. doi: 10.17226/14600.
×
Page 25
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Suggested Citation:"Chapter 2 - Key Issues to Address in Evaluating Freight Projects." National Academies of Sciences, Engineering, and Medicine. 2011. Framework and Tools for Estimating Benefits of Specific Freight Network Investments. Washington, DC: The National Academies Press. doi: 10.17226/14600.
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Page 26

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20 Both public- and private-sector freight stakeholders face a number of different challenges when evaluating potential freight investments. It was critically important to understand these key issues in order to develop an evaluation framework to address them. As described earlier, freight projects are par- ticularly challenging for planning, evaluation, and decision making for the simple reason that they frequently involve some element of access, connection, or use of rail, marine, or aviation facilities that are owned and operated by private companies. That tends to make many freight projects both multimodal and multilayered in terms of the roles of various public and private stakeholders. Balancing public, private operator, and shipper/industry interests and benefits can help engage all potential stakehold- ers in planning and development of freight investments and foster meaningful discussions about how costs, benefits, and risks should be shared. The following sections describe the types of challenges affecting the evaluation of freight invest- ments and how they could be addressed within an evaluation framework. 2.1 Addressing the Motivations of Different Types of Stakeholders Many previous research efforts have discussed stakeholder types that are involved in the identification, planning, financing, and implementation of freight improvement projects. Typically, these efforts have categorized freight stakeholders as public or quasi-public (i.e., DOTs, MPOs, port authorities) and private (i.e., shippers and carriers). This structure, however, does not fully account for the broad range of stakeholders who stand to gain or lose from freight transportation investments, which provides the foun- dation for determining appropriate benefits and impacts. In addition, it does not fully recognize emerging public-private partnerships and interactions, which are an important (and growing) aspect of freight projects. It is important to develop a more nuanced understanding of the types of freight stakeholders involved in freight invest- ment decisions, as well as their concerns and interests. This definition is useful in understanding the types of benefits these stakeholders are most concerned about, and the methods used to measure them. In general, freight projects can affect four types of stakeholders, which the study team grouped as: • Asset providers who develop, lease, maintain, or finance freight investments (both fixed and mobile); • Service providers who provide transportation or logistics services for freight shipments; • End users who include both shippers/consignees, as well as end customers for finished goods; and • Other impacted parties who include neighborhood/ community interests, environmental/land use interests, business interests, and others. Table 2.1 describes the typical public- and private-sector roles of these stakeholder types. It is important to note that some freight stakeholders play dual roles. Railroads, for instance, are both asset providers and service providers; commercial real estate developers pro- vide infrastructure and can be impacted by the freight invest- ment decisions made (or not made) by service providers or end users; and government agencies may be both asset pro- viders and impacted parties representing their citizens. Under- standing these and other interrelationships is important when assessing the types of benefits different stakeholders are concerned with at different points in the investment decision-making process. Stakeholder Perspectives It also is critically important to describe the interest points and perspectives of different stakeholder types—essentially, C H A P T E R 2 Key Issues to Address in Evaluating Freight Projects

what “stake” these stakeholders have in the success of a freight improvement project. Understanding the perspectives of dif- ferent stakeholders—and how they can change depending on the type of project and/or role the stakeholder is playing in project development—is important in developing an under- standing of the types of benefits with which they are most concerned and the adequacy of the tools, techniques, and processes to measure them. The research team has identified the following four types of stakeholder interest/perspectives: • Parties with a direct financial stake in the development and performance of a freight investment. These are prima- rily asset providers (both development and ongoing maintenance/operation) that have a vested financial inter- est in a freight improvement project. These stakeholders are providing capital (public funding, in the case of a state DOT; private capital in the case of a concessionaire or developer) in the hope of attaining particular goals, mis- sions, or mandates. Without this group’s concurrence on how a proposed improvement meets criteria for moving forward, there is no project. • Parties that have an indirect financial stake in the result of a freight investment. These stakeholders typically consist of service providers that operate transportation services on freight infrastructure, as well as shippers who are the true “users” of freight infrastructure capacity and services. In practice, these two groups are connected because service carriers pass on a significant share of their net costs to ship- pers. Together, these parties have a financial interest in the project outcome but no direct investment stake in the project itself. However, the interests of these parties are an important consideration in making investment decisions, because impacts and benefits to these stakeholders can influence the net benefit-cost calculation made by those with direct financial stakes. • Parties that have a major nonfinancial stake in the result of a freight investment. These typically include nearby land owners and occupants affected by access, noise, safety, or livability impacts; or community organizations or resource agencies concerned about broader environmental impacts related to the construction or operation of facilities. There is a clear path in which the project may affect these parties, and those concerns need to be considered as factors in project design and decision making. These impacts can be quantified in monetary terms, although it is sometimes desirable to consider them in the context of nonfinancial tradeoffs. • Parties that have a tangential stake in the result of a freight infrastructure project, either financial or nonfinancial. These stakeholders may include private companies (or a consortium of companies) affected by indirect and induced economic growth impacts, or local or regional taxpayers affected by project financing strategies. Many of their interests are likely to be in the form of concerns (that potentially can be addressed) and more general policy interests, rather than measurable direct effects of an indi- vidual project. These stakeholders should be kept informed and given the opportunity to air their views and provide input to the decision process. 21 Table 2.1. Freight investment stakeholder types. Stakeholder Type Stakeholder Examples Asset Provider State DOT Concessionaire Railroad Financier Commercial Real Estate Developer Port Service Provider Railroad Trucking Company Logistics Provider End User Freight Shipper/Consignee End Customer Other Impacted Party Neighborhood/Community Residents and Property Owners Environmental Resource Agency Chamber of Commerce/Economic Development Agency Commercial Real Estate Developer

