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.
73 Introduction to BCA A BCA is a method by which future streams of benefits and costs are identified and compared. A BCA may be applied to a single project to evaluate its financial feasibility or cost-effectiveness, or a BCA can be used to compare the outcomes of two or more projects to identify the most desirable option. The most effective and comprehensive BCAs evaluate the full life-cycle benefits and costs of a project, such as O&M over the life of the project and decommissioning or waste disposal costs at the end of the useful life of the infrastructure. Stormwater projects at airports are often part of a larger development project and are neces- sary to meet regulatory requirements. For example, construction of a new facility may require a stormwater management solution to comply with the airportâs permits. Without the stormwater project, the new facility could not be built. Thus, airports do not often conduct a stand-alone BCA to evaluate stormwater project alternatives. In many cases, airports simply identify the least-cost option to meet their regulatory requirements and build those cost components into a larger cost analysis for the full project. The use of a BCA to evaluate stormwater project alternatives enables airports to conduct a more in-depth and comprehensive analysis of the life-cycle benefits and costs of each alternative to ensure that the airport is choosing the option that provides the highest value. BCA Definitions and Formulas This appendix defines the major concepts that go into a BCA: benefits and costs, discount rate, real and nominal prices, escalation rates, present value, B/C, IRR, and payback period. When possible and appropriate, this appendix also provides formulas and examples. Included in this appendix is an example BCA that demonstrates the outcome of these concepts over the span of 5 years. Benefits and Costs Benefits and costs are the foundation of a BCA. When conducting a BCA, a comprehensive analysis incorporates the benefits and costs of the full life-cycle of the project; these generally include those for design and planning, construction, annual and periodic O&M, and end-of- life decommissioning and disposal. An analysis should also take into consideration the direct benefits and costs incurred by the entity pursing the project (in this case the airport) as well as those incurred by the environment and society more broadly. Incorporating these perspectives in the analysis achieves a TBL analysis and provides a more complete picture of the effects of the project. A more detailed discussion of TBL analysis is included later in this appendix as well as in Chapter 3. A P P E N D I X A BCA Primer
74 BenefitâCost Analyses Guidebook for Airport Stormwater It is essential that all benefits and costs be identified for a BCA. Some costs will be straight- forward, such as those for construction and O&M, but others may be more difficult to identify, such as negative effects on the environment, community, or airport operations. When compar- ing projects, benefits often occur in the form of avoided costs. For example, gains in efficiencies, cost reductions, avoided fines, and pollution reductions would all be considered costs that would be avoided by selecting one project over another. After developing a complete list of benefits and costs, they must be monetized to the extent pos- sible. While the monetary value of some benefits and costs will be straightforward, other benefits and costs may be difficult or impossible to monetize. Airports will find that their ability to mon- etize benefits and costs will vary depending on several factors, including how far along they are in the planning and project development stage, the availability of data, and the resources available to develop monetary estimates. For those benefits and costs that cannot feasibly be monetized, qualitative evaluations can be developed to supplement the monetary outcome of the BCA. In either case, it is imperative that all benefits and costs be recognized and communicated in some form through the analysis. Chapters 4 and 5 have more detailed information on the types of benefits and costs that should be considered in a BCA of airport stormwater infrastructure. Discount Rate The discount rate quantifies the potential for money to produce returns each year over a period if it were invested in another project or earned interest as a cash deposit. It is usually expressed as an annual interest rate (e.g., 5% per year) and is the rate used to calculate the pres- ent value of benefits and costs. For many airports, the discount rate will be equal to their cost of capital or the amount they would pay, on average, to finance a project. In some cases, it may be appropriate to use different discount rates in a BCA to account for differences in interest rates for the TBL. For example, the social discount rate may differ from the airportâs discount rate. The discount rate used in present value calculations is determined by investors based on their estimate of the opportunity cost of the investment, which is the rate of return for alternative investments. Governments and nonprofit organizations may use a relatively low discount rate (e.g., 3%) because any available cash is likely to be invested in low-risk, low-return instruments. For-profit entities may use a higher discount rate (e.g., 7%) because they may invest in higher- risk, higher-yield instruments. Airports should choose a discount rate that reflects the investment philosophy of the owners. For example, a private, for-profit airport may use the weighted average