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104 S t e p 1 0 10.1 Goal The goal of this step is to develop and employ appropriate decision criteria and then report the results in a meaningful format. 10.2 Tasks Develop and Employ Final Decision Criteria Single Multimodal Project The most common economic decision criteriaâand the ones recommendedâare the NPV and BCR for the build and do-minimum alternatives. If there are several alternatives to consider, use NPV for comparing alternatives. In some cases, it may be necessary to use a modified BCR based on the share of costs borne by each stakeholder in order for the various parties to evaluate benefits relative to their costs or contributions. The literature indicates that the internal rate of returnâthe rate that drives the NPV to zeroâis also useful. It can be reported in addition to the NPV and BCR. The internal rate of return is the measure typically examined by the banking sector; hence it is valuable for investment grade studies. Multiple Alternatives/Groups Only recommend projects that have an NPV greater than zero. When evaluating several alternatives or prioritizing across comparable projects, select the project with the highest NPV greater than zero BCA is the only criterion to focus on. For selecting a group of projects, the following rules and criteria are recommended: â¢ If all projects are independent and there is no fiscal constraint, then rank by NPV. â¢ If all projects are independent but subject to fiscal constraint, rank by NPV but also provide the BCR. â¢ If the projects are dependent, then select feasible sets that maximize NPV. Comparing across Different Asset Lives The criteria and methods for comparing across projects with different asset lives are discussed in Step 2 and Appendix B. The criteria rely on the use of NPV with adjustments made using the EANB or CMPD approach. The adjustments are made in order to take into account differences in asset lives. BCA and Non-monetizable Benefits While NPV may be used to compare across bundles, NPV alone is not sufficient since there is a higher likelihood of more non-monetizable metrics and benefits when comparing one group to Develop Decision Criteria and Report BCA Results
Develop Decision Criteria and Report BCA Results 105 another group. When there are non-monetizable metrics, consider using a multiple-account BCA (MA-BCA) process. This likelihood increases the more difficult it becomes to get suitable inputs as might be in the case of investment bundles. MA-BCA adopts numerous separate accounts: a financial account, social account, environmental account, economic impact account, etc. It relies on many of the same principles as BCA, especially those related to incremental analysis. It also accounts for the fact that several types of projects, such as ports, airports, and intermodal facilities, have economic development and land use benefits that should not be included in the scope of a BCA but that are important for decision making for the pertinent stakeholder groups. In simple terms, with MA-BCA, the actual monetary costs and benefits of a project or project NPV become just one of many issues to be considered. Every account is given a unit weight, making it different from ad hoc multicriteria analysis. Unlike multicriteria analysis, which can aggre- gate across quantitative and qualitative measures using scores, an MA-BCA makes no attempt to aggregate across accounts. It is, in principle, a triple bottom line evaluation process, where many unquantifiables can be accounted for separately and it relies on the same incrementality principles as BCA (a feature that is not shared with multi-criteria methods). As shown in Figure 13, the accounts could include any or all of the following categories, with each accompanied by its own level of detail: â¢ A public agency account. â¢ A private-sector account. â¢ An economic BCA. â¢ A financial BCA. â¢ Hard-to-value benefits. â¢ Hard-to-quantify benefit metrics. â¢ An environmental account. â¢ A public account including consumers. â¢ A development account for projects whose main purpose is development. This could include an EIA. Figure 13. A multiple account evaluation including BCA for developing a business case.
