National Academies Press: OpenBook

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

Chapter: Chapter 3 - Current Practices in Freight Investment Decision Making

« Previous: Chapter 2 - Key Issues to Address in Evaluating Freight Projects
Page 27
Suggested Citation:"Chapter 3 - Current Practices in Freight Investment Decision Making." 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 27
Page 28
Suggested Citation:"Chapter 3 - Current Practices in Freight Investment Decision Making." 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 28
Page 29
Suggested Citation:"Chapter 3 - Current Practices in Freight Investment Decision Making." 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 29
Page 30
Suggested Citation:"Chapter 3 - Current Practices in Freight Investment Decision Making." 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 30
Page 31
Suggested Citation:"Chapter 3 - Current Practices in Freight Investment Decision Making." 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 31
Page 32
Suggested Citation:"Chapter 3 - Current Practices in Freight Investment Decision Making." 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 32
Page 33
Suggested Citation:"Chapter 3 - Current Practices in Freight Investment Decision Making." 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 33
Page 34
Suggested Citation:"Chapter 3 - Current Practices in Freight Investment Decision Making." 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 34
Page 35
Suggested Citation:"Chapter 3 - Current Practices in Freight Investment Decision Making." 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 35
Page 36
Suggested Citation:"Chapter 3 - Current Practices in Freight Investment Decision Making." 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 36
Page 37
Suggested Citation:"Chapter 3 - Current Practices in Freight Investment Decision Making." 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 37
Page 38
Suggested Citation:"Chapter 3 - Current Practices in Freight Investment Decision Making." 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 38
Page 39
Suggested Citation:"Chapter 3 - Current Practices in Freight Investment Decision Making." 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 39
Page 40
Suggested Citation:"Chapter 3 - Current Practices in Freight Investment Decision Making." 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 40
Page 41
Suggested Citation:"Chapter 3 - Current Practices in Freight Investment Decision Making." 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 41
Page 42
Suggested Citation:"Chapter 3 - Current Practices in Freight Investment Decision Making." 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 42
Page 43
Suggested Citation:"Chapter 3 - Current Practices in Freight Investment Decision Making." 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 43
Page 44
Suggested Citation:"Chapter 3 - Current Practices in Freight Investment Decision Making." 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 44
Page 45
Suggested Citation:"Chapter 3 - Current Practices in Freight Investment Decision Making." 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 45
Page 46
Suggested Citation:"Chapter 3 - Current Practices in Freight Investment Decision Making." 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 46
Page 47
Suggested Citation:"Chapter 3 - Current Practices in Freight Investment Decision Making." 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 47
Page 48
Suggested Citation:"Chapter 3 - Current Practices in Freight Investment Decision Making." 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 48
Page 49
Suggested Citation:"Chapter 3 - Current Practices in Freight Investment Decision Making." 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 49
Page 50
Suggested Citation:"Chapter 3 - Current Practices in Freight Investment Decision Making." 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 50
Page 51
Suggested Citation:"Chapter 3 - Current Practices in Freight Investment Decision Making." 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 51

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

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

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

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

3. Private Client Group (BMO Nesbitt Burns), which focuses on wealth management. BMO Capital Markets provides corporate, institutional, and government clients access to equity and debt underwrit- ing, corporate lending and project financing, merger and acquisitions advisory services, merchant banking, securitiza- tion, treasury management, market risk management, debt and equity research, and institutional sales and trading. Evaluation Process. Investment banks, such as BMO Capital Markets, have become an important element in the financing of freight improvement projects, and government agencies increasingly recognize that in order to attract private capital to a project, there must be a payoff for private-sector investors. The private-sector organizations, such as invest- ment banks, carriers, shippers, terminals, etc., are frequently courted by public agencies because of their expertise in busi- ness and in financing large projects. The public sector wants the private-sector partners to pledge capital and to take on some of the risks that have traditionally been absorbed by the public sector. Given limitations in funding from local, state, and federal grants, the public sector often seeks private-sector capital in order to complete a project. BMO, like all infrastructure investors, is concerned about the following two types of risk: 1. Construction and start-up risk, and 2. Revenue risk from operations. Construction and startup risk depends on how sound the planning is for a project, the severity of environmental impacts, and the degree of support or opposition from environmental groups, elected officials, and other stakeholders. In public- private partnerships, investors are typically leery of greenfield projects that are in the early stages of development. Projects that already have received environmental approval and that have been fully designed present significantly less start-up risk. From an investor’s standpoint, projects built under design- build authority are often viewed as having less start-up risk because a firm price of the project is known early. In general, the private sector sees lower risk in purchasing an existing asset, such as an existing toll bridge, as opposed to a project that is still in the planning stages. For example, in 2005, a consortium of Cintra Concesiones de Infraestructuras de Transporte S.A. and Macquarie Infrastructure Group pur- chased the 7.8-mile Chicago Skyway for $1.83 billion, which was 63 times earnings before interest, taxes, depreciation, and amortization (EBITDA). The consortium has a 99-year lease. Revenue risk is far more troubling, because of the uncertain- ties in long-term demand for the service provided. For exam- ple, when a toll road is built, will drivers shun the new roadway in order to avoid the toll? Are there alternatives to using the 30 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 Originating in State) – Freight Only Comparison of the cost of shipping the goods via rail compared to truck Reduction in Automobile Delays at Grade Crossings Value of motorist time (usually a function of average wages) 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 Development Estimated assessed property value after project multiplied by 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. Table 3.1. Benefit categories included in Washington State DOT’s benefit/cost calculator.

