Engineering Economic Analysis Practices for Highway Investment (2012)

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74 chapter four ImplementatIon Value of engIneerIng economIc analysIs EEA has been successfully applied to highway investment decisions throughout the project and program life cycle, as summarized in Tables 3 through 6 and developed in the chap- ter three case examples. Viewed collectively, these examples demonstrate that when properly applied economic analyses yield several advantages: 1. Determination of the merit of a project in economic terms. Information on benefits and costs can be (and often is) supplemented by noneconomic and qualita- tive information to inform highway investment deci- sions that must respond to a range of policy goals and agency objectives. 2. Analytic necessity. It has long been understood that the costs, outcomes, benefits, and other impacts of transportation investments must be analyzed explicitly in a time dimension (refer to the nineteenth-century example mentioned in chapter one). Economic analy- ses enable managers to correctly compare and assess the dollars for an investment today versus the dollar amounts of costs and benefits to be incurred in the future. Straightforward engineering analyses, compar- isons of initial costs of design and construction among project alternatives, and simplified economic methods (e.g., payback period) have their uses, but do not yield a full and fair accounting of future costs and benefits. 3. Demonstration of tangible project benefits. These benefits are typically estimated in terms of reductions in the cost of transportation to highway users, avoid- ance of costs to road users (e.g., costs of collisions or of congestion that are prevented), and avoided costs to the agency and ultimately to the public it serves (e.g., costs avoided through infrastructure preventive main- tenance and reduction of environmental pollution). The maritime shipping analysis that is included in the Criti- cal Facilities case example shows that these benefits extend to other transportation modes besides highways. 4. Comprehensive estimation of project costs. These estimates extend through the project life cycle, includ- ing costs of design, construction, maintenance, facility operation, rehabilitation, replacement, and removal or discontinuation if needed. Comprehensive estimates, done properly, disclose the full implications of the economic commitments to a project, establish a solid basis for parallel financial computations and forecasts, and help to avert unexpected and potentially onerous costs in the future. 5. Development of an explicit linkage between high- way performance and economic outcomes. Costs and benefits, whether to the agency, road users, or the public at large, are influenced directly by the level of performance of the facility in all aspects—roadway and structure preservation, mobility, safety, environmental stewardship, energy conservation, and so forth. This linkage provides a strong motivation to embed eco- nomic thinking across the board, throughout an agen- cy’s business processes and in its internal and external communication of performance accountability. 6. Facilitation of tradeoffs among disparate, compet- ing transportation programs. Preservation, mobil- ity, safety, and other programs each have specific sets of performance measures. These measures are impor- tant for decision making (e.g., in diagnosing problems) and for accountability in monitoring progress toward targets. They can also be used in tradeoff analyses, where professional judgment is applied to assess, say, the need for additional mobility investment versus addi- tional preservation investment. However, where differ- ent program outcomes can be computed as benefits, the commensurate performance measures in dollars can provide greater clarity when comparing alternatives in programming and resource allocation. 7. Encouragement of innovative, creative solutions to problems. Economic analyses encourage managers to see problems in new ways—the Safety Programming case example is an effective illustration. Given current budget pressures, WSDOT and other agencies have realized that a traditional, reactive approach to safety problems—responding to a limited number of high- accident locations with expensive road improvements— could not realistically address many other road safety needs and improve performance cost-effectively. More proactive, systematic, low-cost safety improvements are driven by the need to increase benefits while reduc- ing costs; the case example describes the success of this strategy to date. Of the seven items on this list, the first four are straight- forward: the direct benefits of performing an EEA. They are typically the reasons that analysts add an economic dimension to an engineering comparison of alternatives. The fifth bullet, noting the linkage between facility technical performance and

75 economic merit, has implications regarding transportation investment decisions and accountability: • Among the set of technical performance measures used for a project, one or more could be able to be related ana- lytically to costs (or costs avoided) that are incurred by the agency or highway users. • Although technical performance measures (either out- puts or outcomes) can provide insights into how and to what degree a project addresses a need, economic mea- sures can help gauge the relative importance of these results as perceived by the agency or highway users. • Economic measures of costs and benefits can assist in scaling and scoping a project appropriately, particularly when informed by (1) a forecast of available revenue for this program, and (2) cumulative program needs. (Refer also to the following discussion of the seventh point.) • Technical performance results and economic measures of costs and benefits give different, but related, pictures of outcomes. One analysis can inform the other to gain a more complete understanding of the worth of a project. The sixth point, regarding tradeoffs, recognizes that because dollars are additive regardless of the type of investment they represent, project-level costs and benefits can be aggregated to program-level totals for comparison and relative assess- ment. Although the tradeoff analysis described in the case example is a prototype and has not been implemented to date, it has been included as a useful example of a potential appli- cation of economic analysis. The seventh point departs from an analytic perspective on economic analyses to consider its impact on organizational thinking and decision making. CBA and risk analysis impose a discipline on agency personnel not only to gather and prop- erly apply good information about a candidate project, but also to subject candidate projects to closer examination. By scrutinizing costs, benefits, and their ratio, agency staff is prompted to consider implications and options: • Does the benefit–cost ratio indicate that the project is worthwhile? • Are costs reasonable in light of the benefits to be attained? • Are benefits reasonable in light of the cost of the investment? • Are costs realistically able to be funded in light of total program needs? • Are benefits sufficient to yield a material improvement in overall highway performance? • Will policy goals, agency objectives, and performance targets be met with the proposed mix of projects? • Might other solutions yield greater benefits for cost or lower costs for a given benefit? • Are there aspects of agency business and decision processes—data gathering and analysis, scoping of solutions to meet needs, evaluating competing solu- tions to recommend the best approach, using manage- ment systems, databases, and analytical tools effec- tively, reviewing research findings to gain new ideas, and so forth—that could be improved to make better decisions based on better information? To address some of these questions, further interviews were conducted with the WSDOT State Pavement Engineer, who uses economic analysis to evaluate proposed pavement projects. Washington State was the subject of three case examples in recognition of the important role given eco- nomic methods and criteria by WSDOT and other units of Washington State government. This particular manager did not have a role in the earlier-described cases, however, so the discussion here represents a new perspective. The purpose of these additional interviews was to reinforce the findings earlier and understand more broadly how the use of EEAs has strengthened WSDOT’s organizational capabilities for good decisions on highway investments. strengthened agency decIsIon makIng Managers at WSDOT have found that conducting economic analyses, with the discipline imposed by that process, can yield additional benefits in improved decision making more generally. For example, in the course of defining and analyz- ing alternatives, managers may realize that additional alter- natives exist that could yield even greater cost savings or benefits. An economic framework such as LCCA provides a generally understood, analytic basis for headquarters and field offices to discuss the engineering, economic, and other impacts of project alternatives. Two such examples are drawn from pavement type selection as practiced by WSDOT. WSDOT conducts pavement type selection under the guidance of the department’s Pavement Policy (WSDOT Pavement Policy June 2011). This policy document cov- ers topics in new pavement design, pavement rehabilitation, technical design considerations, type-selection procedures, engineering reports, life-cycle cost worksheets, and typical inputs to the FHWA’s RealCost program used by WSDOT for pavement-related LCCA. Although the Pavement Policy recognizes both the deterministic and the probabilistic analy- ses available through RealCost, it advocates the probabilis- tic capability to provide a risk analysis accompanying the economic estimates. If this is not possible, it recommends that at least a sensitivity analysis be performed using the deterministic analysis (WSDOT Pavement Policy, p. 48). If the difference in total life-cycle costs between two options exceeds 15%, the policy is to select the lower-cost option. If the difference in total life-cycle costs between two options is within a 15% margin, then other, project-specific factors are considered to judge the preferred alternative. These fac- tors include, for example, various environmental impacts, nonuser impacts, safety impacts, pavement-type continuity within a corridor, and several other items listed in Appendix 6 of the Pavement Policy.

