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.
95 S t e p 9 9.1 Goal In this step, the work accomplished in the previous steps is brought together in such a man- ner that it is possible to reach a decision point on the alternatives under consideration. The next two steps discuss how to present the information and how to evaluate the risk and sensitivity involved in the analysis. 9.2 Tasks Determine and Apply Appropriate Discount Rates Adjust the value of current cash flows and benefits to their value at a single point in time (base year) by applying real discount rates to the flows. This follows the basic economic principle that a dollar received today is worth more than a dollar received in the future. This can be explained by the following terms: â¢ Inflation: the increase in prices for goods and services over time. It implies a loss in the nomi- nal value of money over time because it erodes the purchasing power of a currency. BCA for public-sector projects generally controls for inflation by using estimates of future costs and benefits that are expressed in terms of todayâs (or the base yearâs) prices. These are referred to as constant or real dollars. Consistent with this approach, the discount rate used in BCA represents the time value of money after adjustment for inflation. â¢ Discount rate: the notion that a dollar today is worth more than a dollar five years from now, even if there is no inflation, because todayâs dollar can be used productively in the ensuing five years. The discount rate is the rate at which costs or benefits are scaled up when compared to future costs. For example, x dollars today is equivalent to x(1 + r) dollars in one year where r is the discount rate. â¢ Current dollars: the current dollar in the year during which an expenditure is made or a ben- efit is realized. These are not used in BCA but are typical in financial analysis. They are useful for agencies relying on cash flow projections to defray costs. The choice of the discount rate is not trivial. The user has to decide based on perspectives, end users, and all modes in the evaluation: â¢ Adopt the cost of borrowing or cost of capital; this may be appropriate for just the private sector. â¢ Follow guidance from the White House Office of Management and Budget (OMB) and use a relatively high rate (7%). â¢ Follow the OMB analytically preferred approach (3% with adjustments for the opportunity cost of public spending). Conduct BCA
96 Guide for Conducting Benefit-Cost Analyses of Multimodal, Multijurisdictional Freight Corridor Investments â¢ Consider discount rate guidance established by other modal agencies, if more than one mode is involved. â¢ Decide if some benefits should be discounted at a higher real rate to reflect inherent risk. The choice of discount rate has been and continues to be the subject of debate. Higher dis- count rates place greater value on benefits occurring closer to the base period, while lower rates place more value on benefits occurring further away in the future. Discounting of public-private partnership (PPP) projects has also been the subject of ongoing debate. One approach is to adjust the rate for a risk premium using some form of weighted aver- age cost of capital. The second is to use a conventional risk-free rate while subjecting cash flows to risk and uncertainty analysis, including the development of a certainty equivalent cash flow. No single discount rate will be acceptable to all stakeholders (public or private), but the real rates should be used to discount real benefits (constant dollars), and the nominal rate should be used to discount nominal benefits (current dollars). The real rate is the nominal rate from which the expected inflation has been removed. Consistency in use of rates is important, and it is not correct to mix them. Most economic BCAs use the real rate, real benefits, and real costs. A financial BCA and economic BCA rely on discounting. However, financial analysis almost always uses current dollars. Many guidance documents and tools discuss the actual discounting process, so it is not dis- cussed here in this guidebook. Worksheets accompanying this guidebook (Appendix M) walk the user through this process. OMB Circular A-94 OMB Circular A-94 (73) applies to all agencies of the executive branch of the federal govern- ment except the U.S. Postal Service. For projects with federal funding, use the discount rate for federal programs documented in this circular. The current rates to be used are 3 and 7%. These rates are mandated for all projects under USDOT grant programs. For public investments and regulatory analysis, the real 7% rate approximates, according to OMB, the marginal pretax rate of return on an average investment in the private sector in recent years. The OMB relies on the opportunity-cost-of-capital approach. Different Discount Rates for Different Federal Agencies Check the federal agency concerned so that the appropriate rate is used. If a project has the U.S. Department of Energy as a concerned party, then a different discount rate is used than for OMB. Similarly, the USACE uses different rates. The rates used by USACE are based on the after-tax savings rate (as compared to OMB) and updated every year. For federal water resource projects, the 2015 rate is a nominal rate of 3.375% (74). This rate is guided in turn by the Water Resource