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

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

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

Service Provider As discussed earlier, service providers provide transporta- tion or logistics services for freight shipments. The following case studies describe the processes, data, and tools used by Watco Companies (focused on its shortline rail operations) to evaluate infrastructure investments. Case Study—Watco Companies Overview. Watco Companies, Inc. is an integrated transportation service provider, offering services, including transload and intermodal services, property management, switching services, and railroad service. Currently, Watco Com- panies also owns and operates 20 railroads, comprising some 3,500 miles of shortline railroad track in 17 different states. Evaluation Process. Watco railroad operations conduct different processes to evaluate maintenance and operational projects and capital improvements and growth projects. For maintenance and operations improvements, Watco assesses 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 system as a whole, as well as a “risk ratio” for each individual link. The system risk analysis process allows the railroad to highlight problematic or potentially problematic segments, and identify portions of the system that require maintenance or operational improvements. The analysis is performed at least twice a year, although Watco prefers to perform it on a quarterly basis, if possible. Watco has developed a separate process to assess capital improvement and growth projects. Typically, this process starts at the regional marketing manager level, when projects are iden- tified and brought to the attention of the general manager and a regional analyst. This analyst proceeds to populate and run a return on investment (ROI) model to assess the financial wor- thiness of the project. This tool first considers the various costs to the railroad that will be caused by the project, and then com- pares them to a series of financial performance indicators. If the project makes it past this first analysis, it is brought to the regional controller. If approved regionally, it is put in front of the executive team, which is composed of the Watco Companies management team, including the CEO, presi- dent, CFO, COO, etc. The management team is then respon- sible for prioritizing the projects and creating a list of projects that are feasible within the yearly capital budget. Benefit Assessment. To help guide maintenance and oper- ational investments and to calculate the track risk ratio, Watco railroad created and uses a Track Risk Analysis tool, which has three primary impacts: 1. Traffic (i.e., the capacity of the system, and flow of traffic over it); 2. Safety, including derailments, injuries, and experience of staff; and 3. Commodities, including the type of commodity being car- ried (i.e., hazardous material [hazmat], special needs com- modities), as well as the value of the commodity, and the value of the equipment being used to haul the commodity. 34 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 Table 3.3. Port of Portland project evaluation and ranking tools.

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

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

ments of different shippers, and has therefore acquired the tools by which to track the on-time performance of various supply chain segments. Understanding current performance is one of the most important parts of any evaluation process, since it allows BCO to pinpoint where the inefficiencies are in its system. • Timeline planning—Once an issue has been identified, BCO determines an appropriate timeline on which to study or address the issue. For example, a decision to build, site, or operate a distribution center is a very large undertaking, and will be planned on a correspondingly long (strategic) timeframe. However, other decisions—such as the contracts to provide air cargo or marine services—are evaluated every year and are changed to reflect the best combination of costs and service. • Ensure that good partnerships are in place—BCO recog- nizes the importance of strong, enduring relationships with a broad range of stakeholder types. In addition to maintaining longstanding relationships with manufactur- ers and retailers, BCO plays a visible role in the transporta- tion and shipping industries. They are active in multiple professional organizations, including the Retail Industry Leaders Association, the Waterfront Coalition, and the Coalition for Responsible Transportation. • Ensure that decisions made are as efficient as possible— BCO recognizes the importance of efficient transportation system performance. The company estimates that 25% of its efforts to maximize supply chain performance are focused on transportation system improvements. In addition, BCO strives to make decisions that are as environmentally effi- cient as possible. Whether it is in the selection of partners or in the transportation mode selected, BCO evaluates invest- ments with an eye to waste reduction, efficient use of energy, and lessening of emissions of harmful pollutants. Benefits Assessment. BCO is involved in shipping time- sensitive cargo to many different locations. Although BCO evaluates many variables when considering an investment into its supply chain process, there are three benefits that stand out as being most important: (1) cost; (2) delivery times; and (3) commitment (of the transportation or logis- tics provider or other partner). Table 3.5 summarizes some of the categories of benefits that are most important to BCO, as well as the specific benefits that are tracked, and the tools used to do so. In short, the BCO currently uses a single, sophisticated tool for much of its freight investment tracking and decision- making needs. In addition to the quantitative measures eval- uated in the freight investment decision-making process, BCO considers some qualitative performance measures, includ- ing speed and efficiency of customer service, the strength of customer relationships, and careful and safe management of freight. 3.3 Key Issues and Challenges of Existing Decision-Making Processes Different freight stakeholders value different types of benefits, which necessarily leads to different evaluation processes. Different stakeholders clearly use different tools and methods to answer the question “is this a good investment?” Although some benefits are considered by all freight stake- holder groups, each stakeholder group is primarily interested in just a few benefits or impacts. On the private-sector side, freight investment stakeholders are focused primarily on financial benefits, NPV, and ROI. Although these stakeholders consider a wider range of variables when determining their par- ticipation in a freight investment project, the ultimate decision is generally driven by the project’s underlying impact on oper- ating costs and system capacity. On the public-sector side, the list of benefits typically includes economic development, tax revenue, and social/environmental benefits (or disbenefits). 37 Category Specific Benefits Tracked Tool Used Cost Late shipments Inventory Cash to delivery cycle SAP Production/ Supply Chain Software Delivery Times Port-to-port time performance Congestion or bottlenecks and their effects on delivery times SAP Production/ Supply Chain Software Commitment Viability of partner companies SAP Production/ Supply Chain Software Environmental sustainability of partner companies Qualitative Comparisons Table 3.5. Primary benefits considered by BCO.