76 day Versus night construction WSDOT recently completed a pavement type selection for a state route widening project from 2 lanes to 4 lanes plus improved traffic channelization. Two pavement alterna- tives of equivalent design were considered: hot-mix asphalt (HMA) and portland cement concrete (PCC). In the origi- nal analysis, the PCC alternative was preferred. Although the total discounted life-cycle costs of the two alternatives were within 1% of each other, the road user costs with PCC were considerably lower than those for HMA, owing to fewer rehabilitation cycles during the 50-year analysis period. This and other project-specific factors weighed in favor of the PCC alternative. In reviewing this result, however, the managers of the department’s State Materials Laboratory realized that a night- time construction option had not been investigated. A second LCCA was therefore performed based on night construction and rehabilitation for both pavement alternatives. Given the lower traffic volumes at night, road user costs during reha- bilitation projects were considerably reduced. The updated LCCA result favored the HMA alternative by a margin exceed- ing 15%. The HMA alternative was therefore recommended and approved for this project (“SR 24/I-82 to Keys Road . . .” July 12, 2004). The LCCA results for the HMA and PCC alternatives for both daytime and nighttime construction options are presented in Table 22. Both agency costs and road user costs have been reduced by WSDOT’s decision to revisit the original pave- ment recommendation and expand on the options considered. Note that road user cost savings are significant. The overall discounted savings resulting from this exercise are almost $800,000. full-depth Versus non-full-depth shoulders On another state route widening project, a pavement type- selection analysis using LCCA was conducted to compare a PCC with an HMA alternative. The HMA alternative had lower life-cycle costs and was recommended for the project. However, in reviewing this result the managers of the depart- ment’s State Materials Laboratory noted that the shoulders for both PCC and HMA alternatives were based on full- depth designs. Discussions took place at both headquarters and field levels on the pros and cons of full-depth shoulders for this particular highway. These discussions were based on engineering factors such as the performance of longitudinal construction joints, quality of base-course compaction, and impacts on construction staging and traffic. A key consider- ation was whether traffic might be routed onto the shoulder at some point; for example, during periods of construction and lane occupancy. Departmental review of these matters, headed by the State Materials Laboratory, indicated that many could be controlled through enforcement of construction specifica- tions and were not related directly to the depth-of-shoulder question. It was believed to be unlikely that the shoulder would need to serve mainline traffic in the foreseeable future; projected growth was too low to warrant full-depth construc- tion. Moreover, the cost of the full-depth shoulder, even for the preferred HMA alternative, was considerable—$1.2 mil- lion for the roughly 4-mile project (“SR 522—Snohomish River . . .” May 17, 2010). Another LCCA was performed based on partial-depth shoulders for both the PCC and HMA alternatives. Nighttime construction was assumed throughout. The life-cycle cost results were structured in a sensitivity analysis that enabled comparison of alternatives based on the relative unit prices of PCC ($/cy) and HMA ($/ton). HMA was lower in total cost for almost all of the combinations of relative unit prices considered but with one exception, its cost advantage did not exceed the 15% margin needed for automatic selection. Non- economic, project-specific factors were therefore considered, among them the greater surface continuity afforded by HMA, lower pavement-related noise attributable to HMA through- out the 50-year analysis period, and lower environmental and traffic impacts of PCC as a result of fewer rehabilitation cycles. Based on all of these inputs, WSDOT recommended and approved the HMA alternative, with an estimated 6.5% total discounted cost savings and a favorable review of its noneconomic advantages (“SR 522—Snohomish River . . .” May 17, 2010). Pavem ent Alternative Discounted Costs of PCC Alternative Discounted Costs of HMA Alternative Comparison HMA to PCC Construction Option Agency Cost ($1 0 3 ) Road User Cost ($1 0 3 ) Total Cost ($10 3 ) Agency Cost ($1 0 3 ) Road User Cost ($1 0 3 ) Total Cost ($10 3 ) Difference in Total Cost as % of HMA Total Cost Day $1,515.7 $299.1 $1,814.8 $985.1 $811.9 $1,797.0 0.99% Night $1,509.6 $12.1 $1,521.7 $982.6 $35.3 $1,017.9 49.5% Source: “SR 24/I-82 to Keys Road…” (July 12, 2004). TABLE 22 LIFE-CyCLE COST RESuLTS FOR PAVEMENT TyPE SELECTION COMPARING DAy AND NIGHT CONSTRuCTION

77 lessons from the examples WSDOT pavement managers regard their LCCA-based type- selection process as comprising “investment scenarios.” Engi- neering considerations of options, coupled with the use of LCCA as a tool, lead to the best scenario from a technical and an economic perspective. By organizing costs and benefits (i.e., avoided costs) within a well-understood framework, WSDOT managers are then better able to focus on other factors that need to be considered in reaching a decision. These manag- ers offered their observations on ways in which EEA helps to channel engineering, philosophical, and cultural inclinations toward constructive, unbiased outcomes. These observations have been combined with other lessons from the three WSDOT case examples described in chapter three to provide the follow- ing list of lessons learned overall: • There is the tendency to try to include “nice-to-have” features in a project, particularly if “there’s enough money in the budget,” if work force issues are driving a high level of activity, or if there are regional political pressures for a more comprehensive project. If projects are not scoped correctly in the first place or conceived at the appropriate scale, designers may include more than what needs to be done. A solid economic analy- sis helps to realign thinking on the appropriate project scope and engineering approach. • Perceptions of particular types of solutions; for example, a “preferred” paving material—may also skew judg- ments about crafting an effective solution. Again, eco- nomic analysis is helpful in evaluating the relative value of the performance of specific types of solutions. • The SR 24 example, which revealed considerable sav- ings accruing to nighttime construction once it was incorporated in the analysis, illustrates what can happen when a key option is excluded from the investment sce- narios. As a matter of practice, WSDOT requires that LCCA include all potential scenarios. Adherence to this requirement led to the more cost-effective solution and the revision in the recommended pavement type. • For correct project scoping and programming to occur, agency guidance must be clear, managers and staff must understand their roles, and communication must be effective. It is important that analytic tools for per- forming the economic analyses be easy to use and sup- ported by good documentation. Data collection is to be timely, accurate, and complete, and provide informa- tion that is consistent with analyses and reports. • In the face of budget limits, exercising diligence in seek- ing the most cost-effective solution is virtually a require- ment. Certain state funding mechanisms in Washington constrain the projects, programs, and geographic areas that can receive dollars from that source. Cost savings in terms of these funds can be redirected to other eligible projects that reflect statewide priorities. Cost savings resulting from effective analysis of alternatives can be substantial, as noted in the previous examples. • Washington State has a mature system of performance measurement and accountability reporting. The Gray Notebook, as the performance report is referred to, pro- vides a dependable and well understood framework for communicating technical performance trends. Certain technical indicators tracked in the report are useful in estimating costs and benefits. WSDOT also has lever- aged its database and GIS capabilities to provide effec- tive graphical and analytic support for problem diagnosis, needs identification, analysis of alternatives, and decision making. • WSDOT’s communications internally and externally are effective not only in conveying information about current status and trends affecting the transportation system, but also in building credibility among stake- holders and the public that the department is invest- ing wisely and serving as an effective steward of the transportation system. EEA allows agency managers to scrutinize project scoping and development to ensure the best possible solution. When called on, WSDOT reports to the legislature on its strategic management of programs. The most recent report was for pavement preservation and included the criterion of lowest life- cycle cost and actions to extend facility life and reduce costs. WSDOT also described key technological and economic trends; for example, 10-year plans for manag- ing flexible (asphalt) and rigid (PCC) pavements, trends in pavement materials prices and strategic responses to them, and materials and methods such as recycling and permeable pavements (WSDOT Strategies Regard- ing . . . Sep. 2010). Annual reports on pavement condi- tion, performance, and management are also included in The Gray Notebook (Feb. 18, 2011) leVel of effort The level of effort required to perform EEAs as part of an agency’s business processes has not been extensively researched; this topic is recommended as a subject for fur- ther investigation in chapter five. From the case examples presented in chapter three, however, it is reasonable to infer the following: • Caltrans’ conduct of its Value Analysis (VA) studies directly quantifies the level of effort and the recom- mended participation of key staff. Based on this case example, a minimum 6-day commitment is standard, which may increase to 7 or more days if required by project scale, complexity, or other factors. Five days is acceptable for smaller projects; four days is the mini- mum for small, local projects not part of the National Highway System. Three or fewer days is not accept- able. Note also that existing data collection by Caltrans is already structured to support Value Analysis, and analytic models, including guidance for their use and staff training, have been in place for some time.