Development Act of 1974. USACE has historically relied on real values for both benefits and costs as established in the USACE P&G but has also used nominal rates to discount them for present value calculations. This practice is a hotly debated concept in academic circles. If the 3.375 percent is converted to a real rate by removing inflation, the BCA could be made compa- rable to other modal projects that rely on real discount rates. The FAA follows the OMB in using the 7 percent real discount rate (7) as does the FRA. Pipe- line projects, when evaluated from the public-sector perspective of a state, use a 3% real rate with 25 inflation or a 5% nominal rate. Climate change assessments including greenhouse gas emissions as an environmental measure are reflective of intergenerational equity. The social opportunity cost of capital value
Conduct BCA 97 (in per-unit metric ton of CO2) is used for legacy projects that are associated with inter- generational equity. USDOT recommends that the social opportunity cost of capital of 3% be used for CO2 emissions in its guidance. The rates for transportation projects with durable effects are still being debated, and some suggest that project risks should be used to adjust the discount rates. Financial BCA versus Economic BCA The discount rates used in economic BCA should not be confused with those that the private or public sector may use for financial analysis or even a financial BCA. In a financial BCA, the financial opportunity cost funds are typically the basis of the choice. The economic BCA, on the other hand, relies on guidelines and, in most cases, real rates. Different Forms of Discounting Discounting allows a way to incorporate opportunity costs or rates of time preference into BCA. Regardless of the actual discount rate, the discounting process has typically been assumed to be exponential (Equation 23): 1 (23)B b s i it ti Tâ ( )= + where s is the constant discount rate per unit of time and t is the delay length. In this context, the efficiency and equity also clash in BCA. The exponential discounting that is almost universally adopted weights benefits closer in time more than benefits farther away in time. The SCC also applies exponential discounting. Equity over Time The implications of discounting at a constant rate over long periods of timeâessentially reducing the present value of costs and benefits in the far future to insignificanceâhas prompted many researchers to question whether such discounting can be justified on either ethical or technical grounds. This issue often becomes most relevant when analyzing projects with long-lasting environmental impacts on CO2 emissions, and especially for projects with life spans exceeding 50 years or projects with long analysis periods (e.g., marine projects and some types of PPP projects). In such cases (referred to as intergenerational equity), hyperbolic discounting (also known as time-declining discount rates) has been suggested. The authors recommend using the conventional exponential for analysis periods of less than 50 years. Employ Best Practices for Treatment of Transfers, Tolls, and User Charges Transfers are pecuniary effects. When the loss to one is exactly offset by the gain to another, they cancel each other out. Some tax revenues (fiscal impacts) do not represent a social cost or benefit, but rather are transfer from the taxpayer to the government and are typically excluded from BCA. Do not include such tax effects so as to avoid double counting of costs and benefits. Fuel taxes are the most common transfers, and the tax portions are excluded from the price to allow for this as long as only the truck freight mode is under consideration for both scenarios. Tolls should also be considered transfers and omitted from BCA when only highway-related alternatives are compared in the build and do-minimum scenarios.
98 Guide for Conducting Benefit-Cost Analyses of Multimodal, Multijurisdictional Freight Corridor Investments There are two cases where the conventional approach to eliminating tolls and taxes as trans- fers needs to be reconsidered. Determine whether the project(s) under consideration requires special treatment of tolls and taxes. These two cases are: â¢ PPP projects: In projects where user charges are involved, tolls and/or user charges are both costs to users and benefits to asset providers (as cash flows). Tolls and user charges that are received by asset providers or concessionaires in PPP projects affect the financial revenue streams. On the other hand, user fees or charges levied for use are user costs. So, within an economic BCA of project benefits, user charges/fees are costs to users and benefits to the provider. This avoids double counting and provides an accurate assessment of net benefits. Taxes paid by concessionaires in PPP projects are transfers to the government, are part of a financial BCA, and are not included in the economic BCA. User costs, such as tolls, should be considered analogous to negative benefits on the benefit side in the economic BCA. The NPV of benefits to users is the summation of the present value of all positive benefits less the present value of negative benefits and costs. â¢ Mode diversion projects or comparison across two modal alternatives: Correct the rule-of-half consumer surplus with the difference in taxes and in revenues associated with new