Because government agencies often act both as infrastructure providers and holders of the general public interest, they often make decisions that reflect regional mobility goals and the safety, security, and environmental concerns of the communities that the agency represents. These differences in the types of benefits considered by dif- ferent stakeholders necessarily lead to different types of freight investment decision processes. The decision-making process employed by public-sector stakeholders is much more “democratic,” and focuses on building consensus on a wide range of issues. In many situations, the number of stake- holders with a vote at the table is quite large; the multiple objectives (and impacts) of a proposed freight investment often may be muddled; the funding sources and mechanisms are numerous and complex; and the final decision to move forward or not with any given proposal rarely rests with a single agency or decisionmaker. This complex process has many positive aspects; for example, it has given many peo- ple a voice in what happens in their communities, and is more “fail safe” than the early days of publicly funded trans- portation investments. At the same time, this highly partic- ipatory process often drags out the timeframe for planning and implementation of any significant improvements, and may ultimately kill a project or program through death by a thousand cuts. In comparison to the public-sector process, the private- sector process is much more narrowly focused on projects that directly relate to business goals and objectives. The process is much less inclusive, and stakeholders and decision makers are brought into the process only to address specific issues (e.g., permits, approvals) or to provide specific areas of support (e.g., funding, incentives). As opposed to the public process, the final decision to move forward or not with any given proposal often rests with a single decisionmaker or collection of senior executives. Benefits are assessed at different points in the process, using different types of tools. In addition, different stakeholders assess benefits at differ- ent points in the process. The public-sector process typically consists of five key steps: 1. Needs identification—When system needs and defi- ciencies are identified and potential approaches are identified; 2. Plan development—When transportation vision, goals, and strategies are documented; 3. Project programming—When the process of actually implementing transportation improvement projects begins; 4. Project development—When more detailed design and a more formal assessment of the necessary permitting and approval activities occurs; and 5. Project implementation—When final approval is obtained, detailed construction plans are developed, and right-of-way (if necessary) and construction permits are acquired. Within this process, public-sector stakeholders (e.g., infra- structure providers, state DOTs and impacted parties) typi- cally begin developing a detailed understanding of potential investment benefits only within the project programming and project development stages. However, with the exception of a handful of states (e.g., Washington State rail investment process), this benefit assessment occurs after a proposed proj- ect has entered the pipeline, and is generally used to decide among competing investments (both freight-related and non- freight-related) to build support for an investment or suite of investments among impacted parties, and/or to allocate costs and benefits across different stakeholder types. Among private-sector freight stakeholders (e.g., railroads, shippers, and industrial site developers), potential investment benefits are assessed as a first step in the process. Railroads, for example, immediately assess a project’s potential impact on operations and revenue, and calculate NPV of potential invest- ments very early in the process. Similarly, one of the only fac- tors a financial investor or concessionaire will consider within the decision-making process is financial returns, typically via due diligence studies that involve third-party confirmation of market demand and revenue assumptions. This mismatch on when benefits are assessed within the decision-making process can make it difficult for all types of investment stakeholders to focus attention on freight invest- ments that might have benefits for all parties. 3.4 Existing Data and Tools There are a number of distinct classes of tools that corre- spond to the needs of different stakeholder types and their decision-making processes. These tools provide different functions at different points in time, as shown in Figure 3.6. There are several classes of tools used by different stakehold- ers to assess these types of benefits, including the following: • Strategic planning tools—These include tools used to assess long-term needs and deficiencies impacting the transporta- tion system and the lifecycle costs of operating and main- taining transportation infrastructure (for asset providers), as well as longer-term market analyses, production, and site selection alternatives (for service providers and end users). • Carrier cost and performance analysis tools—These oper- ational analysis tools, which estimate the operational per- formance and cost of freight carrier operations under alternative scenarios to represent the impact of transporta- tion projects, programs, or policies, are primarily used by freight infrastructure providers and carriers. 38

• Shipper cost and performance models—These tools esti- mate the cost and time characteristics of alternative freight mode and service options, and are intended to represent the total logistics time, cost, and safety/reliability tradeoffs avail- able for a shipment so that optimal shipping decisions can be made. These tools are primarily used by end users (i.e., the businesses that generate outgoing freight or the consignees who receive the freight and ultimately pay the shipper cost). • Transportation system efficiency models—These tools, often defined as benefit/cost analysis systems, are intended to evaluate the benefit and cost streams over a specified period of analysis to determine whether a proposed investment will yield benefits in excess of its cost. • Economic development impact models—These tools esti- mate impacts of transportation projects on income and jobs in the economy, and are primarily used by public-sector (local, regional, or state) transportation agencies to explic- itly consider business productivity and economic develop- ment impacts that are not represented by transportation system efficiency tools. • Financial impact accounting tools—These tools, typi- cally used by those that have a direct stake in the cost of a project, provide estimates on how the proposal will affect outgoing cost streams, incoming revenue streams, cash flow, borrowing or bond requirements, net profit or loss over time, upside/downside risk, and rate of return. • Risk assessment tools—These tools assist private-sector asset providers and end users in understanding and quan- tifying critical areas of uncertainty related to making invest- ment decisions. These tools have varying degrees of importance to different stakeholders, as shown in Table 3.6. The following sections describe the types of analysis tools within each of these categories used by freight stakeholders to evaluate freight investments. Specific attention currently is given to tools that are sensitive to features of freight transporta- tion, and public-private sector interaction that is inherent in multimodal freight planning and policy. 39 Demand Forecasting Facility Location Risk Assessment Routing Inventory Scheduling Incident Management Operations Production Planning Operations Planning Performance Evaluation Decades Years Months Days Strategic Tactical Daily Tool Functions Figure 3.6. Benefit assessment spectrum. Stakeholder Types Asset Provider Service Provider End User Impacted Party Strategic Planning Performance Carrier Cost and Performance Tool Types Shipper Cost and Transportation Efficiency Less Important More Important. System Economic Development Impact Financial Impact Assessment Risk Table 3.6. Importance of analysis tools to freight investment stakeholders.

Strategic Planning Tools Strategic planning occurs on a long time horizon (20 to 30 years for asset providers and 2 to 5 years for service providers), and is the place where the most costly investment decisions are made. Strategic planning extends beyond 5 years for public-sector agencies and entities, as well as for large freight service providers or end user companies with stable markets. Long-term strategic planning horizons also are typi- cal for those asset providers making right-of-way or new capacity investments. Strategic planning for public-sector agencies is typically accomplished through the development of the long-range transportation plan, which describes the vision, goals, and associated policies to guide investment in the statewide or regional transportation system over a 20-year timeframe. This document is normally updated every 3 to 5 years. However, there are other important strategic planning activities in which these agencies, particularly state DOTs, are engaged. For instance, cost-effective management of transportation infra- structure is an increasingly important activity of public-sector transportation agencies, particularly as some key infrastructure components (roadways, bridges, locks, and dams) are nearing the end of their useful lives. Most states have developed long- range asset management strategies to help ensure the smooth and cost-effective movement of passengers and goods. Many of these strategies entail specific designs, operations, and main- tenance budgeting activities. In addition, many states are beginning to pay close attention to bond rating scores from the nation’s credit rating services, such as Moody’s, Standard & Poor’s, and others. To ensure top ratings, states are paying close attention to long-term stability of the revenue streams, cost-effective management strategies, maintenance activities, and public support for transportation investments. On the private-sector side, the planning horizon may be shorter, particularly for service providers who must respond to conditions created by their end users and their asset providers or those operating in markets with high degrees of fluctuation. The useful lives of many freight assets extend beyond these ranges; certainly for connector links and activity hubs, and for many kinds of mobile equipment as well. Although financial evaluations allow for this, fleets, service networks, and supply chains are adjusted frequently, and assets are moved into secondary markets (right-of-way being the most illiquid). Typical tools used in strategic planning include travel demand forecasting and network optimization. The technol- ogy application to support forecasting and the strategic plans include data available from financial systems, operations man- agement systems, and others. These are the tools that are used to make long-range investment decisions. Forecasting is a central aspect of the planning process for all types of freight stakeholders. This is where infrastructure needs are determined, market estimations are made, and facility loca- tions, equipment specifications, or carrier requirements are evaluated. From the public freight planning perspective, this is where the greatest opportunity lies for developing the environ- ment that will attract or deter freight and supply chain facili- ties to locate or expand in a particular area. This is the time in the product lifecycle where the private sector will evaluate all of the data that it has available, not only in terms of potential markets, but also considering operating history, financial per- formance specific to an area, and future development plans not only for the company but also within an operational zone or location. Carrier Cost and Performance Analysis Tools Systems and metrics for operations are one of the most important investments made in the private sector relative to service networks and supply chains. These are the technolo- gies, equipment, and software that measure cost and revenue that define the utilization of capital in a variety of forms. Private-sector entities are motivated to manage two things: the utilization of assets (which drives revenue) and the reduc- tion of operating costs. Operations tools are employed to manage asset investments, and through that capability they also predict performance and the quality of opportunities. These tools are used in each of the time horizons described earlier in Figure 3.6. Historical data are important to the planning process and these tools also pro- vide input to daily tactical decisions of shippers and carriers in response to short-term needs that are revealed via the metrics. In general, there are separate types of tools and models for each transportation mode—railroad, aviation, and trucking operations—although a common feature of all of these mod- els is the estimation of speed, reliability, capacity, and cost for operating a given modal freight service, under alternative scenarios for infrastructure capacity and usage rules. Typical tools include the following: • Routing tools for truck movements that allow a unit to change routes for congestion avoidance, to make toll choices, and to improve overall fuel efficiency. On the end user side, product and transportation tracking allows a shipper to shift a product quickly to an alternate point of sale while the goods are still in transit. Tools of this sort are very pow- erful in the tactical realm. • Railroad operations tools that estimate how a given rail infrastructure improvement would actually change vol- umes, speeds, and reliability. The source data include spe- cific track, siding and yard conditions, plus road, local and work train characteristics, and schedules that are proprietary to the railroads. Nevertheless, such data have been forth- 40