78 • Tables 3 through 6 represent a number of stages in the project/program life cycle, varying in their respective scope of activity and level of effort across agency units. The levels of effort to conduct economic analyses at each of these stages have not been widely researched (the Value Analysis studies by Caltrans are an excep- tion). Comments by topic panel members who are actively engaged in conducting EEAs for state DOTs suggested that many analyses do not take much time to perform, but this experience has been gained with agencies that have integrated economic analyses within their business processes and developed a history of successful applications. Startup times and learning- curve effects may take longer for states that do not now perform economic analyses. It would require further research to quantify the times needed for analyses at each of the program areas and decision stages in Tables 3 through 6 for states with different levels of experience with economic analyses. • For individual projects, unofficial guidance listed on the website of the TRB Transportation Economics Com- mittee (ABE20) recommends flexibility in judging the appropriate level of effort to devote to economic analy- ses of transportation projects. Factors such as the cost of a project and the expected payoff could be weighed when assessing the level of effort to be assigned to an economic analysis. Specifically, the guidance recom- mends that the cost of a proposed level of effort should not exceed the cost-difference between two projects being analyzed. Rather, “effort should be concentrated on estimating and valuing the benefits and costs that are the largest and that differ the most between projects” (“Transportation Benefit–Cost Analysis” 2010, select link to “Level of Effort”). • Performance-based management is another field requir- ing organizational change and commitment to realize its benefits. (Discussion of the relationship between performance-based management and economic analy- sis is presented later in a separate section.) Guidance on how to view the level of effort needed to bring about this type of change is instructive: Public officials and managers sometimes hesitate to make the move to performance management because they fear that new costs will accompany the change. This fails to recog- nize the heavy costs often borne by governments that provide suboptimum services and make poor decisions without the benefits of data and analysis. The costs inherent in perfor- mance management are simply the costs of good manage- ment. Source: A Performance Management Framework . . . June 2010. • In agencies such as Caltrans and WSDOT, where eco- nomic analyses are widely used and well understood, they are tightly integrated within multiple business processes. It may not be feasible (or meaningful) to isolate the level of effort attributable to economic analyses as opposed to the effort spent on “due-diligence” in reviewing agency products (plans, programs, engineering designs, etc.) and processes. For examples of this integration, refer to the cases for WSDOT and Caltrans in chapter three. These cases illustrate the following: – Tight integration implies economy of activities; for example, data collection and processing potentially simultaneously serve requirements of design engi- neering, traffic engineering, economic analyses, and performance monitoring. To arrive at a level of effort solely for economic analyses, it would be necessary to make arbitrary allocations of time and cost among these functions—allocations that might differ in other agencies. – Departments that use economic analysis effectively and efficiently assign high value to automating data collection, performing the economic analyses, and reporting results. The chapter three case examples illustrate that systems may be developed in-house (often with consulting or academic assistance), as with Caltrans’ Cal-B/C, WSDOT’s MP3 and Safety Management System, and the Mn/DOT spreadsheet workbook to analyze project acceleration options, or can be obtained from institutional or commer- cial sources (e.g., FHWA’s RealCost). (Though not discussed in the case examples, AASHTOWare is another source of systems used by state DOTs.) Again, although the time spent in designing and developing these systems and providing support and training could be estimated, it would require an allo- cation scheme to distribute this effort among all the agency units and tasks that would use and benefit from system capabilities. – It would likely be difficult to derive estimates of “level of effort avoided” as the result of a good decision made at a timely stage using economic analysis. For example, regarding the two WSDOT instances discussed earlier—selection of a nighttime construction strategy and selection of partial-depth rather than full-depth shoulders—it is not clear what alternative project review mechanisms would have been necessary, or could have been applied, to arrive ultimately at the same conclusions but without the assistance of an economic analysis. – “Tight integration” can be complex and difficult to analyze, because it may exist both internally and externally with respect to the agency. using WSDOT as an example, many agency business units are engaged in business processes that take advan- tage of economic analyses, both in headquarters and regional offices. Externally, WSDOT works closely with other state agencies, recognizing their involvement in tasks such as setting strategic state- wide goals and data collection (refer to the Safety Programming case for examples). WSDOT also conducts extensive reporting of its accomplishments and performance measures to the legislature, gover- nor’s office, and other executive agencies, through The Gray Notebook and other mechanisms. These

79 reports include satisfaction of lowest life-cycle cost objectives, which are driven by state law. – For agencies exhibiting (or seeking) this tight inte- gration, it may be more fruitful for future research to focus on what factors make an integrated approach successful, rather than attempting to identify spe- cific levels of effort associated with sole activity of economic analysis. Issues to be dealt with in future research might therefore include how integration of an agency’s activities can be done skillfully to serve multiple uses efficiently, and what human, organi- zational, and technical factors within this integrated approach would enable economic analyses to pro- mote greater team creativity and insight, leading to more cost-effective solutions. success factors role of champions Studies of success factors have been conducted in two areas of transportation system management that make substantial use of BCA: transportation system safety and infrastructure asset management. One item that is associated with virtu- ally all success stories of DOT initiatives is the role of a champion. A champion may be an individual or a group of individuals behind an effort; they may be within a DOT or external to it (e.g., a legislative committee or its full member- ship, the governor, a transportation commission or board, or an advocacy panel). Although the roles played by champions may vary, they tend to have the following characteristics in common (State of Alaska . . . Sep. 2007, pp. E-16 and E-17): • They have not only a strong interest in the particular initiative they support, but are also in an institutional setting capable of exerting their influence in decision processes in which they are involved, as well as influ- encing how other groups address their initiative. • In their positions of influence or leadership, they are able to get others to collaborate. • They have a good grasp of the issues, are good commu- nicators, and can articulate the reasons for collaboration. • They have the tools to promote their initiative; for exam- ple, human, information, and dollar resources, and an organizational or institutional support structure. • They are respected, trusted, and viewed as credible by others. organizational and cultural setting With respect to the WSDOT Safety Programming case described in chapter three, a separate study has described institutional and cultural factors that have favored WSDOT’s success in improving safety performance, reinforcing the efforts of the safety champions (Mercer Consulting Group LLC June 2007, pp. 21–22): • The strong role played by the WTSC, with the support of the governor, in providing leadership and account- ability in promoting a “culture of traffic safety” through- out the state. These groups would be regarded as safety champions external to WSDOT. • Good working relationships among the WTSC, WSDOT, the state legislature, and other state and local entities. For example, the house and senate transportation com- mittees strongly support the traffic safety initiative and other public policies through their actions on transporta- tion funding. State agencies assist local communities in establishing local safety programs. • Strong support by the public for effective safety poli- cies, programs, and actions, which provides an incentive for agencies and the legislature to develop and imple- ment innovative and effective solutions to safety needs. • An aggressive goal (Target Zero) and WSDOT’s his- tory of establishing and maintaining effective partner- ships and programs with other state and local groups to meet transportation challenges. This institutional framework, guided by a clear policy and performance target, has guided a successful, data-driven approach to addressing safety issues. • Leadership and collaboration among all parties to deploy their resources behind key safety priorities and to com- municate performance accomplishments through estab- lished mechanisms of state government accountability. The importance of organizational culture in accepting EEA should not be underestimated. Material assembled for an exec- utive asset management workshop indicated that changing the organizational culture was “the key challenge” to realigning organizational thinking to view asset management as a busi- ness focus (Ferragut and McNeil 2008, p. 34). This workshop pointed out that an important characteristic of successful asset management programs was the marshaling of agency-wide resources and capabilities toward this objective—exactly the characteristic observed in the successful, program-wide implementations of EEA in the chapter three case examples. This finding is further reinforced by a study of performance management within state and local governments, which stated that “to make real improvements, organizational cul- ture must also be addressed” (A Performance Management Framework . . . June 2010, p. 2). (The relationship of EEA to performance management is discussed in a later section.) Although economic analysis is a different subject from safety improvement, asset management, and performance management, there are important parallels that can be drawn in achieving success with initiatives in each of these areas. The development of an organizational and institutional cul- ture favoring economic analyses at WSDOT is instructive, with a key role played by the state legislature as an exter- nal champion. (Refer also to the introduction to the Mobil- ity Programming case example, which outlines the history of benefit–cost and lowest life-cycle cost criteria for capital programming at WSDOT, and the passage of enabling state