Table 2.2 describes the interest/perspectives of different stakeholder types. 2.2 Evaluating Different Investment Types Previous research has focused on classifying freight proj- ects into three types: infrastructure enhancements, capacity upgrades, or operational improvements. However, this struc- ture does not fully account for the sophistication of freight decision-making processes, the relationships among different project types, and the sheer number of stakeholder types that they can include. Despite the growing sophistication of freight investment decisions and partnerships, the justification for any invest- ment is still fairly simple and usually can be explained in terms of enhanced capacity. In fact, although different types of freight stakeholders may explain it using different terms (e.g., carriers may discuss improved reliability, while shippers may talk of a decreased need to hold inventory and a DOT may refer to system efficiency) these stakeholders are all, in essence, concerned with enhancing the capacity of the freight system within the following four typical project types: • Physical infrastructure projects that enhance the capac- ity, design speed, or volume of freight infrastructure; • Productivity projects that increase the size, weight, or vol- ume of freight vehicles; • Reliability and density projects that affect the utilization or safety of freight vehicles; and • Integration and consolidation projects that allow for more efficient communication or transfer of materials between freight vehicles, infrastructure, and facilities. Dividing projects into these four types allows viewing the many types of freight investments in a simpler context that focuses on effective core functionality, rather than long lists of project types. Sample projects that may be included for dif- ferent modes for each of these four project types are summa- rized in Table 2.3. 2.3 Evaluating Projects of Differing Scales The size, scope, and timeline of freight investment projects can vary considerably. In the past, freight projects have been completed by stakeholders working independently and on an as-needed basis—for example, railroads have traditionally prioritized investments and fully funded their most pressing capital projects and rolling stock purchases as their revenue streams allowed. However, the increased prevalence of new institutional arrangements and strategies, such as multistate coalitions and public-private partnerships, has created new opportunities to engage multiple stakeholders on projects of varying scope, timeline, and cost. Projects such as the Alameda Corridor, although a rail infrastructure project, are able to bring other public and private partners into coordina- tion with the railroads to plan and finance a large infrastruc- ture project with benefits to numerous stakeholders. The project team has categorized freight investments according to three different scales, described as follows and in Table 2.4. • Site and local—Projects that involve a single site/facility or infrastructure element, or otherwise benefit freight mobil- ity on a local scale; • Statewide and regional—Projects that involve statewide or regional operations or infrastructure, or benefit freight mobility on a statewide or multicounty scale; and • Multistate or national—Projects that involve infrastruc- ture or operations that span several states or the nation, or that benefit regional or national freight mobility. 22 Table 2.2. Interest/perspectives of stakeholder types. Stakeholder Type Interest/Perspective Category 1 (Direct Financial) Category 2 (Indirect Financial) Category 3 (Major Nonfinancial) Category 4 (Tangential) Asset Provider Service Provider End User * Other Impacted Party * End users that are shippers or consignees generally translate all impacts into revenue or cost (Category 2) changes. However, infrastructure improvements also may affect passenger travel, in which case, there may be personal time or convenience impacts that fall into Category 3.