coming in cooperative ventures, and there are some gener- ally recognized software tools that work with the data. Rail Traffic Controller (Berkeley Simulation Software), RAILS 2000 (CANAC/Savage Industries), and RAILSIM (Systra) are all forms of simulation systems used by railroads to prioritize routing of trains through the network, identify conflicts, and measure effectiveness. Besides the simulation systems, there also has been some work on parametric rail capacity models that develop capacity curves for various operating characteristics, and identify areas with capacity constraints.(2) In addition to these tools, FRA has developed a General Train Movement Simulator (GTMS) designed to support evaluations of new Positive Train Control (PTC) systems and capacity enhancements. As a newly available tool, GTMS is being tested by Class I railroads, and should be available for general use soon for public- and private-sector stakeholders. • Airport operations tools that estimate the capacity of run- way systems and the level of delay that they present when faced with alternative demand levels. These include Total Airport and Airspace Modeler (TAAM) System, the Airfield Capacity Model (ACM) from MITRE Corporation, the FAA’s Airport and Airspace Simulation Model (SIMMOD), and the LMI Runway Capacity Model from the Massa- chusetts Institute of Technology (MIT). There also is the Airport Capacity Analysis Through Simulation (ACATS) model, which is an attempt to improve on the ACM framework.(2) • Marine port operations tools, many of which have been refined by university researchers, typically account for both passenger and freight traffic, recognizing local differences in types of freight (bulk, break bulk, and containers), mix of ship characteristics, water depth and wave motion, and positions of terminals. Typical port planning tools include computer simulation models for port operations, port terminal container handling, and terminal expansion and development (including investment in quays, quay cranes, and storage space). Newly developing models are attempt- ing to integrate traditional performance measures—such as time savings, safety, and operating costs—with wider meas- ures that include the cost of vehicle emissions and mone- tized health benefits. Shipper Cost and Performance Models These tools, typically used to approximate the aggregate decisions made by end users (freight shippers, consignees, or their agents) include various forms of shipping choice, sup- ply chain, or total logistics cost models. In general, these tools estimate the cost and time characteristics of alternative freight mode and service options. They are intended to represent the total logistics time, cost, and safety/reliability tradeoffs avail- able for shipments, so that optimal shipping decisions can be made. Tools include the following: • Modal diversion models that forecast how freight move- ments shift in response to changes in the availability, cost, and/or time performance of available modal alternatives. Most modal diversion models used in transportation facil- ity planning are focused on truck-rail-intermodal options, because there are very real tradeoffs that shippers face when considering ground transportation options for medium- and long-distance travel. On the other hand, air and marine options focus more exclusively on long-distance shipping and offer more distinctly different cost, performance, and availability features. These tools are of interest primarily to public-sector entities. • Total logistics cost models predict how shippers respond to changes in the costs of modal and service alternatives. They actually estimate the total logistics cost of shipping, includ- ing direct transportation expense and inventory cost associ- ated with modal lot sizes and service profiles. The models assume that customers (shippers) select the lowest cost option, and they depend on information about logistical fac- tors in transportation and industry. Shipments are assigned to one mode or another, while allowing for probability uncertainty associated with inventory risk, carrier perform- ance, or unmeasured factors. Sometimes, these models are based on detailed commodity-specific data. Other times, the models may be simple spreadsheet tools to estimate tons switching mode and resulting cost and travel-time differ- ences under different project assumptions. • Intermodal Transportation and Inventory Cost (ITIC) Model is a freight mode choice model from FHWA’s Office of Freight Management and FRA. It attempts to calculate the logistics cost and decision tradeoffs seen by shipper logistics managers and then assigns the truck/rail diversion to alternatives that minimize total logistics cost. It is based on an earlier model developed for FRA in 1995. • Spreadsheet Logistics Model developed by MIT esti- mates the truck/rail mode choice for 48 typical types of customers. This is done on the basis of given customer characteristics (use rate and trip length); commodity char- acteristics (value/pound); and mode characteristics (e.g., price, trip time, and reliability) for rail, truck, and inter- modal options.(3) • Market share models are an alternative predictor of freight shipper choices. They do not estimate logistics costs. Instead, they are based on a statistical correlation between modal performance factors and traffic capture (revealed prefer- ences), and they then project traffic swings when relative performance changes. Stated-preference models have similar purposes, but are developed statistically from structured interviews with freight transportation buyers 41