of its cost of capital (i.e., the rate it pays to fund investment projects) to reflect the expected return to investors. The lower the weighted average cost of capital, the cheaper it is to fund a new project. There may be other considerations for individual projects. Projects funded by the public sector often will use an estimate of the social discount rate, which measures the value that society as a whole places on the consumption it forgoes to fund a project. The social discount rate is usually lower than market rates. The social discount rate may be lower because of potential inefficien- cies in private capital markets or differences in the value placed on future generations by public and private investors. It also may be lower because of paternalism; the public sector uses a lower discount rate than that of private individuals to force citizens to consume less in the present. Historically, the federal government has assumed that the social discount rate is 3%. Real Versus Nominal Prices To ensure that future benefits and costs can be compared, a BCA must consistently use either real or nominal prices. Real prices reflect the value of a good or service after adjusting
BCA Primer 75 for inflation. In terms of a BCA, this means that all prices should be in terms of a single year. Typically, prices would be in terms of the base year of the projectâthe year in which the project begins. Prices from prior years should be adjusted to the base-year prices, and future prices should not be inflated, thus keeping them in terms of the base year. (Keeping them in the base year properly accounts for inflation.) For example, if a project were to be implemented in 2018, all the benefits and costs should be expressed in constant 2018 dollars. In contrast, nominal prices have not been adjusted for inflation. A BCA using nominal prices would have to apply an inflation rate for all future benefits and costs, thus representing all future benefits and costs in terms of the year in which they are incurred. This approach in a BCA is overly complicated and no more informative than presenting all values in terms of a single year, as is the case when using real prices. Furthermore, all future benefits and costs should be con- verted to their present value using the appropriate discount rate. If using a nominal approach, the BCA must use a nominal discount rate, which would be the discount rate adjusted for infla- tion. The nominal discount rate would be approximately equal to the sum of the real discount rate plus inflation. When using nominal prices in a BCA, this nominal discount rate will result in the same final NPV as a BCA that uses real prices. For example, if inflation is 1% per year and the discount rate is 3%, then the nominal discount rate would be approximately 4%. Escalation Rates It is typically assumed that all future benefits and costs will increase in real terms according to the overall rate of inflation. However, an airport may have reason to expect that some costs will increase by more than inflation. The escalation rate is the rate of increase for a given good or service above the rate of inflation. For example, if annual inflation is expected to be 1%, and the annual rate of increase for airport salaries is 2%, then the escalation rate of labor is 1% per year. An airport should carefully evaluate which costs, if any, may need to be adjusted using an escalation rate. There are industry-specific cost indices that an airport can use to estimate the escalation rate of key components of a BCA. Measures of Value This section defines the metrics that can be used to measure value in a BCA: present value and NPV, B/C, internal rate of return, and payback period. When possible and appropriate, this section also provides formulas and examples. The Example BCA Scenario section later in this appendix demonstrates the outcome of these concepts over the span of 5 years. Present Value and Net Present Value BCA compares benefits and costs over the lifetime of a project and must account for the ele- ment of time by adjusting future benefits and costs to todayâs dollars. For example, investing $100 today in a project with an annual return of 5% would return $105 in the first year. Because of the time value of money, future payments should be reduced or discounted to compare them to payments made in the present. Thus, the promise of a payment of $105 in one year is worth $100 today. (The time value of money is an economic concept that implies that, all else being equal, people would prefer to have money today rather than in the future.) The present value of a future payment or receipt is the maximum amount an individual would be willing to pay today for the right to receive the money in the future. The present value of an amount paid in 1 year is calculated by dividing the payment or receipt by (1 + r), where r is the discount rate. If the discount rate is 5%, payments or receipts 1 year from
