Guide for Conducting Benefit-Cost Analyses of Multimodal, Multijurisdictional Freight Corridor Investments (2017)

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25 S t e p 3 3.1 Goal The goal of this step is to include and adequately account for all project costs. These costs will be compared to the benefits in order to arrive at a project decision, so having the correct costs is important to the accuracy of the BCA. 3.2 Tasks The main task in this step is to identify costs (fixed and variable) and known funding sources. Identify Lifetime Costs Specific to the Project Identify the lifetime costs and their magnitude, timing, and whether in current-year or con- stant dollars for the scenarios being compared for each project (or for every project that is part of a multimodal project) separately. The lifetime costs include:5 • Costs for land and property purchase (including right-of-way acquisition). Include oppor- tunity costs in the valuation of land already owned or donated by an agency. Value them at market value (including leaseholds, air or mineral rights, easements, and purchases) when the land or property could be considered for different uses. • Construction costs (including material, labor, and equipment). For rail infrastructure, this includes all costs associated with tracks, sidings, electrification systems, and safety- and security- related installations. For airside capacity, it includes costs associated with landing systems, runway/taxiway facilities, cargo terminal building costs, and access development costs. • Capital costs, including equipment purchases (e.g., equipment at terminals), costs at termi- nals and intermodal facilities, guideways, and track. • Operating, maintenance, and administration costs over the project life cycle (including land rents; staff labor; equipment- and track-related costs; material for renovations and repairs; utilities; rolling stock leases; administrative and fuel costs; and rolling stock maintenance). These are costs that continue after the project is put in place. • Planning or preliminary engineering costs, including feasibility studies and site preparation costs. • Life cycle costs. This includes future rehabilitation and repair costs occurring over the service life of the asset. Account for Project Costs 5Costs of funding or financing (this may become increasingly important as different sources of financing are used to defray costs). These are justified in a financial BCA but not an economic BCA.

26 Guide for Conducting Benefit-Cost Analyses of Multimodal, Multijurisdictional Freight Corridor Investments • Contingency costs. Projects with large capital outlays should include contingency costs (pro- visions) for price changes, inflation, or design changes since it is unrealistic to assume that cost estimates will apply with perfect knowledge and/or price stability. Analysis of sensitivity, risk, and uncertainty for these cost figures will occur later in the BCA. Contingency costs become useful for subsequent risk analysis on the cost side. The analysts can examine contingency costs from projects of similar sizes. Define Analysis Time Frames and Determine Residual Value Parameters Analysis Time Frames To determine how long the analysis period should be, select a period that is long enough to achieve full representation of benefits over the long term. Be careful to not make the period too long so that it becomes difficult to provide good volume forecasts. In some cases, the time frame is included in guidance from funding agencies or specified by legislative action. When evaluating public-private partnerships (PPPs), the concession term is often used as the analysis period. In most other cases, the typical analysis period must be guided by the service life of the asset(s) (determined in Step 2) and could include the construction period. So, for a project with service life of 30 years and a construction period of 5 years, a 35-year analysis period can be used. (The FRA, for instance, suggests using the construction period plus at least 20 years.) By allowing the construction period to be part of the analysis period, differences in construction disruption costs can also be included in the BCA. The last period of the analysis period (terminal year) is typically assigned a residual value associated with the investment. Residual Value If the common multiple is 40 years but travel forecasts are available for only 30 years, then the residual value (RV) approach is recommended, or alternatively the equivalent annual net benefit (EANB) approach could be used as long as both have service lives less than or equal to 30 years. Consider using RV when the service life of the investment exceeds the analysis period by more than five years. Two common methods of establishing RVs are: • Straight-line depreciation: This method continues to be the most common method of estab- lishing RVs. • Salvage values: This method can be considered if specific components have market value at the end of asset life. The scope of the RV can be for: • The project as a whole. • The separate components of the project. The component method is often data intensive. The component method is appropriate when several different modal components are built into the project and can be analyzed separately. In either case, the RV is calculated as follows: 1. Determine the percentage of useful life remaining beyond the analysis period. For example, if the analysis period is 30 years, the service life is 40 years, and the construction cost is $50 mil- lion, then this method suggests that 25% of $50 million or $12.5 million is the residual value using straight line depreciation. 2. Multiply that percentage by the construction cost for that component or the project.