demand (whether generated or shifted). Adjust the consumer surplus in Equation 24 as shown in Equa- tion 25 (75): 1 2 (24)Consumer Surplus V P P V V P Pnb nb b b nb nb b( ) ( )( )â = â + â â (25)Surplus Consumer Surplus Taxes Revenues or Faresâ = â + â + â where subscript nb is the do-minimum scenario, subscript b is the build scenario, V is volume, and P is generalized cost. This essentially means that: â Fuel and diesel prices should be inclusive of taxes in modal diversion projects to correctly reflect consumer surplus. In practice, this is made complicated when comparing truck, rail, inland waterways, and other modes due to differences across states, and investment tax credits that apply in some contexts. â Tolls and user fees should be included as user costs on the benefit side (consumer surplus) and should also be included as revenues (producer surplus). Address Equity Considerations Equity can be integrated into economic BCA if you allow the possibility that interpersonal comparisons are possible (which is not allowed under the Kaldor-Hicks efficiency criterion). Public and Private Perspectives in BCA There are four broad contexts for considering specific perspectives (both public and/or pri- vate) in freight transport planning, all of which require consideration of public externalities: 1. Public-sector funding programs that seek to maximize social welfare. 2. Public-sector mandates to include public benefits for private freight investments (e.g., freight rail). (Some states such as Washington, Florida, Virginia, and Pennsylvania have guidelines drawing on BCA aspects.) 3. Public-sector planning and prioritization processes that include public and privately provided infrastructure (e.g., Virginia DOT and Georgia Statewide Logistics Plan). These planning-level studies include a mixture of private and public benefits used to prioritize projects from long- range plans. 4. PPPs where freight investments are shared across multiple jurisdictions, including railroads and state, federal, and local governments. These large-scale projects include both public and
Conduct BCA 99 private benefits. This contrasts with a pure private perspective where the BCA would only consider private benefits and contracts with financiers who would only consider benefits and costs to financial stakeholders (financial BCA). Table 15 lists several possible ways to integrate public and private perspectives. The approach adopted in the guidebook integrates the international reliance on consumer and producer sur- plus concepts with the literature partitioning benefits by stakeholders and combines them to provide an integrated perspective for addressing public and private perspectives. Emerging developments in wider economic benefits and the limitations of perfect competition notions are used to extend the concepts of consumer and producer surplus to handle freight markets, which are often characterized by market failures (76). Distributional Equity Considerations Distributional equity analysis requires evaluating projects in many different ways. One is related to how the distribution or incidence of benefits compares to the distribution or incidence of proj- ect costs across groups. The second is simply evaluating distributional aspects of benefits without regard to costs. Examine the project and the corridor to determine the specific kind of equity analysis that can be incorporated as part of BCA. The level and detail of equity analysis will depend on nature of impact, level, and detail of the data available for analysis. In the past decade or so, several agencies (federal and state) have been interested in showing how benefits vary by scale (geographic) or by groups. Public and private entities are different groups in BCA called referent groups. For public funding, for instance, the referent group is the general affected public or community. For collaborative funding schemes, the distribution of costs and benefits should both be considered. Addressing Equity. Addressing distributional equity considerations across user groups requires that benefits be examined across different transport users. This may be possible if the Costs by Mode Accountinga Total Impacted Mode 2 Impacted Mode 2 Private-sector provider costs: Investment costs (capital) A A1 .. Operating and maintenance costs B B1 .. Acquisition costs C C1 .. Other planning costs D D1 .. Public-sector provider costs: Investment costs (capital) G G1 .. Operating and maintenance costs H H1 .. Acquisition costs I I1 .. Other planning costs and subsidies J J1 .. Private-sector provider revenues: Tolls, fares, fees, and user charges (less subsidies, if any) K K1 Other revenues L L1 Public-sector provider revenues: Tolls, fares, fees, and user charges M M1 Other revenues (e.g., developer contributions or other applicable) N N1 Public provider costs, as applicable Q = G + H + I + J (to be used in BCA) Private-sector provider costs, as applicable R = A + B + C + D (to be used in BCA) Financial analysis components: Public-provider net cash flow impact Q (M + N) Private-provider net cash flow impact R (K + L) a The entries in the accounting column are only accounting entries. They do not stand for anything, other than indicating them as variables to be added or subtracted as shown in the last two rows of the table. Table 15. Stakeholder matrix costs (public and private accounts).
