How can economic analysis of the benefits and costs of planned highway projects and programs improve your transportation decisionmaking process? The Federal Highway Administration’s (FHWA) new Economic Analysis Primer (Publication No. FHWA-IF-03-032) examines the critical role that economic analysis can play in helping highway agencies and others target limited transportation resources to their best uses. It can help reveal, for example, if a planned highway project is worth undertaking, which design for the project will yield the best return and when and how to implement the project.
The primer begins by looking at such fundamental economic concepts as inflation and discounting. It then describes how to apply economic analysis methodology, such as life-cycle cost analysis (LCCA) and benefit-cost analysis (BCA). LCCA considers all the future costs over a project’s usable life, so that project design selections are not based solely on the lowest initial costs. For example, if a bridge must be replaced, LCCA can be used to select the replacement option that would cost the least over the expected life of the bridge. Selections based solely on life-cycle costs are valid only if the replacement options being evaluated each yield the same benefits and level of service to the traveling public.
A BCA, meanwhile, can indicate to an agency whether the benefits resulting from a project justify the costs of the resources invested in it. This form of analysis is useful when comparing projects that differ in terms of benefits and level of service to the public. For example, BCA can be used to select from among design alternatives that yield different benefits, such as reconstructing a roadway with additional lanes versus not adding any lanes, or unrelated projects, such as widening a road versus adding an interchange to another road.
The primer’s discussion of BCA includes looking at forecasting traffic for benefit calculations, because accurate forecasts of traffic volumes are critical to obtaining valid results from BCA. For example, assuming that the historical growth rate of traffic on a road will continue unchanged after the road is improved can lead to significant miscalculations of actual future traffic. The reality might be that traffic levels on the improved road actually increase faster than they otherwise would have, as drivers change their patterns to take advantage of the enhanced roadway. At the same time, this redistribution of traffic to the improved road can reduce congestion on other roads in the system.
Also covered are various aspects of risk analysis, including defining risk and measuring risk through sensitivity analysis and probabilistic analysis. Once risks have been identified and quantified, the primer notes, the agency can then evaluate potential actions to mitigate them. These actions may include increased engineering, additional quality testing, application of value engineering or such contracting methods as design-build. The range of potential economic outcomes for the project should then be calculated with and without the various risk mitigation actions in place to see if the mitigation actions are worth undertaking.
Finally, the primer discusses economic impact analysis (EIA), which complements BCA by identifying how the direct transportation benefits and costs of a project could affect such variables as regional accessibility, jobs, tourism, land values and economic development. Basic methods of performing EIA include using such tools as survey studies, market studies and comparable case studies. Productivity impact analysis seeks to measure the aggregate economic growth that may result from additional highway spending. Regional economic modeling, meanwhile, typically includes input-output analysis, which quantifies the multiple economic effects of transportation capital spending.
Ultimately, the many tools now available for economic analysis of highway projects provide information vital to the planning, design, construction, preservation and operation of the transportation infrastructure. Economic analysis also can contribute valuable information to the environmental assessment process required under the National Environmental Policy Act of 1969 for projects or activities receiving federal funds or other federal approvals.
To learn more about using economic analysis in transportation decision-making or to obtain a printed copy of the primer, call 202/366-4036.