80 legislation in RCW 47.05.) The following is based on the author’s experience, with additional information provided in an FHWA case study (“Comprehensive Transportation Asset Management . . .” Apr. 2007). • The investigation of a new capital programming approach, based on economic efficiency criteria, was initiated in a study sponsored by the legislative Joint Transportation Committee in the 1990s. • Following completion of the study, state law was revised to require consideration of economic criteria in recommending highway projects and programs as part of the legislative budgeting process. This enabling legislation was RCW 47.05, discussed in the Mobility Programming case example in chapter three. • This new capital programming approach was phased in over a period of a few years to develop the necessary analytic procedures and performance measures that sup- port the economics-based calculations. Ongoing com- munications with legislative committees and members ensured that the new approach would be understandable and acceptable when used in program budget recom- mendations. Collaboration with other agencies, consul- tants, and academic experts was critical to successful development of specific methods and procedures within each transportation program, subprogram, and type of project. Champions supporting the use of engineering economics methods emerged within WSDOT as well as among external bodies such as the governor’s office, the Office of Financial Management, and Washington Transportation Commission. Training of WSDOT staff familiarized them not only with the mechanics of how to apply the economic methods and criteria, but also with the change in thinking that economic analysis would bring about; that is, project costs had to be justified by project benefits. • Since that time, WSDOT has continued to expand and refine the economics-based effort. The three WSDOT- related case examples (Mobility Planning, Mobility Pro- gramming, and Safety Programming) illustrate how the resulting organizational and institutional roles and capa- bilities, as well as the analytic methods and tools, char- acterize the successful application of economic methods. adapting to an agency’s profile Applications of economic methods in other agencies will rely on a common set of economic concepts and methods, such as LCCA and benefit–cost. However, they will likely differ in their specific objectives, motivations, needs, and require- ments; their organizational and institutional roles and respon- sibilities; the public policy and political environment; and the particular analytic products and data that are used. under- standing these organizational, institutional, and cultural dif- ferences, and how economic analyses can be successfully applied in each case, is important to fostering more wide- spread use and acceptability of these methods. An approach that has been used in many studies is to develop agency pro- files (e.g., FHWA’s series of asset management case studies and AASHTO’s primer on performance-based management). An implementation that parallels what could be called for in economic analysis appears in an asset management system study. The study develops agency profiles in tabular form to characterize successful system implementations in different organizational settings (Cambridge Systematics, Inc. Sep. 2010). A future research effort could use a similar approach to characterize profiles of agencies of different characteristics that have applied economic analysis broadly across a number of agency functions and stages of project/program develop- ment and implementation, and that routinely make use of this economic information in their business and decision processes. Details on this agency-profile research recommen- dation are provided in chapter five, drawing on prior work (Cambridge Systematics, Inc. Sep. 2010). useful resources A number of resources are available with information on engi- neering economic methods and their uses. Basic information is provided on selected websites such as those maintained by Caltrans and Mn/DOT, and by the TRB Transportation Eco- nomics Committee (ABE20). These websites provide defi- nitions and explanations of engineering economic methods (e.g., benefit–cost and net present value), as well as break- downs of key elements of the analysis; for example, expla- nations of different components of transportation benefits (travel time, VOC, and so forth), and typical components of costs. Each agency may also include references to in-house applications, such as those for pavement type selection or VE, as well as descriptions of ITS that perform these analyses, examples of system reports, and case studies developed by the agency or by others. There may also be links to other rel- evant websites, and lists of applicable literature. For example, the TRB ABE20 Committee website includes links to state and provincial DOTs; federal, local, and international agen- cies; universities; and other relevant sites. Although WSDOT makes considerable use of economic analyses, its website is organized more along the lines of agency functions and business processes; for example, planning, capital program- ming, safety, and performance accountability. References to economic analyses are embedded within these descriptions or are accessible by means of links to documents describing WSDOT plans, programs, and studies. FHWA maintains websites on economic methods and ref- erences documents such as those cited in chapter two. These documents specifically provide guidelines for using economic analyses for highway investments. They provide details on life-cycle cost techniques, uses of particular economic meth- ods when analyzing highway investments, descriptions of ITS that employ economic analyses [e.g., FHWA’s High- way Economic Requirements System (HERS), HERS-ST, and RealCost], guidance in matters such as selecting and using a discount rate, and suggestions for effectively using

81 economic methods. NCHRP reports and economics papers in TRB’s Transportation Research Record are also good cur- rent sources. All of these sources and the websites discussed previously have the advantages of being readily available and directly applicable to highway investments. Other useful references have been called out in chapters two and three. A bibliography is included following the reference list. There is a significant body of literature including textbooks related to EEA. However, care must be exercised where texts are oriented toward private-sector practices, because methods, nomenclature, and examples may differ from the definitions and guidance cited in this report. The case examples have provided a number of instances of agencies’ abilities to develop the data needed to drive suc- cessful economic analyses. Although the discussion of GAO findings in chapter two pointed to the potential difficulty in obtaining data that would be accepted by different audiences and researchers, the case examples nonetheless indicate that successful analyses based on credible data are achievable. This is true even for categories of data that were identified in chapter two as potentially problematic in their monetiza- tion; for example, travel-time savings, reductions in emis- sions, and reductions in serious accidents. A key strategy is to seek out as wide an array of potential sources of these data as possible. Data may be available from the resources of the agency itself: its own experience in managing projects and activities, its storehouse of historical data, and the analyses and databases associated with its management systems. If in-house sources are not available, data can be obtained from external sources in both the public and the private sectors. • The Safety Programming case example illustrated WSDOT’s use of IIHS data to better understand the types of safety problems on different classes of highways, as influenced by specific highway characteristics (e.g., num- ber of lanes and curvature). The IIHS study was not only a source of data, but also an influence on WSDOT manag- ers’ thinking about how to approach the problem of col- lisions and what types of solutions might be technically and economically feasible. • The Acceleration of Project Completion case illustrated Mn/DOT’s use of a wide range of data sources encom- passing federal, state, local, academic, consultant, and international studies. As one example, the monetization of vehicle emissions to account for the environmental pollution effects of different investment strategies dur- ing and after construction was based on unit cost data (dollars per ton of vehicle emissions) from the FHWA’s HERS model. • The u.S.DOT recommended values of travel-time sav- ings and related guidance for various transportation modes and categories of transport users. These data are contained in guidance memos posted on the agency’s website: http://ostpxweb.dot.gov (“Revised Departmen- tal Guidance . . .” Feb. 11, 2003). Other potential federal and national sources of data and guidance were reviewed in chapter two. • More comprehensive reviews of road costs are also available, including environmental and other social costs. For example, a comprehensive study of the social costs of motor vehicle use in the united States was con- ducted for the period 1990–1991 (Delucchi 1998). This study estimated the monetized value of a number of environmental impacts resulting from air, noise, and water pollution, as well as a wide range of social costs associated with accidents, parking, congestion, and vehicle use. Although the time frame of the study is limited to 1990 and 1991 data, its findings provide a framework for considering a broad range of costs that are not encountered in typical highway studies. They are also a point of departure for potential updates and adjustments to the data presented. More comprehensive and sophisticated engagement of economic methods would benefit from the development of an agency profile (discussed earlier) for a peer DOT with a history of successful economics-based applications. For now, the case examples indicate that EEAs draw on a wide range of agency capabilities. These human, information, and organizational skills already exist generally within the typi- cal DOT structure; the key is to bring these capabilities to bear in supporting the specific requirements of economic and risk management applications. An agency may already have a distinct organizational unit dedicated to economic analyses; however, this is not always the case, even among the state DOTs represented in the case examples. Addi- tional desired capabilities suggested by the case examples encompass transportation planning, capital programming, relevant engineering disciplines (e.g., roadway design, proj- ect and program delivery, traffic engineering or operations, and maintenance), geographic services (to advise on or pro- vide GIS and GPS capabilities), the transportation data unit (which may be attached to an engineering, materials, project, or program unit), information technology, the interagency coordination unit, and the legislative liaison office. It may also be desirable from time to time to consult with, or have the assistance of, the agency’s research and library unit, the external reporting or communications unit, the strategic busi- ness planning or strategic assessment unit (which provides strategic direction and may oversee performance monitoring and management accountability), and the special studies unit (e.g., for major projects). Many of the case agencies consult academic or private-sector experts to advise on unusual or complex problems, or to develop unique or specialized ana- lytic methods and organizational capabilities. economIc analysIs and performance management economic Versus technical performance measures A relationship between EEA and performance (or performance- based) management can be observed in the chapter three case examples, and is an issue recognized and discussed in the