100 Guide for Conducting Benefit-Cost Analyses of Multimodal, Multijurisdictional Freight Corridor Investments inputs are obtained from demand models that allow a breakdown of volumes across user groups. It is common in passenger travel to observe trip purpose breakdowns, for instance. Equity analy- sis does not change the NPV; it only serves as additional information for agencies. In the context of multimodal freight, equity issues can arise from the distribution of negative externalities and associated health effects. For example, if a project is known to impact emissions and health, a health impact BCA can be conducted using tools suggested in Section 7.3 . This may be the case if Congestion Mitigation and Air Quality (CMAQ) funding is expected to be involved. Vertical equity, or addressing effects across different income groups, may be accomplished by distributional weighting, although the academic and the practice communities are split on the use of distributional weighting. When this is the case, different valuation parameters can be used to value different groups. Commodity models may provide commodity class breakdowns. Geographic equity of benefits in BCA requires that volume forecasts be well apportioned to account for trips that stay in the region, trips that are through, and trips with one trip end out- side the region. Distribution of benefits to different industry sectors requires an understanding of the com- modity mix being served by the facility at a minimum. In short, there are many ways in which distributional equity may be achieved, but each one comes with specific data and informational requirements and is tailored to the purpose for the agency. At times, this can add to complexity, since it may be difficult to apportion consumer surplus to different users, shippers, or regions with any level of precision. Keep the following principles in mind when addressing distributional aspects: â¢ Disaggregated benefits: Disaggregate benefits based on data availability and context rel- evance. There is no need to disaggregate benefits in investment-grade studies, for instance. Smaller-scale projects need not consider disaggregations, but they might be beneficial for projects that are multijurisdictional. Additionally, benefit disaggregation is meaningful if a funding gap has to be bridged and parties have to collaborate. Benefit disaggregation is particularly meaningful if the public sector, the private sector, or any other party desires to consider the economic worth of paying into a project. When they do so, their criteria and perspectives for assessing returns on investment vary. However, certain specific met- rics cannot be accommodated with an extended BCA. In accordance with discussions in the accompanying technical report and differences between economic analysis, financial BCA, and economic impacts discussed earlier, some metrics will have to be considered outside of a BCA until research has filled the need in terms of valuation or measurement or both. â¢ Comparable and congruent benefit categories: Include comparable and congruent benefit categories and cost disaggregations when comparing across modes. Also consider differences in asset lives by adjusting the NPV. â¢ Distribution of net benefits and assumptions: Include the distribution of net benefits and assumptions used when reporting BCA. This helps maintain transparency. Stakeholder Matrices. Consider using stakeholder analysis and representation of benefits to incorporate distributional equity considerations into the BCA process when appropriate. A stakeholder matrix is especially useful for large-scale projects. The process of discerning perspec- tives by itself does not alter the costs, benefits, or project NPV; it does, however, require parsing out benefits/costs by stakeholder category. The parsing process may place specific demands on data collected and analyzed. At the very least, benefits may be determined in the aggregate and parsed by apportioning weights. Stakeholder matrices facilitate greater alignment with the beneficiary-pay principle (which is defined as those who benefit pay for the benefit). In concept, the distribution of benefits
Conduct BCA 101 can be used as a decision support mechanism (but not a decision-making tool) to engage stakeholders to contribute toward a project. If, for instance, stakeholders such as beneficial cargo owners can be identified and benefits attributed to them specifically, then that infor- mation may be used to engage stakeholders to partake in cost sharing. Free rider issues (a situation where some users pay less than their fair share of costs or consume more than their fair share of a resourceâtransport infrastructure in this case) can and always will arise but may be mitigated somewhat by adopting this process of allocating consumer and producer surplus. When such benefits cannot be identified with precision or stakeholders cannot be clearly identified, proportional rules are difficult to use. OMB Circular A-21 (77) suggests an interrelationship rule, which notes that the distribution should be guided by a reason- able and rational basis when the proportional benefit cannot be identified and applied to the individual