106 Guide for Conducting Benefit-Cost Analyses of Multimodal, Multijurisdictional Freight Corridor Investments An example of MA-BCA is shown in Appendix J. Do not count metrics from one account in other accounts to avoid double counting. Some agencies use hybrid methods such as embedded BCA results as part of a multicriteria process (sometimes known as hybrid BCA or adjusted BCA or even simply multicriteria analysis). This approach is not recommended since it requires subjective weighting. While it is important to work with existing processes, in the longer term an MA-BCA approach should be used that pre- sents different accounts including both quantitative (e.g., BCA, EIA, environment and/or health, and other equity or sustainability metrics) and any qualitative benefits or non-monetizable benefit metrics. For instance, if a reliability metric can be computed but cannot be monetized due to a lack of valuation measures, this process allows for considering those metrics. Similarly, as research progresses on either suitable metrics or suitable valuation parameters, this process does allow for flexibility in reporting and analysis. The MA-BCA approach has been adopted in most recent Canadian transport BCAs. Timing of Investments Freight corridor projects are typically indivisible, and timing of investments is important to avoid excess capacity. Jenkins et al. (79) provide a thorough treatment of investment timing of indivisible infrastructure projects. Their analysis provides for considering the timing of invest- ment itself as an alternative in a BCA, for instance, the decision to build today versus build five years from today. Four contexts and decision rules are presented based on the pattern of estimated benefits and costs for addressing the timing of an investment (most freight projects typically span Cases 2 and 3): 1. The benefits of the transport project are a continuously rising function of calendar time, but investment costs are independent of calendar time. The decision criteria are such that if the opportunity costs of investments in period (t) (rCt) exceed the foregone discounted benefits B at time period (t + 1), then postpone the project (rCt > Bt+1); otherwise, undertake the project (where t is the time period when the project is supposed to begin). 2. The benefits and investment costs of the project are rising with calendar time. If rCt > Bt+1 + (Ct+1 - Ct), then postpone; otherwise, start the project (where (Ct+1 - Ct) is the difference in costs in moving one period). 3. If the benefits are rising and then declining with calendar time while the investment costs are a function of calendar time, the criterion in this case is to undertake the project if: 4. If the benefits and investment do not change systematically with calendar time, then choose t to maximize NPV. Report BCA Results For the final report of benefits and costs, follow the broad grouping of benefit categories by stakeholder type. An example of such an analysis is presented in Table 17 for monetizable fac- tors. It excludes agency cost savings and allows all WEB effects to be provided as supporting information. In particular, Table 17 considers transportation economic efficiency benefits net of any travel costs, externalities, and changes in any tax revenue benefits that can occur in mode shift projects, revenues, and residual values. If wider benefits are quantifiable, they can be included in this table and reported separately. In most cases, each line needs to be divided into public or private accounts. NPV B 1 r C RV 1 rr 0, r discount rate. (26) i 1 i 1 i n n it i nâ ( ) ( )= + â + + > = + + â=
Develop Decision Criteria and Report BCA Results 107 In a case where there are quantifiable but hard-to-monetize measures or difficult-to-quantify metrics, the table entries can be converted into the multiple-accounts format shown in Appen- dix J. NPV 2 and NPV 1 are just methods of reporting benefits with and without reliability and WEBs respectively assuming that some of these may be difficult to quantify or monetize. How- ever, when all benefit sources can be considered, then NPV 2 is the appropriate project NPV. For each project, a detailed report of the methodology used, including all assumptions made, input parameters and values, algorithms specified, discount rate, and any sensitivities involved (see Step 10), should be provided. 10.3 Inputs: Recommended Tools and Data Sources A number of tools can assist the analyst with developing decision criteria and reporting BCA results: â¢ Agency guidance documents for reporting BCA. â¢ See the Excel worksheet in Appendix M (Assumptions Checklist). 10.4 Best Practices and Examples Best practices for Step 10: â¢ Use consistent methods and/or templates for reporting benefits for existing users and new users before aggregating them. â¢ List all tools and methodological assumptions separately. â¢ Use an MA-BCA process for reporting BCA and other pertinent metrics in a system of sepa- rate accounts. Table 17. BCA reporting tableâsummary worksheet (all quantifiable metrics). Benefit Category Accounting Market Structure Adjustments, If Applicable NPV TEE metricsâusers (non-business) (less travel costs) A NPV TEE metricsâbusiness users (less travel costs) B Adjusted values $B1 NPV TEE metricsâasset providers C Adjusted values $C1 NPV tax-related costs, if applicable D NPV asset provider effectsâasset maintenance cost E NPV safety F NPV environmental benefits including CO2 G NPV asset providerârevenues H Residual Values I Optional benefits NPV reliability J NPV wider benefits as applicable K NPV of costs (including subsidies and net of right-of-way contributions) L NPV benefits (less optional) (1) M = A + B + C + D + E + F + G + H + I NPV (with additional benefits) (2) N = M + J + K BCR (1) M/L BCR (2) N/L Project NPV (1) M-L Project NPV with additional benefits (2) N-L
108 Guide for Conducting Benefit-Cost Analyses of Multimodal, Multijurisdictional Freight Corridor Investments â¢ Use an MA-BCA process for developing a business case, which can easily accommodate addi- tional criteria such as WEBs, environmental or health effects, noise effects, or others (qualita- tive, hard to measure, or hard to monetize) based on the affected environment and context. A financial BCA can also be included in this system. Several examples of consistent reporting are now available as part of WebTAG development in the United Kingdom. The TIGER discretionary grant program has established consistency in reporting metrics. 10.5 Common Mistakes Common mistakes occur when the project team: â¢ Does not clearly show and discuss non-financial objectives/criteria (e.g., regulatory compliance). â¢ Uses too many or irrelevant criteria, or inappropriate scoring, in multi-criteria analysis. â¢ Forgets to include important non-financial costs and benefits. â¢ Counts the same measure in multiple accounts.