82 literature. The discussion is usually framed in terms of the measures produced by each practice; for example, benefit– cost ratio or net present value as economic measures of infra- structure investment alternatives, and technical condition and performance measures reflecting different engineering aspects of the infrastructure system that would result from investment alternatives. The key issues are what economic and technical performance measures represent in relation to one another, the relative value of the different types of infor- mation they convey, and how they work together to provide a more complete picture of the relative advantages and dis- advantages of infrastructure investment options. The Virginia Housing Development Authority has com- pared these two types of measures within its own discipline (A Performance Management Framework . . . June 2010, pp. 36–37, paraphrased and adapted to highway systems): • EEA and resulting economic measures reflect the eco- nomic efficiency of an investment strategy, and the eco- nomic dimension of investment outcomes or impacts. They consider whether work procurement and perfor- mance were done efficiently regarding the type, amount, and quality of resources used (affecting the “cost” side of the calculation), and whether the work produced a value-added result (affecting the “benefit” side of the calculation). These analyses can be updated over time to determine whether other alternatives exist that can achieve objectives at lower cost (an interaction with the technical component). • Engineering analyses and technical performance mea- sures reflect the actual impacts or outcomes of an investment strategy. They indicate whether goals or objectives are being achieved by the results produced. They can also be used to assess whether goals, objec- tives, and targets are themselves suitable and relevant or need to be adjusted to account for revised trends, assumptions, and public policies; to identify factors that impede attainment of desired performance, and how updated solutions can improve system performance; to update these analyses over time to determine whether other alternatives exist that can achieve objectives at lower cost (an interaction with the economic compo- nent); and to determine whether the technical measures themselves are relevant, meaningful, and reliable. “Value for money” concept Economic methods and measures are unique in that they can express “value for money” of an investment, not simply its technical outcomes. An international scan of agency practices in Australia, Great Britain, New Zealand, and Sweden found that several agencies performed a BCA of every project. The benefit–cost ratio provided a common language for discuss- ing project acceptability for selection and the value-added provided by a program, both internally and externally among other ministries, the legislature, and the public. It was also noted, however, that many major projects had other consid- erations driving investment decisions besides benefit–cost, including broader public priorities and political issues. Risk management techniques can play a role in assessing project suitability from an economic perspective. For example, sen- sitivity analyses or scenario testing has been used by these agencies to evaluate different types of bridge investments, to set appropriate speed limits, and to support safety improve- ments, all based on the concept of “value for money” (Link- ing Transportation Performance . . . Jan. 2010, pp. 7–8). The scan report cited further applications of “value for money” that were combined with effective technical diag- nosis of problems, reinforcing similar types of findings in the chapter three case examples (Linking Transportation Performance . . . Jan. 2010, pp. 11–12): • A BCA conducted by the New Zealand agency found that increasing police enforcement at locations with recurring speeding problems would reduce collisions to yield a 28-to-1 benefit–cost ratio. • The New South Wales Roads and Traffic Authority’s diagnosis of safety problem areas showed that roadway departure crashes often occurred on horizontal curves where the radius was small enough to cause difficulty in handling the vehicle, but not small enough to prompt drivers to slow down sufficiently. By focusing limited safety funding on highway curves with these specific characteristics, they reduced roadway departure crashes cost-effectively through various countermeasures such as widened pavement and shoulder surfacing [refer to the international scan plus the following references: Levett (2007) and de Roos et al. (2009)]. Other exam- ples of targeted, systematic solutions by Swedish and Australian agencies included the use of cable barriers and skid-resistant pavements at high-crash locations. toward common objectives and purposes The preceding examples illustrate that although economic and technical measures are distinct from each other, they serve a common objective and together can provide good insights into cost-effective solutions. The objective can be stated concisely as “better results for the public,” where gov- ernment bases its judgment of desirable results on its under- standing of public needs and expectations. These needs and expectations extend to achieving cost savings and to improv- ing performance against targets and attaining customer sat- isfaction (A Performance Management Framework . . . June 2010, pp. 2–6). This statement encompasses the principles of both performance management and EEA. Put into practice, it provides a strong contrast to more traditional ways of look- ing at public-sector projects and services: While bureaucratic processes focus on preventing bad things from happening, performance management [including analysis of economic performance] adds a focus that government actually