about the tradeoffs they would make if faced with hypo- thetical choices. A statistical process is then applied to these responses to infer decision points and probable traffic diver- sions in response to changes in competitive service offerings. For instance, one such model estimates truck-rail diversion based on a combination of the (1) Uniform Rail Costing System, (2) TRANSEARCH commodity-flow database, and (3) a demand elasticity model calibrated from his- torical carrier price and volume data. The elasticities dis- tinguish price sensitivity by traffic type, geographic region, and commodity group, and the model forecasts the specific freight flows that would likely be diverted to rail, given changes in railroad or intermodal service char- acteristics. • The Uniform Rail Costing System (URCS) Model (Sur- face Transportation Board) can estimate the changes in shipper productivity associated with rail system perfor- mance changes. The URCS model uses data on average car- rier cost and performance measures to estimate the cost of providing service, so it can estimate how a change in facility capacity or speed (affecting rail cars per day) would trans- late into average shipper dollar savings per ton-mile. Transportation System Efficiency Models (Benefit/Cost Systems) These tools are intended for use by public-sector (local, regional, or state) transportation planners. They are defined as benefit/cost analysis systems, intended to evaluate the benefit and cost streams over a specified period of analysis to deter- mine whether a proposed investment will yield benefit in excess of its cost (after monetizing all streams and dis- counting to present value). In current practice, benefits are most commonly defined in terms of transportation system efficiency, reflecting estimated savings in travel time, safety, and vehicle use costs that a project can provide for vehicle movement through the transportation network. These sav- ings are typically defined in terms of the savings accruing to vehicle owners, drivers, and passengers. The public-sector benefit/cost tools grew out of the urban transportation planning process and, accordingly, they tend to focus on road and transit systems with greatest detail on passenger movements. For instance, the handling of car and transit travel typically includes an accounting of the number of riders and trip purposes. On the other hand, the handling of freight vehicles seldom includes any information on either the type of cargo or amount being carried. The direct benefit calculation in these tools is often referred to as a measure of user cost savings, although freight planners often prefer the label traveler cost savings to highlight that these calculations include costs associated with travelers and vehicles, but not shippers and consignees, who are the true users of freight transportation systems and direct beneficiaries of improve- ments in freight movement. Externality impacts on the environment (primarily air quality impacts) are sometimes also added as a broader societal impact. Typical tools are described in the following sections. Traditional Benefit/Cost Tools There are several modeling tools that are widely used to assess transportation system efficiency impacts (in terms of traveler benefits) for highway investments. They share com- mon features—the valuation of travel-time savings for differ- ent classes of travel, as well as vehicle operating costs, safety, and air quality impacts. Commonly used benefit/cost tools include the following: • Cal-B/C, developed by the California DOT (Caltrans), is a spreadsheet model for benefit/cost analysis of highway and transit projects in a corridor that already contains a high- way facility or a transit service. Highway projects may include high-occupancy vehicle (HOV) and passing lanes, interchange improvements, and bypass highways. Transit improvements may include enhanced bus services, light rail, and passenger heavy-rail projects. Default data are given for California conditions. • MicroBENCOST is designed to analyze seven types of high- way improvements in a corridor: (1) capacity enhancement, (2) bypass construction, (3) intersection or interchange improvement, (4) pavement rehabilitation, (5) bridge improvement, (6) highway safety improvement, and (7) rail- road grade crossing improvement. Highways may contain HOV facilities. This tool was originally developed by NCHRP as a computerized implementation of recom- mended practice set out by AASHTO.(4) • Surface Transportation Efficiency Analysis Model (STEAM) is designed to assess multimodal urban trans- portation investment and policy alternatives at the regional and corridor levels. Transportation system alternatives may include up to seven modes. Peak and off-peak periods and multiple trip purposes may be considered. The model is closely linked to outputs from the four-step urban trans- portation modeling process. • Highway Economic Reporting System (HERS) is a system- level optimization framework for analyzing investment strategies to maintain and improve an existing highway net- work. New highway construction is not considered. The program automatically generates candidates for highway improvements, which may be combined with user-specified improvements. It then determines the best combination of projects. HERS is closely linked to the Highway Performance Monitoring System (HPMS). 42

• StratBENCOST is a strategic-level evaluation method to analyze investment alternatives for expanding and improv- ing a highway system. This tool represents an upgrade from previous analysis methods by incorporating cost calcula- tions from MicroBENCOST and HERS, and adding con- sideration of risk and uncertainty. A particular strength of this model is its explicit consideration of the random nature of input parameters. New highway projects, as well as improvements to existing highways, may be considered. Nonhighway modes are not considered. The program is used to compare an investment alternative to a base con- dition, which may be another investment alternative. The program can perform either a single-segment analysis with or without induced traffic, or a network-level evaluation with traffic diversion; the latter typically requires linkage to the four-step transportation modeling process. BCA.Net This system was developed for the FHWA Office of Asset Management as a Web-based tool for benefit/cost analysis of highway projects. The tool is freely accessible over the Internet, and requires no user-installed software other than a Web browser. The tool compares and evaluates alternative highway improvement projects (e.g., preservation, lane-widening, lane additions, new alignments, addition of traffic control devices, intersection upgrades). Projects for comparison in BCA.Net are multiyear, full lifecycle investment and maintenance strategies. Work zone costs (e.g., user costs associated with construction- related delay) are included in the calculation of net benefits. The benefits considered by BCA.Net include highway user costs (travel time and vehicle operating costs, safety) and envi- ronmental impacts. Benefits in BCA.Net are calculated based upon changes in traffic flow, given improvements in volume and capacity relationships as defined in Highway Capacity Manual 2000.(5) User cost calculations (given average hourly traffic, speed, and roadway parameters) are based on the HERS model (not MicroBENCOST, as has been reported elsewhere). BCA.Net includes the calculation of costs and benefits due to induced demand. BCA.Net has built-in risk analysis capabili- ties, and benefit/cost and intermediate results can be viewed in charts and reports as probabilistic ranges. In BCA.Net, the user specifies forecast demand in the base year and rates of growth in the near term and long term. For three user-defined years in the period of analysis, users specify time-of-day distribution of traffic (e.g., peak, peak shoulder, off-peak) and traffic mix by vehicle type (e.g., auto, truck, bus). In a BCA.Net analysis, users divide the year into as many sea- sonal traffic patterns as required. If roadway saturation limits are reached in peak periods, BCA.Net will spread traffic to peak shoulder and off-peak periods. From the freight perspective, BCA.Net accounts for the impact of trucks on traffic flows and benefits, while permitting users to specify—at a high level of granularity—the amount of trucks among total traffic over the period of analysis. GradeDec.Net This tool, sponsored by FRA, is a Web-based system for evaluating the safety impacts and the benefit/cost of improve- ments to highway-rail grade crossings in a corridor or region. The tool is freely accessible over the Internet, and requires no user-installed software other than a Web browser. The tool has been used by DOTs, railroads, MPOs, and consultants for projects in dozens of jurisdictions. The benefits considered by GradeDec.Net include the array of highway user costs (travel time and vehicle operating costs), safety effects for highway and rail users, and environmental impacts. From a freight planning perspective, it can be important to consider the fact that growth in railroad traffic near rail- highway intermodal facilities and large railroad traffic diver- sions due to system improvements often result in more frequently blocked crossings and blocks of longer duration, which are a focus of GradeDec.Net. Congestion and environ- mental effects due to queued vehicles at crossings are a major concern when considering rail system upgrades to accommo- date increased flows of freight in the vicinity of metropolitan areas. GradeDec.Net includes a number of features for evaluat- ing the benefit/cost of roadway capital improvements at cross- ings (i.e., grade separations, approach improvements) and traffic management mitigating measures (i.e., one-way restric- tions, redirection of traffic to adjacent crossings, signal synchro- nization). The tool permits the specification of percentage of trucks in the traffic mix. GradeDec.Net allows for the evaluation of multiyear capital improvements in a corridor. GradeDec.Net has built-in risk analysis capabilities and benefit/cost calcula- tors. Intermediate results can be viewed in charts and reports as probabilistic ranges. FHWA Highway Freight Logistics Reorganization Benefits Estimation Tool This tool seeks to quantify certain freight improvement benefits that are not captured in traditional benefit/cost analysis (BCA). The FHWA tool seeks to measure the second- order benefits, that come about when firms direct the money saved on logistics expenses away from maintaining inventory, and toward other more productive uses. These benefits can then be added to those estimated through BCA to arrive at a complete picture of total benefits. Beginning with a national estimate of highway freight demand to delay (i.e., the price), the analysis then estimates national second-order benefits that would arise out of high- way freight improvement projects. Finally, these results are disaggregated for use in local and regional highway investment studies to provide accurate estimates of second-order benefits 43