Account for project Costs 27 The calculated RV will need to be discounted to current dollars. This is addressed in Step 8. When multiple assets are combined, RVs should be computed for each separately, and the BCA procedure should account for those time differences in asset lives (see Appendix B and Appendix C). Freight rail, for example, combines assets with different service lives such as tracks, tunnels, and equipment (railcars and locomotives). RVs are typically considered on the cost side as a negative cost in an economic BCA (with a negative sign) because they reflect the capacity of remaining service life and potential of assets to generate demand and benefits. Therefore, the NPV of costs is equal to the discounted value of all costs less the RV. RVs are also a significant part of a financial BCA. When used, RV enters the analysis as a negative cost in the last year of the analysis period. Remove Sunk Costs Do not include sunk costs—costs incurred prior to the analysis period for existing facilities. The outcome of the project evaluation will not affect these costs. However, if any aspect or fea- ture of sunk investment associated with a facility has salvage value or has a positive opportunity cost, it must be included. Sunk costs must also be included for new facilities. These can be quite high for rail and pipeline investments. Adjust Costs Occurring at Different Time Periods to a Base Period If costs are not in constant dollars, adjust costs occurring at different time periods to base year dollar figures. Costs occurring in the future need to be adjusted for future inflation. If histori- cal costs are used to arrive at base period costs, they must be adjusted for inflation between the year of cost estimates and the base period for analysis. It is customary to use construction cost indices published by Engineering News Record (or sometimes even a producer price index). In the case of highways, the FHWA’s National Highway Construction Cost Index can be used to adjust dollar costs occurring in different time periods to a base year, while Railroad Cost Index can be used for rail. Total costs (TC) can be represented by Equation 1, discounted to the base year of the analysis period (t = 0) using the commonly used exponential discounting: ∑∑ ( )( )= + θ +== 1 1 (1),10TC C r k t tk n t T where r is the discount rate, q is a contingency parameter to account for cost ranges (low and high) as available (this factor can include price contingencies, physical contingencies, and/or situations to cover unexpected conditions), k is the individual cost categories, T is defined as the end of the analysis period, and n is the nth cost category (given that k = 1 . . . n). Evaluate Funding Sources A conventional economic BCA is not directly associated with funding sources because this is assumed to be part of a financial BCA. Funding sources, however, can indirectly influence an economic BCA by emphasizing the estimation of certain benefits. A conceptual BCA may not need to really know the sources of funds; however, it may allow the analysts to identify stakeholders to include their public, private, or quasi-public perspectives in the BCA. These different categories are known as referent groups. This process can be complex but allows for a greater alignment of the BCA with the beneficiary pay principle—beneficiaries should

28 Guide for Conducting Benefit-Cost Analyses of Multimodal, Multijurisdictional Freight Corridor Investments share in costs to the extent to which they benefit from projects of regional, state, or national significance. The consideration of funding sources facilitates a separate financial BCA (financial analysis), which can evolve as the project advances and is particularly valuable for PPPs focusing on cash flows only. The amount and timing of funding influence the financial BCA or financial analysis of the costs. The focus of this guide, however, is only on the economic BCA, and the goal of evaluation of funding sources at any stage of analysis is to identify referent groups. Funding sources include grant programs and subsidies targeted to specific freight projects. Sources include federal, state, local, and private funds. Certain grants emphasize the demonstration of specific benefits. An example would be where a grade separation component in specific projects may make certain projects eligible for Highway Safety Improvement Program funds, with a requirement for dem- onstrating safety benefits. Grants like these may influence the depth of analysis included in a feasibility study but are unlikely to influence a conceptual analysis. 3.3 Inputs: Recommended Tools and Data Sources A number of tools and resources can assist the analyst with identifying and estimating costs: • U.S. Government Accountability Office’s GAO Cost Estimating and Assessment Guide: Best Practices for Developing and Managing Capital Program Costs (19) (http://www.gao.gov/new. items/d093sp.pdf). • For highway mode: Project Management for Construction: Fundamental Concepts for Owners, Engineers, Architects, and Builders (http://pmbook.ce.cmu.edu/05_Cost_Estimation.html). • For highway mode: Guidance for Cost Estimation and Management for Highway Projects dur- ing Planning, Programming, and Preconstruction (20) (http://onlinepubs.trb.org/onlinepubs/ nchrp/nchrp_w98.pdf). • TRB’s BCA website (http://bca.transportationeconomics.org). • American Trucking Research Institute (operating cost only) (http://atri-online.org/). • Pipelines: Oil and Gas Journal Annual Data Books, available for purchase from PennEnergy Research (http://ogjresearch.stores.yahoo.net/ogj-databook-2014.html). • Freight: – Rail cost data (construction, track maintenance, equipment/locomotive, and railcar main- tenance): Association of American Railroads (AAR) and Uniform Rail Costing System (URCS) tool (https://www.stb.dot.gov/stb/industry/urcs.html). – General data cost elements for different modes: NCFRP Report 22 (21) (http://onlinepubs. trb.org/onlinepubs/ncfrp/ncfrp_rpt_022.pdf). • Ports and waterways operating and maintenance costs (infrastructure, vessels, tugs, and barges): USACE 2004 Economic Guidance Manuals and USACE Navigation Data Center (http://planning.usace.army.mil/toolbox/library/EGMs/egm08-04.pdf). • Nation Highway Construction Cost Index, FHWA. • Engineering News Record, http://www.enr.com/economics. • Railroad Cost Index, https://www.aar.org/data-center/rail-cost-indexes. • USACE and Environmental Protection Agency Guide to Developing and Documenting Cost Estimates During the Feasibility Study, 2000 (22), https://yosemite1.epa.gov/ee/epa/ria.nsf/ vwAN/S200010.pdf/$file/S200010.pdf. • See the Excel worksheet in Appendix M (Worksheet Step 3: Cost Checklist and Step 3: Con- stant Dollar Values).