83 produces positive results. Source: A Performance Management Framework . . . June 2010, p. 4. The theme of both technical- and economics-based perfor- mance in serving a unified highway program objective and purpose has been recognized in other references relevant to state DOT practice: • An AASHTO CEO Leadership Forum on performance- based management cites one of the purposes of performance management as “assessing the status of a program [and] evaluating its cost- and [technical] performance-effectiveness.” Also, “Successful imple- mentation will continue to result in . . . [greater] results with constrained resources and fewer investments with low performance benefits” (Cambridge Systematics, Inc. May 2009, pp. 2-1, 4-2). • The Leadership Forum document notes that some agencies set performance goals and targets based on a number of considerations: financial (considering real- istic funding levels to achieve the goal), technical (goals should be achievable based on current and forecasted condition and performance), policy (goals must be con- sistent with existing policies and priorities, customer expectations, public outreach results, and executive and legislative input), and economic (minimizing life-cycle costs and maximizing benefits in relation to costs). A survey conducted for the Leadership Forum found that most respondents had developed performance goals for asset preservation and for safety. It is not uncommon for maintenance and preservation goals to be expressed directly in economic terms; for example, specifying cost-effective methods of accomplishment, with a goal of minimizing life-cycle costs, as illustrated several times in the referenced text (Cambridge Systematics, Inc. May 2009, pp. 2-7, 2-13, 2-14). Corresponding technical targets may be set in terms of engineering measures (e.g., levels of pavement roughness, service- ability, or surface condition index and values of bridge health index) that correspond to the minimum-life- cycle-cost principle. • NCHRP Report 551, which considers performance measures and targets for transportation asset manage- ment, cites several examples where technical and per- formance measures are used together and interact with each other (Cambridge Systematics, Inc. et al. 2006). These cases include the development of long-term goals based on technical and economic factors (p. ix; refer also to the previous bulleted item); the strengthen- ing of management systems to enable better executive decision support, CBAs, tradeoff analyses, and other higher-level analyses (pp. 43–44); inclusion of cost- effectiveness and benefit/cost measures within the set used to guide project selection and program-level trad- eoffs and resource allocation (pp. 53–54); evaluation of investment tradeoffs based on life-cycle benefits and costs, as opposed to immediate impacts (p. 53); inclu- sion of road user costs and benefits within benefit–cost and cost-effectiveness measures where feasible and appropriate (note that road user impacts are functions of the road’s technical condition and performance) (pp. 53, 55); and application of technical and economic measures to performance target-setting (p. 88). • NCHRP Report 551 illustrates the latter item on target setting by using congestion mitigation. Performance measures for congestion mitigation, including economic measures, should be meaningful at two levels: to the individual road user (e.g., commuter, traveler, passen- ger, shipper, and freight carrier) and at a more aggregate level indicating the overall magnitude of the problem given the composite traffic stream. At the individual level, appropriate measures might include travel time or delay per person, per trip, or per unit of freight carried. Measures at the aggregate level might include total hours of delay, percentage or statistical measures of reliability, or total dollars based on respective values of travel time across categories of road users or a monetized measure of travel reliability. These monetized, aggregate costs or costs avoided would be used in BCAs and provide a way of treating passenger travel and freight travel together. Monetized values of mobility depend on engineering performance of the highway link, corridor, or system: a function of its capacity and operational characteris- tics in relation to the traffic demand. To establish a base level for comparison to congested conditions, Caltrans and WSDOT have explored the use of “maximum pro- ductivity,” a throughput concept reflecting an optimum combination of speed and traffic volume, as a target. This optimum tends to occur at speeds near 50 mph on a freeway, higher than target speeds of approximately 35 mph that have been used as targets in congestion analyses in the past. This approach shifts the nature of the mobility target from the notion of “what might be achievable through additional mobility investment” to “what is the operating efficiency of the highway now and after the investment” (Cambridge Systematics, Inc. et al. 2006, p. 88). • Although economic measures convey information on the relative merits of investment alternatives, technical measures also play important roles in analyzing strat- egies. NCHRP Report 551 observes that the Ministry of Transportation of Ontario (MTO), which uses finan- cial measures of asset value relative to their replace- ment cost as high-level system preservation measures, continues to rely on technical condition information for more detailed performance analyses. Asset man- agement systems for pavements and bridges are able to apply detailed deterioration models to predict future asset condition in terms of these technical parameters. Such predictions enable a wider and more precise set of analyses than would be possible using the simpler forecasting models for asset value alone. Furthermore, although financial asset value encourages continued investment in preservation to maintain that value above

84 a defined baseline, it does not yield information on the cost-effectiveness of investment options that do so. Economic analyses are still needed for this purpose (Cambridge Systematics, Inc. et al. 2006, p. 65). ex-post analyses International Scan Some overseas agencies visited on the international scan for performance management evaluate the impacts of major projects after they are completed (that is, in an ex-post or post-construction analysis). In an economic context, this analysis indicates to what degree the benefits estimated in the project’s before-construction BCA were actually realized by the completed, operational facility. More generally, the analysis can consider what went right and what went wrong on a project assessment, with lessons for future evaluations of highway investments. The scan team included post-con- struction evaluations of project economic analyses in its “les- sons learned” recommendations for the u.S. transportation community (Linking Transportation Performance . . . Jan. 2010, pp. 7, 13). european eVa-tren project A considerable amount of work on ex-post evaluations and their role in strengthening economic assessments of projects has been accomplished by the European EVA-TREN project team. EVA-TREN stands for EVAluation of Investment for TRansport and ENergy Networks in Europe. Its team repre- sents a consortium of European university research institutes. EVA-TREN is a research project supported by the European Commission . . . The main objectives of the project are: • reviewing the ex-ante assessment approaches for large infrastructure projects; • selecting the best practices; [and] • improving the assessment methodologies for the ex-ante evaluation through [an] ex-post evaluation. [The] EVA-TREN project aims at improving the ex-ante appraisal practices for the assessment of large Energy and Transport Infrastructure projects through the ex-post analysis of several case studies. Furthermore, the project will also develop a docu- ment containing evaluation guidelines on the topic. Source: EVA-TREN website: www.eva-tren.eu/project.htm. Most of the following material is drawn from papers and proceedings that were prepared in conjunction with the 1st Experts’ Workshop for EVA-TREN held in Lausanne, Swit- zerland, on November 7, 2006. The findings cover not only the importance of ex-post analysis in strengthening the informa- tion basis for highway investment decisions, but also compa- rable practices (or lack thereof) in Canada, the united States, and Japan. Although much of the writing reflects the Euro- pean context in terms of highway programs and funding, the following points have general applicability for the economic analysis methods followed in the united States and other countries. To maintain consistency with the original sources, the terms ex-ante and ex-post will be used frequently, as well as CBA for cost–benefit analysis. In u.S. practice, these terms may be used synonymously with pre-construction, post- construction, and benefit–cost analysis (BCA), respectively, or comparable nomenclature. The reviewed literature on the subject will be distilled to its essential points; readers may consult original sources for more detail. The following spe- cific points are from a working paper supporting the EVA- TREN project (Florio and Sartori Jan. 2010): • Ex-ante CBA assessments of projects vary considerably in their quality and assumptions. Common shortcom- ings include incomplete or inconsistent information and errors in methods; for example, different analysis periods (time horizons) for similar projects, different assumptions in the treatment of externalities, and inac- curate estimates of future traffic demand (particularly overestimation of demand) and of project costs (dif- ferences in actual-to-estimated cost on a set of EVA- TREN project studies ranged from -17% to +116%). This initial weakness in the ex-ante estimates in turn confounds the ability of ex-post analyses to yield use- ful information. The problem of inaccurate estimates echoes the discussion of forecasting bias in the meth- odological issues discussed in chapter two. • Systematic ex-post evaluations are needed to correct problems in the ex-ante estimates and to determine whether divergences are the result of methodological errors, incorrect assumptions, or changes in the exter- nal project environment. Properly discerning the causes of incorrect forecasts is the only way to determine the steps needed for improvement. Building incentives to conduct ex-post analyses into an agency’s business processes and personnel roles and responsibilities is an important aspect of ensuring that these analyses con- tribute to improved decision making. • The objectives of an ex-post analysis according to the EVA-TREN project are: – Increased transparency regarding the impacts of a transportation investment in meeting its economic, financial, environmental, and social goals. – A measure of the utility of a project as well as the quality of the ex-ante estimates of its merits. – Identification of ways to improve future ex-ante esti- mates by providing feedback on methods, assump- tions, and data. – Collection of data on projects to be used for future reference. – An incentive for better, more accurate ex-ante esti- mates in the future by describing publicly the real, demonstrated achievements of completed projects. • EVA-TREN has identified the steps contributing to a correct ex-post assessment as follows: – Establish what has to be evaluated. This is a matter of understanding the primary objectives and targets