76 BenefitâCost Analyses Guidebook for Airport Stormwater today would be divided by 1.05. Discounting is compounded; an amount paid or received in 2 years is divided by (1 + r)2, an amount paid or received in 3 years is divided by (1 + r)3, and so on. If the discount rate is 5%, an amount paid or received in 2 years would be divided by 1.052, or 1.1025. A payment made in 3 years would be divided by 1.053, or 1.1576. The present value of a stream of payments made each year over a period is equal to the sum of the discounted amounts paid or received each year. Formally, the PV of a stream of payments of P over N years is: PV P 1 r t t 1 N tâ ( )= += The monetary values of each projectâs benefits and costs are estimated for each year of the expected life of each project. The present values of future benefits and costs are then calculated using the appropriate discount rate. The difference between the present value of benefits and costs is the NPV of a project. This approach allows for comparisons among projects in the same units (present dollars) regardless of what the different benefits might be or when they are expected to occur. It can then be used to effectively compare projects with different expected lifetimes and outcomes. BenefitâCost Ratio A B/C is another measure by which to evaluate the results of a BCA. The B/C is calculated by dividing the present value of benefits by the present value of costs. B C PV PV b c = The ratio provides a measure of the overall return on the investment or the overall value for money of each project. The higher the ratio, the better the investment. A B/C of greater than 1 means that the benefits are greater than the costs, and the project is a good investment. A B/C of less than 1 means that the costs outweigh the benefits, and the project typically should not be pursued. In some cases, all project options may have a B/C of less than 1 but the project is neces- sary for other reasons. In these cases, the project with the largest B/C should be pursued. A B/C can also be calculated using important evaluation criteria. For example, an airport may want to consider how well a stormwater project reduces a key contaminant. In this case, the airport could use a B/C that looks at the cost to reduce the concentration of a contaminant in runoff to a desired threshold for event mean concentration. The project with the lowest cost to achieve the threshold for a given percentage of storms may be the preferred option. Internal Rate of Return The IRR is the discount rate (r) that sets the NPV of all cash flows over the life of the project equal to zero. In other words, it is the discount rate at which the present value of costs equals the present value of benefits. IRR is represented by the following formula, in which net payments (P) are discounted by the IRR in each period (t) over the life of the project, and where P in any given period is equal to the sum of benefits and costs in that period. 0 P P 1 IRR 0 t tt 1 Nâ ( )= + += The IRR is another way to account for the time preference of money to evaluate the prof- itability or cost-effectiveness of a project. The project with the highest IRR has the highest
BCA Primer 77 profitability or cost-effectiveness. Airports can use the IRR to determine whether to proceed with a project. If the IRR is greater than the airportâs cost of capital, then the project should be considered because it indicates that the project has a positive NPV. Payback Period The payback period of a project is the time required to recoup the initial expense of the project. The underlying assumption in a payback period evaluation is that the project requires up-front investment that results in long-term cost reductions or efficiency gains. A payback period is calculated using a straightforward formula where the initial investment is divided by the cash inflow per period: Payback period Initial investment Cash inflow per period = Applying this measure to a stormwater project at an airport may be more complex. In many cases, a stormwater project may not produce a positive NPV, in which case the project will never recoup its costs. Some projects may help the airport avoid significant costs, such as regu- latory fines and lawsuits, or projects may result in efficiency gains, such as reductions in potable water purchases or improvements in energy efficiency. In these cases, when projects have a positive NPV, the airport can measure the payback period. For example, the initial investment for a stormwater project would be the up-front design, permitting, and construction costs. The cash inflow per period might be the cumulative avoided costs on the project anticipated for each period. Unlike PV calculations, the payback period does not discount future benefits and costs. If the payback period of the project with the highest NPV is longer than the airport can support, the airport can consider means of financing the project. For example, by borrowing money to pay for the initial investment, the airport can minimize the projectâs impact on its cash flow. Example BCA Scenario To demonstrate the formulas and measures discussed previously, Table A1 outlines a simple BCA over 5 years. The analysis uses the following basic assumptions: â¢ Discount rate = 5%, â¢ Up-front capital costs = $100, incurred today (year 0), â¢ Annual maintenance costs = $10, starting next year (year 1), and â¢ Annual benefits = $35, starting next year (year 1). In the table, Column A marks the year in the analysis (today is year â0â), Column B shows the value of the benefits each year, Column C shows the costs each year, Column D shows the difference between Columns B and C, Column E shows the discount factor based on a 5% discount rate, Column F shows the NPV of the benefits for each year using the discount factor, Column G shows the present value of the costs for each year using the discount factor, and Column H shows the NPV for each year. Based on this analysis, the B/C is 1.06, indicating that the project is expected to earn a return of $0.06 on each dollar. The IRR is 8%. This value exceeds the projectâs discount rate, indicating that the project has a positive NPV and that it is worth pursuing. Finally, the payback period is 4 years. It takes 4 years for the airport to recoup the initial investment and the annual costs of the project.