for smaller areas, such as MPOs or states, and encapsulated within a spreadsheet model. The Highway Freight Logistics Reorganization Benefits Estimation Tool consists of the fol- lowing four basic components: 1. Estimation inputs, which gather data from the user describing the specific highway segment under considera- tion, initial (pre-improvement) conditions, and anticipated changes due to the improvement. Initial conditions data include standard transportation performance measures (such as annual truck-miles on the corridor, percentage of trucks in the traffic mix, and average speeds), as well as estimates of the value of time, freight vehicle operating costs, and travel-time reliability. Anticipated changes involve expected savings in operating costs and travel times, and changes in reliability of travel time. For multi- state projects, users can select a two-state model configu- ration, which utilizes input data from both states. Users can opt for predefined values for the various parameters, or they can override the predefined values with their own inputs. The predefined values are based on research and may be state specific, national averages, or calculated from other inputs. 2. Conventional BCA freight benefits input, which allows users to input the freight benefits estimates from a con- ventional highway cost/benefit analysis into the tool. These would be the freight-specific benefits, which begin to accrue in a certain year (defined by the user), and con- tinue through the total number of years in the analysis. The tool can accommodate any type of monetized units (e.g., thousands, millions, or billions of dollars) in either nominal or real terms. 3. Summary of results, which summarizes the results of the analysis as calculated based on the input values, and requires no user input. The screen provides charts and tables showing generalized truck travel cost and truck transport demand before and after the improvement, and the additional benefit obtained through firms reor- ganizing their logistics processes. It therefore shows the total additive benefits associated with an improvement (i.e., conventional cost/benefit estimates plus firm reor- ganization benefits). 4. Summary of inputs, which provides a summary of all the data inputs used in the analysis, which is useful for record- keeping in case analysts need to enter future updates for a specific project. Economic Development Impact Models These tools are intended for primary use by public-sector (local, regional, or state) transportation agencies that desire to explicitly consider business productivity and economic devel- opment impacts that are not represented by the transporta- tion system efficiency tools. They are sometimes referred to as models of wider economic impacts or economic develop- ment impacts. In general, they estimate impacts of trans- portation projects on income and jobs in the economy. The drivers of these economic impacts may be changes in spending patterns, changes in the relative costs of trans- portation, or improved market access. As part of their analy- sis process, these models can recognize business productivity impacts related to logistics, production, and agglomeration economies, as well as trade and business attraction effects that are not included in the transportation system efficiency tools. On the other hand, they typically exclude the value of personal time savings or environmental effects to the extent that they are valued, but do not affect the flow of money in the economy. An important aspect of economic impact tools is that they trace economic impacts of transportation projects by industry. They generally translate impacts on travel time and operating cost into commodity-specific freight flows and industry- specific income flows as a necessary step in the process of calculating impacts on the flow of money between industries, workers, and households. To varying degrees, most of these tools also incorporate measures of access and connectivity, including labor markets; truck delivery markets; airport serv- ice areas; and access to intermodal rail/truck terminals, air- ports, marine ports, and border crossings. From the viewpoint of freight investment decisionmakers, these economic impact tools are particularly important because they also can cover productivity effects that span carrier, ship- per, and consignee impacts. In some models, these effects are added together in the calculation of overall economic impact, so that the allocation of impact among the various classes of stakeholders may not be well distinguished. However, there are exceptions where business productivity effects are explicitly shown. From the viewpoint of local and statewide decision- makers, wider economic impact analysis tools can also help answer questions from constituents that benefit/cost analy- sis fails to address—particularly the extent to which a pro- posed project may positively or negatively affect the overall business environment of a community and resulting changes in jobs and income. They may further assist economic devel- opment agencies to identify how proposed projects may affect their efforts to diversify the area economic base and attract target industries—shifting the quality and pay level of available jobs, reducing dependence on declining industries, or improving business stability by enhancing supporting and complementary activities. Economic impact models are discussed in terms of two aspects—the core economic model and the analysis frame- work that translates freight-related transportation impacts into economic model inputs. 44