85 of a project, its bounds, and relevant questions that need answering. – Measure the outcomes of a project. This involves first considering the no-build option: what would have happened if the project had not been built? This step establishes a benchmark against which project out- comes can be compared. Second, define the outputs and performance measures to be used, and obtain the data to quantify these results. Practical considerations are important to controlling the costs of acquiring this information. – Compare the ex-post evaluation results with the expected project outputs from the ex-ante stage. Results to be compared (recall that these projects can be in transportation or energy) can include project costs, revenues, demand, and impacts in the several dimensions discussed earlier (economic, financial, etc.). It is important to identify not only the differ- ences ex-post to ex-ante, but also, to the degree pos- sible, what has caused these discrepancies. – Classify the results and their likely causes of success or failure. The EVA-TREN re-examinations of its case study projects have underscored the importance of understanding “Why?” as well as “What?” hap- pened on a project. It is important to learn whether the causes of inaccuracies or errors in the ex-ante pro- jections of project impacts were the result of internal factors (e.g., errors in assessment methods, data, and assumptions; incorrect assessments of risk or uncer- tainty), other project-related factors (e.g., ex-ante forecasts and estimates were valid, but project man- agement failed to deliver on expectations), external factors (e.g., natural disasters, unexpectedly adverse weather, and other unlucky events), or external proj- ect environment updates (e.g., changes in policy or in public expectations). Further information is provided in additional working papers prepared for the EVA-TREN experts’ workshop (Chevroulet Jan. 2008 and Feb. 2008), the workshop pro- ceedings (EVA-TREN: Improved Decision-Aid Methods . . . 2008a), and the annex to the proceedings (EVA-TREN: Improved Decision-Aid Methods . . . 2008b). Key findings relevant to this synthesis include the following: • Methods of appraisal among the European union (Eu) countries “differ considerably in scope, sophistication, methodology, and parameter values”; research results on these methods “are not fully transferred between coun- tries”; and transnational projects within the Eu remain difficult to complete efficiently. Given one examined fund as an example, the result is that cost overruns affect the majority of projects, with the average overrun 15% to 20% above budget (EVA-TREN proceedings, 2008a, p. 4). The different practices and levels of sophistication noted among Eu nations recalls a similar diversity in the level of attainment among u.S. state DOTs described in chapter two. • The workshop proceedings observe that the united States has “no official requirements or guidelines for ex-post evaluation of transportation projects” (EVA- TREN proceedings, 2008a, p. 12). • Problems with existing ex-ante and ex-post evaluations and associated CBAs are as follows (EVA-TREN pro- ceedings, 2008a, Table 7.1, p. 15): – The CBA methodology is often unclear or weak because of the different treatment of basic problem parameters and economic impacts. – The CBA methodology does not exist or is struc- tured only in financial, not economic, terms. – Project documentation is weak or lacking in impor- tant data (e.g., on project output). – It is difficult to establish the ex-post economic rate of return owing to lack of a clear project description or a comparison between the build and no-build cases. – The ex-post economic rate of return is lower than the ex-ante estimate as a result of changes in project parameters (e.g., the investment amount, project out- put, or timing of events) or in methods and data (e.g., shadow prices or inclusion of externalities). These issues recall analogous concerns expressed by FHWA in reviewing the economic analyses accompanying the TIGER grant applications (chapter two). In raising these issues, the EVA-TREN team seeks to assist Eu agencies in being more aware of observed shortcomings and problems with economic analyses, and to improve both their ex-ante and ex-post estimates according to the recommendations described earlier. The EC Guide (discussed in chapter two) mentions ex-post analyses and an ex-post perspective, but does not go into the methodology in detail. The EVA-TREN documents listed previously provide more comprehensive information and guidance. Other Examples Other examples of ex-post analyses have been reported as follows: • A review of benefit–cost ratios with regard to the ben- efits of public investment in Australia’s road infrastruc- ture, developed for the Australian Automobile Associa- tion (The Allen Consulting Group 2003). • A review of the causes of project delays and estimates of the cost of these delays, accompanied by re-estimates of the project benefit–cost ratio to compare ex-ante (or appraisal) with ex-post B/C values, prepared as a research study in public policy in Japan (Morichi et al. 2005). • The re-examination of the centerline rumble strip solu- tion described at the end of the Safety Programming case example in chapter three, an example of ex-post analysis applied by a state DOT. Although not strictly an ex-post analysis, the method- ology developed in the Accelerated Project Delivery case

86 example illustrated the use of data from a completed project to build a method for use on future projects. As more gen- eral guidance, it is recommended that agency staff validate the data used in performance management analyses, which would apply to economic analyses as well (A Performance Management Framework . . . June 2010, p. 35). further lessons The literature has provided additional lessons with respect to performance management, of which economic analyses are an important part. These are summarized here. • WSDOT has distilled its experience with performance management to several concise guidelines (Cambridge Systematics, Inc. May 2009, p. 4-1): – “Keep perspective. Performance measurement is one of several decision-making tools.” – “Timing is everything. Don’t delay until you have the perfect data, framework, or IT system.” – “Lead, don’t follow. Tell your story before someone else tells it for you.” – “Don’t tolerate silos. Strive for a ‘One DOT’ men- tality.” • The international scan regarding performance manage- ment reported that Queensland addresses financial risk in future maintenance commitments for existing infra- structure by estimating unfunded liabilities resulting from deferring or under-investing in maintenance. This calculation is supported by data from asset inventories and use of asset management systems and techniques. The calculated liabilities are formatted within a bal- ance sheet-type statement. The scan also reported that Sweden, the united Kingdom, and New Zealand used variations of this approach to consolidate infrastruc- ture financial needs within a unified statement of future public-sector liability for facility preservation (Linking Transportation Performance . . . Jan. 2010). (Although a sufficient level of funding is a financial, not an eco- nomic, issue, ensuring that financial liabilities are met is important to maintaining the integrity of the LCCA on which the project was originally justified. For exam- ple, if it is believed that legitimate maintenance needs cannot be met on future projects, other project options; for example, involving a premium or low-maintenance design and higher construction quality—might be more realistic and preferred in terms of technical and eco- nomic performance.) • Commenting in an interview on the relationship of eco- nomic analysis to performance measurement, a state DOT manager noted that her agency looks to performance- based planning as a way of directing project solutions to identified performance needs or problems. The use- fulness of economic analysis is sometimes diminished by relatively narrow choices set up for evaluation—that is, alternatives between specific projects of one type as opposed to different types of projects or solutions. (For example, the move toward systematic, low-cost solutions would define a different approach to safety needs from more traditional, larger-scale, reactive projects. Also, the two WSDOT pavement examples earlier in this chapter illustrated in their initial results the pitfalls of too narrow a consideration of project options.) Further, economic analysis can be misapplied to justify a project for which a decision to build has already been reached. The ongo- ing movement at the national level (e.g., in the TIGER grant process) to demonstrate more transparently what the public is getting for its transportation investments may improve the application of BCA. communIcatIon and reportIng NCHRP Report 551 emphasizes the importance of commu- nicating and reporting performance results. Although the content and detail of reports to technical managers, political leaders, other stakeholders, and the general public may differ, in general the communication of information on transporta- tion system performance, including its economic performance and the value of program investments, is important across all these segments of the audience. Effective reporting of pro- gram accomplishments and communication of the value received from transportation investments reinforces the cred- ibility of the program, contributes to a better understanding of benefits received by the public, establishes accountabil- ity for program results, and strengthens the public’s support of transportation policy (Cambridge Systematics, Inc. et al. 2006, p. 42). These two messages—the importance of com- municating results effectively and understanding diverse needs for information among different groups within the audience—is repeated in guidance on performance manage- ment. Good information “can provide the vehicle for under- standing results and trigger discussion and debate on how to improve the results” (A Performance Management Frame- work . . . Jun. 2010, p. 40). The case examples in chapter three for the most part are built around communication of information in a technical context, as would be the case in transmitting information to agency managers and profes- sional staff. A variant on the largely tabular reporting methods used in the cases is a graphical approach employed by the San Francisco Bay Area Metropolitan Transportation Commis- sion (MTC) in appraising its competitive slate of candidate investments. This approach entails plotting the benefit–cost ratio against the number of defined transportation goals satis- fied by each proposed program investment. A schematic of this graphic is shown in Figure 4 (Performance Assessment Report . . . Dec. 2008). The bubble shapes represent the average result for proj- ects of a particular type of investment; for example, freeway widening, transit-oriented development, high-occupancy toll