78 BenefitâCost Analyses Guidebook for Airport Stormwater Triple Bottom LineâHow Is It Being Used? Intent of TBL Assessment Airport stormwater projects and investments can benefit from the assessment of a compre- hensive range of objectives and TBL metrics, especially if sustainability is a consideration. Such an analysis is intended to go beyond compliance and incorporate multiple measures that can assist in selecting an infrastructure design option that meets multiple objectives. A stormwater infrastructure analysis should ultimately be able to support the evaluation of multiple devel- opment goals and provide a comprehensive assessment of a projectâs impact on the TBL (i.e., the financial, environmental, and social effects of the project). Identifying and evaluating the financial, environmental, and social benefits and costs during the design phase allows for better anticipation of risks and potential opportunities throughout a projectâs full life cycle. Infrastruc- ture projects that broaden the spectrum of benefits to the airport, community, and watershed will ultimately be the most successful, as measured by overall effectiveness as well as social and environmental impacts (Gresham, Smith and Partners, 2013). Evolving to a TBL Approach NCHRP Report 750: Strategic Issues Facing Transportation, Volume 4: Sustainability as an Organizing Principle for Transportation Agencies describes changes that have taken place over the last few decades in how the impacts of transportation projects are assessed (Booz Allen Hamilton, 2016). In a TBL sustainability approach, a transportation agency pursues not just the agencyâs goals, but overall societal sustainability. A more comprehensive TBL approach broadens the stakeholders involved to go beyond the government sector (i.e., state and local governments) to include the private sector (e.g., transportation providers and system opera- tors) and interest groups (e.g., community and civic groups; environmental groups; profes- sional organizations; and social, economic, ethnic, and cultural interest groups) (Booz Allen Hamilton, 2016). Given this broader perspective, an assessment of the TBL may lead to dif- ferent conclusions than a less comprehensive evaluation. Years from Today (A) Benefit (B) Cost (C) Net (D) Discount Factor (E) Present Value of Benefits (F) Present Value of Costs (G) NPV (H) 0 â ($100) ($100) 1.000 $0 ($100) ($100) 1 $35 ($10) $25 0.952 $33 ($10) $24 2 $35 ($10) $25 0.907 $32 ($9) $23 3 $35 ($10) $25 0.864 $30 ($9) $22 4 $35 ($10) $25 0.823 $29 ($8) $21 5 $35 ($10) $25 0.784 $27 ($8) $20 Total $175 ($150) $25 â $151 ($144) $10 NPV $8 B/C 1.06 IRR 8% Payback period 4 Table A1. Outline of a simple BCA over 5 years.
BCA Primer 79 Different Approaches to TBL As described in Chapter 5, there are a variety of frameworks, tools, rating systems, checklists, and traditional decision-making processes that identify and sometimes measure the net effect of projects on the TBL. No one assessment or framework has emerged as the standard practice or predominant system (McVoy et al., 2013). A single framework, such as Envision, Greenroads, or GreenLITES, can be selected. Alternatively, a combination of frameworks or assessment tools can be reviewed, and the most relevant aspects of each can be combined into a single TBL assess- ment approach (Taylor, 2005). Many of the available frameworks and tools are either broad in nature or specific to a scope and type of infrastructure. Most of the frameworks or assessments can be applied to airports, but they are not specific to airports or stormwater infrastructure projects. For example, Greenroads, Illinois Livability & Sustainable Transportation (I-LAST), and INVEST are directed to highway and road infrastructure projects, whereas Envision is used for various types of civil infrastructure (e.g., airports, bridges, landfills, roads, and water treatment systems) (Institute for Sustainable Infrastructure, 2016). Before an airport chooses a path, it is important for it to have a clear understanding of all options and their approaches (i.e., criteria and metrics), costs, and applicability to the air- portâs goals and objectives. An Analytical Framework for Sustainability Analysis of Transporta- tion Investments Across the Triple Bottom Line Using a Common Metric (McVoy et al., 2013) and Sustainability Assessment of Transport Infrastructure Projects: A Review of Existing Tools and Methods (Bueno et al., 2015) describe the basic elements of the principal frameworks and assessment tools. The following frameworks and assessment resources are valuable for airports or stormwater management contexts (see additional discussion in Appendix E): â¢ Envision Rating System, Institute for Sustainable Infrastructure; â¢ EONS â Economic, Operations, Natural, and Social, Sustainable Aviation Guidance Alliance; â¢ Global Reporting Initiative, Sustainability Reporting Guidelines, Airport Operators; â¢ GreenLITES Scorecard, New York State Department of Transportation; â¢ Greenroads Manual, University of Washington and CH2M Hill; â¢ I-LAST Rating System, Illinois Department of