projects. User Charges and Tolls. Account for user charges and tolls in the stakeholder matrix. Table 15 shows the public and private aspects of funding/financing (costs) that can support a financial BCA. This table breaks down the costs borne by the public and private sectors individually or jointly. User charges, other revenues, and subsidies received are separated as part of a sepa- rate cash flow financial analysis, which can be separated from BCA. The accounting column in the table shows how to account for the benefits (benefit categories) to lead to NPV and BCR. The table treats negative benefits or disbenefits as costs on the benefit side, thus reduc- ing NPV. Negative benefits are user costs and do not enter into the cost side of the frame- work. Similarly, user charges appear on the cost side for charging agencies as benefits in a related financial analysis/BCA. Impacted Modes. Table 16 is associated with an economic BCA showcasing the distribution of public and private benefits by impacted modes. The table shows five classes of stakeholders for categorizing benefit recipients: â¢ Public users (user charges are reflected as negative benefits and travel costs)/end users. â¢ Public-sector providers/asset providers. â¢ The publicâthe affected community or broader public. â¢ Private-sector users (shippers, operators, and third-party providers)/end users. â¢ Private-sector providers/asset providers and service providers. This format has much similarity with what is also known as a Kaldor-Hicks Tableau (78). Perform Benefit Calculations For every benefit category, monetize each benefit using appropriate valuation parameters over the analysis period as discussed in previous steps and discounted back to the base period. The discounted costs and benefits should be used for NPV determination. The reporting of the results and testing for risk and sensitivity are covered in the final two steps. 9.3 Inputs: Recommended Tools and Data Sources A number of tools can assist the analyst with conducting the BCA: â¢ Stakeholder list. â¢ Inventory profile of freight flows. â¢ Stakeholder matrices (Table 15 and Table 16). â¢ Benefits from Steps 6â7. â¢ See the Excel worksheet in Appendix M (Step 9: Reporting Table).
102 Guide for Conducting Benefit-Cost Analyses of Multimodal, Multijurisdictional Freight Corridor Investments 9.4 Best Practices and Examples Best practices for Step 9: â¢ Recognize that not all categories/cells may be pertinent in all cases. â¢ Apportion already calculated benefits to already identified stakeholder types. â¢ Focus on the most important distributional concerns for the context, and evaluate them fur- ther rather than addressing all aspects. â¢ Exercise due diligence in including appropriate benefits across stakeholders and impacted modes. â¢ Use stakeholder analysis for engagement and discussion only where appropriate because it may support allocation of some project costs. â¢ Recognize that some benefit categories can be discounted in different ways. NCFRP Report 12 provides several examples of stakeholder disaggregation and analysis. Stakeholders (General Public, Public Sector, and Private Sector) Accounting Total Impacted Mode 1 (Applicable Users) Impacted Mode 2 Benefit categoriesa Auto users Pu bl ic us er b en ef its (T EE an d e xte rna liti es ) le ss tr av el c os ts TEE Category A A=A1 A1 Travel time Operating costs (including fuel) Reliability, if applicable Travel costs (user charges or tolls) B (negative) B=B1 B1 Net publicâusers/consumer benefits E = A + B Business work users Freight shippers Freight operators Pr iv at e- se ct or u se r be ne fit s (T EE ) le ss tra ve l co st s, if a ny TEE Category F F1+F2 +F3 F1 F2 F3 Travel time Operating costs Reliability, if applicable Logistics effects, if applicable Travel costs, if applicable G (negative) G1+G 2+g3 G1 G2 G3 Net private-sector user benefits H = F + G Af fe ct ed co m m u n ity / pu bl ic e xt er na lit ie s All users/ affected community Safety I I1 Environmentâemissions and climate change J J1 Pu bl ic- se ct or pr ov id er be ne fit s Asset provider Maintenance, if applicable K K1 Pr iv at e- se ct or pr ov id er im pa ct s Asset provider Service provider Maintenance, if applicable L L1 L2 NPV of user benefits (TEE) including externalities M = E + H NPV all benefits (less Residual Values [RVs])b N = M + I + J + K + L a Negative benefits are treated like user costs. They are both netted out from benefits. b RVs can also be added in public- and/or private-sector provider impacts, as applicable. Table 16. Example public-private stakeholder benefit matrix.
Conduct BCA 103 WebTAG provides several examples of broad public/private breakdowns; however, it is not clear in what way the breakdowns are used in that context and guidance. 9.5 Common Mistakes Common mistakes occur when the project team: â¢ Fails to use the appropriate discounting approach for long-term benefits such as those associ- ated with CO2. â¢ Fails to discuss assumptions in the use of discount rates other than those suggested by OMB. â¢ Fails to discuss the assumptions used in distributional analysis or stakeholder analysis. â¢ Uses different discount rates for benefits and costs.