Input-Output Models Input-output (I-O) models have limited application for transportation impact analysis. In the United States, the two most widely used I-O tools are IMPLAN and RIMS-II. Both are regional impact systems built on the basis of the same national U.S. Department of Commerce accounting system, and trace how direct changes in the flow of purchases or sales of one industry lead to broader indirect and induced changes in purchases and sales (and ultimately jobs and income) in other industries in that region. That makes them very useful for estimating the local impact of industry openings, closings, expansions, and contractions. As a result, both IMPLAN and RIMS-II are widely used to show the job and income impacts of operating or expanding airport and seaport facilities. However, neither tool can esti- mate the impact of changes in costs or market access, which are the two key impacts of most freight rail and highway proj- ects. For such applications, it is necessary to utilize an external methodology or tool to translate changes in transport costs or access characteristics into direct impacts on the behavior of transportation system users before an I-O model can be used to assess broader impacts. In practice, the necessary front-end tool can take three forms. First, a market study can be conducted to estimate how a new access route will lead to direct changes in ongoing industry activity. Second, it can just be assumed (rather naively) that all transport cost changes translate into corresponding percentage growth in income and output for those industries. Third, an external cost-elasticity response tool may be employed. All three methods have been used outside the United States and Western Europe, where I-O models are the only available economic impact analysis tools. However, in the United States and Europe, the norm is to rely on economic impact simulation models that have inputs representing changes in transport cost and market access. Regional Simulation Models These are tools that forecast future changes in jobs, income, value added, and business output by industry. These models are set up for single or multiple regions and often track the flow of jobs, income, and business activity between regions. They are like I-O models, in that they incorporate representation of inter-industry and interregional flows to show effects of spending changes, but they also add a capabil- ity to show time series impact of changes in transport costs. Regional simulation models used in current practice include the following: • Computable CGE models—In Europe, there has been sub- stantial effort to develop computable general equilibrium (CGE) models of the economy for large regions and nations. Typically, these models have a spatial component that tracks transportation connections (and travel times) and trade (industry product flows) among regions, and an industry component that tracks the cost of freight transportation by commodity group between regions. The CGE element esti- mates the economic impact of transportation projects and policies through a process that first calculates their impact on interregional freight transport cost, effective labor sup- ply, value of capital stock, and overall factor productivity. This can include effects of changing travel times, congestion levels, reliability, accident rates, and operating costs. The macroeconomic response is then estimated as changes in industry growth and associated changes in commodity trade between regions. A notable example for large-scale impact estimation is ASTRA—a systems dynamics simula- tion model that also models commodity movements in a multimodal context but is spatially limited to major regions within Europe. ASTRA has been used to estimate economic growth effects of projects proposed for the Trans-European Network (TEN), a Europe-wide program for developing new multimodal trade corridors across the continent. For that analysis, the ASTRA model was implemented with the TIPMUC (Transport Infrastructure and Macroeconomic) process that calculated effects of proposed projects on gen- eralized transportation costs by industry.(6–7) On a much smaller scale, another European example is PINGO— a spatial CGE model for Norway with 20 regions and 10 commodities. • REMI Policy Insight—In the United States, the REMI Pol- icy Insight Model emerged during the 1980s as a structural simulation model for regional and statewide estimation of economic impacts. It shares many of the features of the spa- tial CGE model, combining inter-industry I-O equations with transport price response and additional impacts on labor supply/demand and migration rates. To estimate impacts of transport projects or policies, there are REMI Pol- icy Insight inputs, including generic transport cost and over- all business operating cost by industry. Changes in effective distance between regions also can be used to calculate changes in generalized transportation costs by industry, which then can affect interregional trade. REMI Policy Insight is flexible and can be built for relatively small areas (counties) or for larger regions. In practice, REMI Policy Insight also needs a front-end tool to translate freight-related transportation impacts into economic model inputs. One option is REMI TranSight. TranSight directly links results of a road network and travel demand model to the REMI Pol- icy Insight macroeconomic model. This front end, used in Oregon and Connecticut, allows the user to change inputs to the transportation model (affecting car/transit mode split, vehicle volumes, speeds, or distances) to represent alternative 45

future scenarios. However, the modal choices are limited to highway modes and rail transit; there is no separate freight rail mode and no ability to differentially affect truck versus rail impacts on either transport cost or effective distance. Over the past decade, a variety of other analysis systems have emerged that provide a more useful interface for use of REMI Policy Insight. They all share a greater ability to assess economic impacts, benefits, and costs of transporta- tion network alternatives at a statewide level and include the following: – MCIBAS (Major Corridor Impact-Business Analysis System)—A system developed for Indiana DOT for corridor analysis; – HEAT (Highway Economic Analysis Tool)—A system developed for Montana DOT for corridor analysis; and – BEST (Benefits Estimation System for Transportation) spreadsheet tool—A methodology developed for Michi- gan DOT for corridor analysis. • TREDIS with CRIO-IMPLAN—Web-based tools for small area transportation impact analysis emerged in 2007 with the CRIO-IMPLAN model, offered as part of the TREDIS system. CRIO-IMPLAN follows the concept of Occam’s Razor as “a reduced form regional model that adds a strong set of features for estimating the incremental effects of trans- portation improvements at the local and regional levels, but shaves off broader macroeconomic factors that do not nor- mally come into play for these types of situations.”(8) It combines an interregional I-O model with trade flows, together with a time series framework for estimating eco- nomic growth forecasts over time, and “a series of econo- metrically derived functions relating transportation access and travel cost changes to shifts in local industry output and employment growth.”(8) The access factors include same- day truck delivery, labor market, and intermodal air, rail, marine, and truck freight terminal access. Interregional trade (and associated costs) are represented by both com- modity code and mode, with alternatives for utilizing HIS/Global Insight’s TRANSEARCH commodity flow data- base, FHWA’s Freight Analysis Framework (FAF), or other freight flow data sources. It has been used with the broader TREDIS front-end system in Texas, Kansas, Wisconsin, Illi- nois, Massachusetts, and 20 other states. • Global Insight Economic Model—For state-level freight policy studies, the Global Insight freight model provides a specialized economic impact analysis system. Leveraging the short- and long-term forecasting macroeconomic models of Global Insight, this system provides highly detailed responses to changes in transport costs by mode and commodity. It uti- lizes econometric (statistical) equations that are sensitive to changes in transport costs per ton for transporting a wide range of commodities by all available freight modes. It also includes detailed information on freight flows by com- modity and mode. The model forecasts changes in wages, prices, and spending patterns. This model option currently is available at a state or multistate level, working with the TREDIS front-end system. Spatial Access Impact Models These are tools that forecast impacts of local changes in transport access and connectivity on future attraction of busi- ness activity to an area. They originated in the economic development field as regional business attraction analysis tools, and have since migrated to mainstream transportation planning. Examples of relevance to freight transportation planning are discussed below. • The University of Maryland spatial econometric model estimated, at the zip code level, the effect of highway proj- ects on the level of economic activity and growth in a zone, based on a wide variety of transportation indicators. These included network density and spatial agglomeration, as well as changes in access times to airports, intermodal rail/truck freight terminals and rail transit, and the size of labor, consumer, and supplier markets. This model was used to analyze expected impacts of a proposed highway corridor development in Maryland. • LEAP (Local Economic Assessment Package) was origi- nally developed by the Appalachian Regional Commission for business attraction analysis in the 13 Appalachian states. It explicitly showed how costs of land, labor, energy, and taxes interacted with transport costs and access (including ground access time to intermodal rail, air and marine ports, and highways) to differentially affect the attraction of various industries to an area. It was subsequently applied by consultants to highway impact studies in a dozen Appalachian states. A commercial version of LEAP also was incorporated into the Montana DOT’s HEAT system and the TREDIS framework as applied for regional freight access analysis in Portland (Oregon), Vancouver (British Colum- bia), Chicago (Illinois), and Houston (Texas). Integrated Frameworks These combine economic simulation models, front-end tools to translate travel model data into economic models, and back-end tools that translate the economic model results into information for freight project planning and decision making. There are both low-end (general approach) and high-end (tailored approach) options. • Generic Approach: TREDIS—This is a modular framework operating through a Web-based server to integrate various tools for travel impact analysis, spatial access impact analysis, 46