87 lanes, and emissions reductions. For simplicity, these clas- sifications of projects are referred to here as “categories.” As a schematic, Figure 4 illustrates ten categories of proj- ect investment, A through J. The MTC includes street and highway, transit, nonmotorized, and climate protection/ emissions reduction categories in its candidate project invest- ments. The relative size of each bubble represents the annu- alized benefit computed for the plan target year: in this case, 2035. The bubbles are plotted according to their computed benefit–cost ratio and the number of defined transportation goals that they are judged to serve. In several cases the pro- grams are shown satisfying goals partially: this allows the MTC to distinguish among “strong support of,” “support of,” or “be neutral toward” a goal. Goals are expressed qualita- tively; for example, support of system maintenance; conges- tion relief; emissions reduction; focused growth; access to transportation for youth, elderly, and disabled persons; and nonmotorized safety. Figure 4 enables MTC professionals to assess the results and conduct discussions of tradeoffs in selecting project cat- egories for investment. The strongest categories are in the upper right, displaying both high benefit–cost ratios and sat- isfaction of multiple goals. The lowest performers are in the lower left. Organizing the results this way helps ensure that high-end performing categories of projects are included in planned investments; for example, H and J. Low-end per- formers (e.g., A, B, or C) would be included only if there are other compelling reasons to do so; for example, they represent a local high-priority category or they address a special need (e.g., lifeline transportation). The MTC may also choose to weight some goals more highly than others to see how results are affected. Also note that Figure 4 treats all modes listed earlier in the same way, with the same eco- nomic, policy, and technical criteria judging projects of dif- ferent categories. In this manner, the figure serves as a way to see how the economic performance of project categories can be combined with other technical and socioeconomic cri- teria to understand the relative benefits of each category and thereby to inform tradeoffs and decisions on transportation investments. ongoIng and emergIng areas of analysIs Work to extend the applicability of engineering economic methods is proceeding on several fronts as indicated by the synthesis survey results, interviews with practitioners, cur- rent areas of research, and the literature review. Following are examples illustrating the range of recent activities and trends in thinking. • Agencies are strengthening their capabilities to do EEAs. Survey responses and findings from the litera- ture review provide the following examples: – One agency is developing economic-based methods for programming and resource allocation for “other asset” (i.e., nonpavement, nonbridge) categories. EIAs are done for selected major projects. – In a second agency, a PMS is nearly operational that will take budgets and apply them to the pavement conditions to develop network scenarios. – A third department reports that it is in the early stages of developing economic analysis methods for Benefit-Cost Ratio Low (<1) Medium (1 - 4) Medium- High (5 - 9) High (>10) Number of Goals Addressed 1 2 3 4 C A B D I HG F E J FIGURE 4 Schematic: MTC performance assessment graphic (adapted from Performance Assessment Report . . . Dec. 2008).

88 the following program categories: ITS, other opera- tions (one of three urban mobility categories, the others being urban capacity and ITS), and economic impacts. – A fourth DOT is developing a set of economic analy- sis guidelines that will appear on the agency website. The department is also looking at techniques based on road user costs to establish budgets for mitigating construction-related impacts on traffic. Agency staff uses ITS Deployment Analysis System software to prepare economic analyses for potential ITS proj- ects, with the objective of prioritizing ITS invest- ments. With the relative scarcity of O&M funding, the economic analysis helps establish the business case for these ITS investments that sustain ongoing O&M commitments. Finally, this state has a long- standing statutory requirement to prepare BCAs for major projects, which are new or relocated highways comprising more than 5 lane-miles. – An analytic tool has been developed for a state DOT to provide consistent methods and data for the eco- nomic analysis of project costs and benefits. The tool is based on the AASHTO Red Book, with a custom- ized version of the Redbook Wizard to allow a differ- ent procedure for input data on traffic volumes, travel times, and highway capacity (Findley et al. 2007). • Engineering economic methods have been applied, or are under research for application, to assessing a wider set of highway features, particularly some of the newer, highway operations-related devices; for example, ITS technology, including ITS-controlled (automated) applications of anti-icing chemicals to prevent winter- time accidents (Stowe 2001); electronic toll collection systems (Li et al. 1999); intersection safety hardware (Madanu et al. Feb. 2010); and IntelliDrive deployment for wireless networking of data among road vehicles, road infrastructure, and passengers’ personal commu- nications devices (NCHRP Project 03-101, announced in Fy 2011). • Engineering economic methods may also be applied to topics involving the value of information, including the value of research. Examples include the application of benefit–cost methods to the use of Road Weather Information Systems to inform decisions on anti-icing applications and other weather-affected maintenance activities (Boselly 2001; Boon and Cluett 2002); to freeway management systems (“Freeway Management Systems” n.d.); and to the use of information from full- scale APT facilities (Steyn 2012). • FHWA and GAO observations on the competition for the first installment of the TIGER grant program were described in chapter two. Among the findings of those reviews were: (1) transportation agencies, including state DOTs, will conduct economic analyses if they are required to and this requirement is perceived to be in their broader self-interest; (2) the quality of the proj- ect economic appraisals varied, with the higher-quality submissions illustrating that economic analyses are indeed practical to conduct given data and methods typically available to transportation agencies, and the lower-quality submissions exhibiting various errors and incomplete data and options; and (3) changes in program administration could be considered to provide a fairer, better informed, and more transparent process for evaluations in future iterations of the grant program. In the context of this chapter, the TIGER grant program has been regarded as a potential model for future fund- ing programs based on competitive project merit rather than a formulaic nationwide distribution of funds. The GAO is particularly interested in a federal surface trans- portation program that is more performance-oriented and that uses a merit-based competitive approach to fund transportation projects of national or regional sig- nificance. A recent GAO study included several recom- mendations for future discretionary grant programs such as the TIGER grant program (Surface Transportation: Competitive Grant Programs . . . Mar. 2011): – If Congress deliberates such a competitive grant pro- gram it may wish to consider ways to balance the com- peting goals of merit-based competition and funding distribution based on geographic equity, perhaps with mechanisms to limit the geographic influence. – To provide greater transparency in u.S.DOT deci- sions on grants, the secretary of transportation might document the circumstances of key decisions, par- ticularly the reasons for accepting or rejecting grant applications and the decisions in which lower-rated applications are selected for award over higher- rated applications. – The secretary of transportation, in consultation with the u.S. Congress, might develop and implement a strategy for disclosing information on grant-award decisions. • The Puget Sound Regional Council (PSRC) employs a BCA that includes reductions in travel-time unreli- ability as one of its benefit components. unreliable travel time reflects the risk that passenger and freight road users might experience excessively long travel times under onerous conditions. The PSRC computa- tion translates this risk into a “certainty equivalent”: essentially a willingness-to-pay concept to reduce this risk. This procedure is implemented in PSRC’s B-C analysis (Analysis and Forecasting . . . Oct. 2009). Other transportation agencies, including the state DOTs reviewed in this synthesis, typically include travel-time reductions in their assessment of highway-investment benefits, but not reductions in the variability of travel time. Travel-time reliability (or unreliability) is a con- cern to all road users, but has a specifically economic dimension to freight traffic. There is a demand for the capability to include travel-time reliability in benefit– cost calculations and exchanges of ideas on this topic

89 are ongoing, as demonstrated by an international forum on travel-time reliability and CBA held in 2009 (“Value of Travel Time Reliability . . .” Oct. 2009). Further research is needed to develop and implement this idea more widely, including both the analytic treatment of the variation in travel time and the estimation of the time-dependent value of different categories of freight. • Road user costs are often modeled as a function of traffic flow, speed, and congestion (refer to several case examples in chapter three), but the relationship between user costs and pavement surface condition has not been updated for u.S. highways in more than 20 years. NCHRP Project 1-45, Models for Estimating the Effects of Pavement Condition on Vehicle Operat- ing Costs, is nearing completion and will provide new models of fuel consumption, tire wear, and vehicle repair and maintenance costs as a function of pavement roughness.