a

GAO

United States General Accounting Office

Report to the Ranking Minority Member, 

Committee on Commerce, Science, and 

Transportation, U.S. Senate

June 2004 SURFACE 

TRANSPORTATION

Many Factors Affect 

Investment Decisions

GAO-04-744
www.gao.gov/cgi-bin/getrpt?GAO-04-744.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Kate Siggerud, 

(202) 512-2834, siggerudk@gao.gov. 

Highlights of GAO-04-744, a report to the 

Ranking Minority Member, Committee on 

Commerce, Science, and Transportation, 

U.S. Senate 

June 2004

SURFACE TRANSPORTATION 

Many Factors Affect Investment 

Decisions 

Federal requirements specify the overall approach that states and regional 

organizations should use in planning transportation infrastructure projects, 

but generally do not specify what analytical tools planners should use to 

evaluate projects. These key requirements include developing strategic 

goals and objectives; considering a wide range of environmental and 

economic factors; preparing long- and short-range plans; and ensuring an 

inclusive process that involves many stakeholders. 

The Office of Management and Budget, the Department of Transportation 

(DOT), and GAO have identified benefit-cost analysis as a tool to help 

decision-makers identify projects with the greatest net benefits. The 

systematic process of benefit-cost analysis helps decision-makers organize 

information about, and determine trade-offs between, alternatives. 

Researchers also acknowledged challenges in applying benefit-cost analysis, 

including quantifying some benefits and costs, defining the scope of the 

project, and ensuring the precision of estimates used in the analysis. 

Ongoing research by DOT and others is aimed at improving and expanding 

state and regional decision-makers’ application of benefit-cost analysis. 

Many of the transportation planners we interviewed said that factors other 

than the analyses developed during the planning process often influenced 

final investment decisions. For example, state and regional decision-makers 

must consider the structure of federal funding sources. Since federal 

funding often is tied to a single transportation mode, it may be difficult to 

finance projects that do not have dedicated funding, such as railroad 

improvement projects. In addition, decision-makers must ensure that wideranging public participation is reflected in their deliberations and that their 

choices take into account numerous views. In some cases, voter support 

through referenda is required before a project may proceed or financing can 

be secured. The physical constraints of an area may also affect investment 

choices. Difficulties in expanding capacity and limits on existing 

infrastructure may direct investments to preserving and maintaining existing 

facilities or improving operations. Finally, multistate transportation 

corridors present special challenges in coordinating investment decisions. 

Key Factors Affecting Transportation Planning Decisions 

Passenger and freight traffic are 

expected to grow substantially in 

the future, generating additional 

congestion and requiring continued 

investment in the nation’s surface 

transportation system. Over the 

past 12 years, the federal 

government has provided hundreds 

of billions of dollars for investment 

in surface transportation projects 

through the Intermodal Surface 

Transportation Efficiency Act of 

1991 and its successor legislation, 

the Transportation Equity Act for 

the 21st Century. Reauthorization of 

this legislation is expected to 

provide hundreds of billions of 

dollars more in federal funding for 

surface transportation projects. For 

this investment to have the greatest 

positive effect, agencies at all levels

of government need to select 

investments that yield the greatest 

benefits for a given level of cost. 

This report provides information 

about the processes that state and 

regional transportation decisionmakers use to analyze and select 

transportation infrastructure 

investments. GAO identified (1) 

key federal requirements for 

planning and deciding on such 

investments, (2) how benefit-cost 

analysis facilitates sound decisionmaking, and (3) other factors that 

decision-makers consider in 

evaluating and deciding on 

investments. We provided copies of 

this report to the Department of 

Transportation for its review. The 

Department generally agreed with 

the report’s contents and provided 

technical comments, which we 

incorporated as appropriate. 
Page i GAO-04-744 Transportation Investment Decisions 

Letter 1

Results in Brief 3

Background 5

Federal Requirements Specify an Approach for Planning and 

Deciding on Transportation Projects 7

Benefit-Cost Analysis Is a Method for Evaluating Alternatives and 

Improving Transportation Infrastructure Decision-Making 17

Many Other Factors Shape Transportation Investment Choices 25

Concluding Observations 39

Agency Comments and Our Evaluation 40

Appendix I Scope and Methodology 41 

Appendix II Summary of Three Types of Economic Analyses for 

Comparing Investment Alternatives 43 

Appendix III Overview of Benefit-Cost Analysis 46 

Appendix IV GAO Contacts and Staff Acknowledgments 54 

GAO Contacts 54

Acknowledgments 54

Tables 

Table 1: Potential Stakeholders Involved during the Metropolitan 

and Statewide Planning Process 8

Table 2: Key Factors To Be Considered in Planning and Deciding 

on Transportation Investments, as Identified in Federal 

Requirements 14

Table 3: Key Elements for Benefit-Cost Analysis 20

Figures 

Figure 1: Federally Required Elements of Metropolitan and 

Statewide Transportation Plans 11

Contents 
Page ii GAO-04-744 Transportation Investment Decisions 

Figure 2: Comparison of Three Types of Economic Analyses 43

Abbreviations 

AASHTO American Association of State Highway and Transportation 

 Officials 

APTA American Public Transportation Association 

CALTRANS California Department of Transportation 

CMAQ Congestion Mitigation and Air Quality Improvement 

 Program 

CREATE Chicago Regional Environmental and Transportation 

 Efficiency 

DOT Department of Transportation 

EIS Environmental Impact Statement 

EPA Environmental Protection Agency 

FAF Freight Analysis Framework 

FHWA Federal Highway Administration 

FTA Federal Transit Administration 

ISTEA Intermodal Surface Transportation Efficiency Act of 1991 

ITS Intelligent Transportation Systems 

MPO Metropolitan Planning Organization 

NCHRP National Cooperative Highway Research Program 

OMB Office of Management and Budget 

NEPA National Environmental Policy Act 

SCAG Southern California Association of Governments 

STIP State Transportation Improvement Program 

STP Surface Transportation Program 

TCRP Transit Cooperative Research Program 

TEA-21 Transportation Equity Act for the 21st Century 

TIP Transportation Improvement Program 

TRB Transportation Research Board 

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. It may be reproduced and distributed in its entirety without further 

permission from GAO. However, because this work may contain copyrighted images or 

other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately. 
Page 1 GAO-04-744 Transportation Investment Decisions 