2.4 Accounting for Different Costs, Benefits, and Impacts The types of benefits received by different stakeholder groups also have been discussed in previous studies and research efforts. However, many of these previous efforts tended to focus only on a handful of stakeholder and project types, typically public-sector transportation planning agencies (DOTs, MPOs) or a single carrier mode (such as benefits from Class I and short- line freight railroads). It is important to identify benefits that are of concern to the broader set of freight stakeholders, including infrastructure developers, investment bankers, industrial site selection analysts, supply chain professionals, and others. In general, the types of benefits that are meaningful to these freight stakeholders can be summarized in two categories: cost factors, and benefit and other impact factors. 1. Cost factors include • Facility capital costs, which tend to be dictated by site location and design, as well as the partners involved in the planning process; • Facility maintenance costs, or the ongoing costs of main- taining a facility to ensure safe operations and upkeep; and • Operating costs, such as labor, fuel, and equipment costs, as well as the time lost to congestion or to the breakdown of efficient supply chains. 23 Table 2.3. Capacity enhancement project types. Project Type Sample Project Types across Different Transportation Modes Physical Infrastructure Expanding marine terminals Increasing highway-lane width/adding highway capacity Redesigning interchanges or addressing localized bottlenecks Lengthening railway sidings Developing parallel lanes, tracks, or terminal slots Increasing the number or length of runways Productivity Operating longer combination vehicles or larger vessels Lengthening trains Reliability and Density Enhancing turn-outs and emergency pull-outs Implementing controls for vehicle separation, design, and channelization Using information services to reduce vehicle interactions, plan routing, and avoid congestion and incidents Improving incident management techniques Integration and Consolidation Improving/streamlining logistics services Improving efficiency of cross-modal transfers Ensuring interoperability of technology applications Developing shared-use corridors Table 2.4. Project scales and sample project types. Project Scale Sample Projects Typical for Stakeholder Type Site and Local Roadway enhancement projects Enhanced signals or use of Intelligent Transportation System (ITS) Site access enhancements or operational improvements Warehouse/development center site development Terminal expansion at nonstrategic land, air, or marine ports Class I classification yard improvements Statewide and Regional Statewide or regional ITS projects Bottleneck alleviation projects Bridge safety or capacity enhancement projects Multistate or National Trade corridor improvement projects Projects to enhance capacity or throughput at strategic land, air, or marine ports that serve as key national entry points Class I railroad double-tracking projects

2. Benefit and other impact factors include • Capacity, which includes alleviating the impact of high- way and rail system bottlenecks, as well as the through- put attainable on any transportation infrastructure or facility access point; • Productivity, such as the ability to operate a supply chain from start to finish with maximum efficiency; • Loss and damage, or maximizing the safety and security of freight operations and movements to minimize loss to the shipper, carrier, or community; • Scheduling/reliability, or the ability to have predictable and timely delivery of goods, allows for streamlined inventories, less disruption in the manufacturing or supply process, and a more efficient supply chain; • Tax revenue, such as that received by new industrial land development, distribution centers, or other freight- intensive land uses; • Wider economic development, including increased jobs that result from a distribution center, transload, or intermodal facility, as well as the multiplier effects to regional economies; • Safety, such as minimizing of impacts of freight land uses on neighboring communities, and the safe opera- tion of freight vehicles and facilities; and • Environmental quality, including mitigation of air or water quality impacts, reduction of truck vehicle miles traveled (VMT), and noise or vibration reduction. Although some benefits, such as safety, are likely to be con- sidered by all freight stakeholders, it is certainly the case that each stakeholder group will be interested primarily in just a few benefits or impacts. The scale of the benefits or impacts received by a particular freight investment strategy will likely be the determining factors as to whether a freight stakeholder chooses to participate in a freight investment strategy or not. As shown in Table 2.5, the primary considerations for most freight stakeholder types can be summarized by about two to four benefits. For example, although it is likely that a service provider considers a wide range of variables when determin- ing participation in a freight investment project, the ultimate decision generally is determined by the underlying impact on operating costs and system capacity. It is important to note that government agencies can be considered as both an asset provider and holder of the general public interest, and must make decisions that reflect regional mobility goals and the safety, security, and environ- mental concerns of the communities that the agency repre- sents. In addition, some benefits are felt by numerous groups—for example, tax revenue impacts are created by both increased income to service carriers and additional income generated to end users. Nevertheless, it is possible to general- ize the primary benefits considered by each of the four freight stakeholder types. Understanding the benefits felt by each stakeholder group has several practical applications. First, by understanding 24 Table 2.5. Stakeholder types and benefits. Benefit Category Cost Factors Facility Capital Costs Facility Maintenance Costs Operating Costs Benefit and Other Impact Factors Capacity (Includes Bottleneck Congestion) Loss and Damage Scheduling and Reliability Business Productivity Tax Revenue Wider Economic Developments Safety Environmental Quality, Sustainability, or Energy Use Key: Less Important Asset Provider Type of Beneficiary Service Provider More Important End User Other Impacted Party