regional economic impact analysis, and benefit/cost analysis. The primary benefit of TREDIS is that it provides a flexible off-the-shelf methodology for regional or state agencies to conduct economic impact and benefit/cost analysis in a con- sistent manner spanning road, rail, air, and marine modes. It has been applied with various combinations of road and pavement management systems, travel demand and net- work models, land use models, commodity flow data- bases, and economic models (the latter, including REMI, CRIO-IMPLAN, and HIS/Global Insight). • Tailored Approach: HEAT—This is a modular system that integrates a statewide highway network model and a statewide economic impact model together through a geo- graphic information system (GIS) to provide a high degree of spatially detailed information. It is a custom-built sys- tem, tailored to the needs of the specific state, providing graphical map-based information on (1) economic condi- tions among communities, (2) transportation dependence and commodity-specific impacts among industries, and (3) commuting and freight flows along highway networks. It also provides both economic impact and benefit/cost analysis results. However, it focuses specifically on highway networks. Since the core access and economic impact mod- ules in TREDIS and HEAT are essentially the same, it is pos- sible for a state DOT to start using TREDIS and later upgrade to the GIS-based HEAT system for highway analysis. Financial Impact Accounting Tools These tools are intended for primary use for financial analy- sis by stakeholders that have a role in transportation project development or ongoing operation, or that operate services using the infrastructure. They may be public agencies, private operators, or public-private partnerships. They are commonly used as decision-support tools to assess how much alternative projects and scenarios will affect outgoing cost streams, incom- ing revenue streams, cash flow, borrowing or bond require- ments, net profit or loss over time, upside/downside risk, and rate of return. The private sector utilizes a number of different financial tools that are centered on systems that feed general ledger and income statements. These tools are both commercially avail- able or home grown and are often a combination of the two. The general ledger builds on input from the transactional systems such as receivables, payables, and the operating sys- tems that track cost items like fuel economy, maintenance costs, production efficiency, network routing, etc. Systems are applied to determine the effectiveness of pricing strate- gies, risk management, and other ancillary functions. Often, these systems include equipment investments for tracking, process monitoring, and efficiency. Utilization of the physi- cal assets and resources is reported via the financial data. Another category of financial analysis tools deals not with freight generation or freight flows, but rather with the eco- nomic viability of transportation infrastructure projects and the freight services that use that infrastructure. These tools are related to economic impact analysis tools only in the sense that (1) both are driven by common assumptions about the trans- portation project costs and demand response and (2) direct impacts on productivity and wider impacts on the economy also will affect financial performance of stakeholders. How- ever, they become particularly relevant for freight because of the involvement of private companies as developers and operators of many freight facilities (particularly rail and port, but also increasingly air and highway facilities). Private com- panies providing shipping services also are major users of both publicly and privately operated freight facilities. There are several types of financial models: • For public agencies, fiscal impact models calculate impacts on public tax and fee revenues, as well as requirements for increasing expenditures to serve new population and eco- nomic growth that may result from the projects (including public safety, education, and other municipal and state services). • For private entities, pro forma models calculate risk and rate of return associated with proposed, new investment projects. A due diligence study (involving third-party con- firmation of market demand and revenue assumptions) is commonly required for private-sector financing. • For public-private partnerships, a combination of both types of models is necessary. These are commonly devel- oped on an ad hoc basis to meet the needs of the specific situation. Risk Assessment Tools As described, risk assessment has been a critical component of private-sector investment decision-making for a long time and has taken on more importance among public-sector agen- cies given recent interest in utilizing public-private partner- ships or shared asset activities. Although infrastructure and public projects do not fall into a standard process, the tools used to determine private-sector investment benefits are fairly generic and include due diligence tools and risk assessment tools, described below. Due Diligence Tools Due diligence tools include economic demand estimation, technical review, and financial modeling. The common goal of these tools is to verify the information and potential of a particular project. Typical types of tools or methods used include the following: 47

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

49 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. Table 3.7. Types of risks and risk allocations. 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. Table 3.8. General template of risks.

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

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

Next: Chapter 4 - Development of the Freight Evaluation Framework »
Framework and Tools for Estimating Benefits of Specific Freight Network Investments Get This Book
×
MyNAP members save 10% online.
Login or Register to save!
Download Free PDF

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.

  1. ×

    Welcome to OpenBook!

    You're looking at OpenBook, NAP.edu's online reading room since 1999. Based on feedback from you, our users, we've made some improvements that make it easier than ever to read thousands of publications on our website.

    Do you want to take a quick tour of the OpenBook's features?

    No Thanks Take a Tour »
  2. ×

    Show this book's table of contents, where you can jump to any chapter by name.

    « Back Next »
  3. ×

    ...or use these buttons to go back to the previous chapter or skip to the next one.

    « Back Next »
  4. ×

    Jump up to the previous page or down to the next one. Also, you can type in a page number and press Enter to go directly to that page in the book.

    « Back Next »
  5. ×

    To search the entire text of this book, type in your search term here and press Enter.

    « Back Next »
  6. ×

    Share a link to this book page on your preferred social network or via email.

    « Back Next »
  7. ×

    View our suggested citation for this chapter.

    « Back Next »
  8. ×

    Ready to take your reading offline? Click here to buy this book in print or download it as a free PDF, if available.

    « Back Next »
Stay Connected!