Account for project Costs 29 3.4 Best Practices and Examples Best practices for Step 3: • Present costs as ranges, particularly when components are subject to variation. The particu- lar conditions encountered in a project make it difficult to apply a simple rule of thumb or standard unit cost. • Include the costs of financing as a separate cost item when the agencies incur borrowing or rely on an alternative form of funding/financing such as PPPs. • Fully document the cost estimates. The estimates should be comprehensive and include appli- cable costs for both scenarios. Do not double-count costs. • Include only incremental fixed operating costs associated with the investment scenarios com- pared. For instance, if there are elements of operations and maintenance costs that will be different in each of the build, no-build, or do-minimum scenarios, they can be modeled and estimated separately and moved to the benefit side of the equation to capture changes in costs from those sources specifically. • If the project is part of a larger system, include all other system investments needed to achieve project benefits to the extent that they are dependent. • Engage a financial analyst and economist to work with engineers to provide the cost analysis required for financial BCA and analysis and economic BCA, respectively. • Cost estimates are developed for all alternatives being compared. A feasibility cost assessment and costs for investment grade analysis should be more precise. The EPA suggests precision levels of -30 to +50% for feasibility compared to initial analysis -50 to 100%. Example 1: ECORYS Transport and CE Delft’s report to the European Commission, Infra- structure Expenditures and Costs: Practical Guidelines to Calculate Total Infrastructure Costs for Five Modes of Transport (23), provides an excellent resource on cost estimation for roads, rail, air, inland waterways, and marine (http://ec.europa.eu/transport/themes/infrastructure/studies/ doc/2005_11_30_guidelines_infrastructure_report_en.pdf). Example 2: The Reno Transportation Rail Access Corridor is an example of a regional-scale multimodal corridor improvement (freight rail, bridges, station, and utility relocations), show- casing the coverage of costs of different classes as part of a benefit cost analysis. The project includes: • Construction costs and associated contributors. • Operations and maintenance costs and associated funding sources. • Other funding sources including costs of financing (e.g., interest expenses and cash). • Variable fuel-related operational costs changes, which are the only operating cost changes included on the benefit side. See the FHWA Office of Innovative Program Delivery (https://www.fhwa.dot.gov/ipd/project_ profiles/nv_retrac.aspx) d and NCFRP Report 12 (http://www.trb.org/Main/Blurbs/166317.aspx) (18). Both sources indicate costs evaluated at $279.9 million. It is assumed that these are all in 2006 dollars. 3.5 Common Mistakes Common mistakes occur when the project team: • Artificially splits a project to reduce the project investment cost in order to fit under a particular project threshold.

30 Guide for Conducting Benefit-Cost Analyses of Multimodal, Multijurisdictional Freight Corridor Investments • Under-scales a project and fails to recognize that it may not be possible to justify a portion of a project in isolation from other functional elements. • Does not distinguish the logical phasing of projects and how costs and benefits should be allocated to the phases over time. • Includes sunk costs (costs incurred prior to the project) of an investment project for an exist- ing facility. • Does not include all aspects of costs associated with an investment scenario (e.g., future oper- ation and maintenance costs or lifecycle costs). • Does not report contingency factors separately. • Presents a total investment cost in the BCA or its individual elements that is inconsistent with the values presented in the feasibility study or in other more advanced engineering design documents, if available. • Uses a total investment cost in the BCA or its individual elements that is inconsistent with the values presented in the feasibility study or in other more advanced engineering design docu- ments, if available. If comparing modal alternatives or solutions for a corridor, the analysis fails to consider differences in service lives. Examples include, a project that compares three modal alternatives: (a) highway widening, (b) rail enhancement in the corridor, and (c) new access highway. NPV is evaluated for a fixed 30-year duration with no adjustments for service lives of highway and rail.