who benefits from a freight improvement project, it is easier to assign responsibility for a project at a level that is propor- tionate to the benefit received. This is very useful when entering into a project where several different stakeholder types, including carriers, public agencies, and communities, are involved in project planning, approval, and financing. In addition, understanding the benefits received by user groups can help to highlight those situations where there may be a compelling public interest in supporting freight network improvements. 2.5 Assessing Risk Risk assessment has been a critical component of private- sector investment decision-making for a long time. Monitor- ing safety, regulatory compliance, and emissions is important because the costs associated with risk experience can be very high, and sizable loss can be devastating to small firms. Risk management metrics also have a role in customer satisfaction, potential market development, and market access. All of the functions in this category can have a direct cost—insurance, employee safety and retention, financial penalties and down- time, etc. On the public-sector side, risk management tech- niques are typically included in asset management strategies for pavements, bridges, and other investments. Rarely are risk management techniques employed as part of the investment decision-making activities of these agencies, including freight investments. However, risk assessment has taken on more importance among public-sector agencies given recent interest in utiliz- ing public-private partnerships (PPP) or shared asset activ- ities. The emphasis placed on financial evaluation is typical for private-sector projects, but the degree of analysis devoted to risk assessment stands out, and (according to players in this market) exceeds that to which the public sector is accustomed. PPPs provide a route to funding and operat- ing a project by accessing private-sector funds and support. It is a partnership that is marked with differences, however, because the public sector is responsible for promoting proj- ects for the good of its constituents, and the private sector functions and operates based on its bottom line. Financially, they have evolved separately and rely on different sources of funds. For the private sector to participate, the public- sector agency should have established policies, processes, and frameworks that facilitate a partnership, including the following: • Structure—A functional regulatory and institutional framework acts as a roadmap for proceeding; • Public need—A demonstrated need for such a partnership adds purpose and mutual goals; • Feasibility —Demonstrable feasibility with respect to eco- nomic market, technical, environmental, financial, and risk allocation aspects is important; • Risk management—A clear understanding between the allocation of risk and benefits/rewards is critical; • Transparency in procurement—Good access to relevant materials allows for accurate evaluation of benefits and costs, which in turn reduces the need for estimating values of withheld information; • Proper due diligence—Verifying actual and projected volumes/turnover, costs, revenues, and risks; • Public-sector “buy-in”—Identifying issues pertaining to permitting and acquisition; • A strong and “true” partnership—Should be set forth in a clear contractual framework; and • Innovation—In handling costs, risks, and revenues. Understanding the risks associated with a project involves evaluating design and construction, market risk, operation and maintenance risk, financing risk, insurance, and termi- nation risk. The private sector often is interested in under- standing the uncertainty that surrounds forecasts and proj- ects. A number of tools can be consulted to address these risks, including a risk allocation matrix and due diligence financial and technical risk analysis through statistical means. When engaging in PPPs, a common practice is to develop a risk allocation matrix that clearly outlines categorical risks and the responsibilities of each party. Risks are allocated and quan- tified to clearly describe the various scenarios, costs, and responsibilities involved. Areas of concern may include insur- ance, permitting, design, and construction, among others. Table 2.6 outlines the general types of risks that are accounted for, and which parties may take responsibility for these risks. Each conceived risk should be collected and quantified in a detailed risk matrix as shown in Table 2.7. The basic ele- ments may include • An explicit explanation of the risk event or scenario, accom- panied by logical and achievable remedies and solutions; • A rating of the potential of the occurrence of such a risk; • The party primarily responsible for the risk; and • The percent share of the risk by party, along with the dol- lar value of the cost. As a part of evaluating investments, a common practice is to develop forecasts; these carry an obvious degree of uncer- tainty. Risks can be technical and financial, including cost overruns and benefit shortfalls. Monte Carlo methods can be used to simulate the various sources of uncertainty that affect the outcome of projects, with respect to costs or benefits, and calculate an average expected value for the given possible val- ues of the components. 25

26 Table 2.7. General template of risks. Risks Input Overall Risk Characteristics Category of Risk Risk type Description Event/scenario being addressed Party Primarily Bearing Risk Party 1 Risk Share Y percent Party 2 Risk Share X percent Risk Value (in USD) Dollar value Annualized Value at Risk ($k/year) Dollar value Optional Additional Risk Controls Remedies and proposed solutions Party Best Able to Direct Mitigation Party X Effect of Additional Risk Controls on Level of Risk High, medium, low Residual Risk Percentage Annualized Residual Value at Risk ($k/year) 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. Table 2.6. Types of risks and risk allocations. Risk Private Public Legislative (Existing and Future) Sharing within defined parameters Major responsibility Acquisition and Environmental Sharing within defined parameters, with public-sector assistance Major responsibility 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 availability of insurance Sharing based on event and availability of insurance Source: Halcrow, Inc.

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TRB’s National Cooperative Freight Research Program (NCFRP) Report 12: Framework and Tools for Estimating Benefits of Specific Freight Network Investments provides a framework and tools designed to help estimate the private and public benefits of potential freight infrastructure investments.

The evaluation framework is intended to assist public planning and decision-making processes regarding freight; to supplement benefit/cost assessment with distributional impact measures; and to advance public-private cooperation.

The framework is capable of handling projects that span all of the different modes and able to assess benefits from a variety of project types, including those that are designed to improve freight operations, as well as those that would generate more capacity through infrastructure expansion.

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