Transportation; â¢ INVEST, FHWA; and â¢ STAR Community Rating System Version 2.0, STARS. Level of Effort The level of airport staff and funding resources will dictate whether an airport chooses an off-the-shelf assessment or rating system or develops its own unique tool or system that matches its context and objectives. Considerations for making this decision include integra- tion into existing agency sustainability policies, primary users of the assessment, requirements versus voluntary efforts, and interest in tracking continual improvement (McVoy et al., 2013). The level of effort necessary to use these resources varies, from online assessment tools that require a few hours to input to fee-based third-party certification systems that are more rigor- ous in their documentation and take more calendar and staff time. NCHRP Report 708: A Guidebook for Sustainability Performance Measurement for Transpor- tation Agencies (Zietsman et al., 2011) is intended to help a transportation agency develop its sustainability performance measurement and discusses the components of a framework that can evolve over time. ACRP Report 80: Guidebook for Incorporating Sustainability into Tradi- tional Airport Projects outlines how sustainability can be incorporated into traditional airport projects. The authors discuss how an airport can move on a continuum; topics include discuss- ing developing a vision, sustainability plan or sustainability champion, objectives and metrics,
80 BenefitâCost Analyses Guidebook for Airport Stormwater implementation, and closing the feedback loop (Landrum & Brown et al., 2012). Integrating this type of larger-scale approach as well as more comprehensive approaches for the project- level decision-making process can be a challenge to different sized airports, depending on staff resources and capital constraints (Landrum & Brown et al., 2012). Assigning Weights Evaluating Multiple Criteria Infrastructure projects have begun using methods such as TBL analysis that consider multiple types of criteria. Such decision-making tools are useful when addressing complex problems that have conflicting objectives, perspectives, uncertainties, and forms of evaluation (Bueno et al., 2015). This more comprehensive approach encourages and highlights the use of infrastructure best practices and is particularly useful for sustainability issues (McVoy et al., 2013). Using multiple types of criteria can also help in considering multiple viewpoints and building aware- ness, knowledge, and consensus in a group (Taylor, 2005). Choosing or developing a framework and an appropriate weighting scheme establishes a common language and expectations for meeting internal agency and external stakeholder objectives. TBL frameworks and infrastructure rating systems, such as Envision, Greenroads, GreenLITES, or INVEST, can evaluate a range of metrics that go beyond site performance and cost considerations. Typically, these rating systems involve assigning points to the project (by either the project management staff or third-party certifiers) to indicate how well the criteria are being achieved. Decision criteria can be quantitatively based, like U.S. Green Building Councilâs LEED certification process, but there may also be qualitative criteria. Weighting, Ranking, and Scoring Criteria At the start of projectâs evaluation, the metrics, criteria, weightings, and points of compari- son that the analysis will use should be established. For qualitative measures, the sustainability metrics need to be scored and then entered into the weighting and ranking structure for each project alternative. The complexity and rigor with which this is done depends, in part, on avail- able staff and consultant time. According to FHWAâs INVEST tool, the goal of weighting the criteria is to âmake the point value for each criterion commensurate with its potential to affect sustainability both in terms of significance and duration of the impactâ (FHWA, n.d.). While weighting is generally necessary, it is one component of the decision-making process that can be perceived as arbitrary (Bueno et al., 2015). Ultimately, alternatives may require ranking to incorporate additional analysis and group discussion (Bueno et al., 2015). ACRP Report 21: A Guidebook for Selecting Airport Capi- tal Project Delivery Methods gives a brief overview of weighting and ranking for airport capital projects (Touran et al., 2009). One of the main challenges in a BCA assessment of the TBL is avoiding purely subjective evaluations of results. Not all TBL metrics lend themselves to a binary value, and some are better represented as a spectrum or range of values. Concerns about subjectivity or arbitrariness can be minimized by developing the framework in a group or consensus-based process. If the scoring, ranking, and weighting are not completed in a transparent manner, it is possible for stakeholders and others involved in the process to see it as subjective or as a âblack boxâ (Bueno et al., 2015). Having a broad group of decision makers or a more equitable ranking and weighting system can improve the outcome.