June 30, 2004 

The Honorable Ernest Hollings 

Ranking Minority Member 

Committee on Commerce, Science and Transportation 

United States Senate 

Dear Mr. Hollings: 

The scope of the U.S. surface transportation system—which primarily 

includes roads, mass transit systems, and railroads—is vast and 

increasingly congested.1

 Passenger and freight traffic are expected to grow 

substantially in the future, requiring continued investment in the surface 

transportation system. For example, from 2000 to 2010, passenger travel 

on roads is expected to grow by about 25 percent, and passenger travel on 

transit systems is expected to increase by about 17 percent, according to 

U.S. Department of Transportation (DOT) forecasts. DOT also estimates 

that freight traffic will increase by 43 percent from 1998 to 2010. 

Over the past 12 years, the federal government has provided hundreds of 

billions of dollars for investment in surface transportation projects 

through the Intermodal Surface Transportation Efficiency Act of 1991 

(ISTEA) and its successor legislation, the Transportation Equity Act for 

the 21st Century (TEA-21), which expired in 2003 but has been 

subsequently extended.2

 Reauthorization of this legislation—an issue 

currently before Congress—is expected to provide hundreds of billions of 

dollars more in federal funding for surface transportation projects over the 

next 6 years. For this investment to have the greatest positive effect on 

emerging transportation problems, agencies at all levels of government 

will need to select projects that provide the greatest benefits for a given 

level of cost. Making cost-effective investment choices will become even 

more critical if, as some experts believe, the nation faces a sustained 

 1

In this report, we specifically included highways, mass transit systems, intercity passenger 

railroads, commuter railroads, and freight railroads in our definition of surface 

transportation modes. 

2

State and local governments provide an even greater share of the funding for surface 

transportation investments than the federal government. For example, in fiscal year 1999, 

state and local governments contributed 75 percent of the total public sector spending for 

public roads and 85 percent of total public spending for transit systems.

United States General Accounting Office 

Washington, DC 20548 
Page 2 GAO-04-744 Transportation Investment Decisions 

period of deficits and fiscal imbalance, resulting from growing mandatory 

commitments for Social Security and Medicare and increased homeland 

security and defense commitments. These challenges require the nation to 

think critically about existing government programs and commitments and 

implement decision-making processes that will provide the most costbeneficial outcomes. 

The federal government has established a framework of planning 

requirements and processes designed to improve the quality of decisions 

about investing in transportation infrastructure investments. ISTEA and 

TEA-21 specified much of this planning and decision-making framework. 

Various analytical approaches have been refined over time to better 

calculate the benefits and costs of transportation investments and provide 

decision-makers with the tools to make better-informed choices. This 

report responds to your request for information about the processes that 

transportation decision-makers at all levels of government use to analyze 

and select surface transportation infrastructure investments. As agreed 

with your office we identified (1) key federal requirements for planning 

and deciding on surface transportation infrastructure investments, (2) how 

benefit-cost analysis facilitates sound transportation investment decisions, 

and (3) other factors that transportation decision-makers consider in 

evaluating and deciding on investments. 

To identify the key processes for transportation infrastructure planning 

and decision-making, we reviewed existing federal laws, regulations, and 

guidance on the transportation planning process and interviewed federal, 

state, regional, and local transportation agency officials to gain their 

perspective on the different federal requirements. To identify how benefitcost analysis facilitates sound transportation investment decisions, we 

analyzed the existing economics literature and transportation planning 

studies containing evaluations of benefit-cost analysis, and we interviewed 

academics and representatives of a broad range of transportation 

organizations to gain their perspective on issues, including the 

generalizability of benefit-cost analysis and the feasibility of comparisons 

among various transportation modes. To identify other factors that 

decision-makers consider in evaluating and deciding on investments, we 

(1) analyzed pertinent research on transportation planning and decisionmaking, as identified by our own review of the research and by 

transportation researchers we interviewed; (2) reviewed planning 

documents and analyses used by state, regional, and local transportation 

decision-makers; and (3) interviewed federal, regional, state, and local 

transportation officials; representatives of private sector and civic 

organizations; and other transportation experts involved in the planning 
Page 3 GAO-04-744 Transportation Investment Decisions 

and decision-making processes. Many of these interviews and document 

reviews were part of site visits that we conducted in three metropolitan 

areas that are major centers of passenger and freight traffic—Chicago, IL; 

Los Angeles, CA; and San Francisco, CA—to understand how investment 

decisions were actually made in those locations. To ensure the reliability 

of information presented in this report, we relied to a large extent on 

studies from the economics and transportation literature that were 

reviewed by peers prior to publication; and we corroborated much of the 

testimonial information provided during our three site visits by obtaining 

documentation of investment decision-making processes and results. We 

conducted our work from September 2003 through June 2004 in 

accordance with generally accepted government auditing standards. (See 

app. I for more information about our scope and methodology.) 

Federal laws and requirements specify an overall approach for 

transportation planning and decision-making that states and regional 

agencies must follow in order to receive federal funds. This approach 

includes involving numerous stakeholders, identifying state and regional 

goals, developing long- and short-range state and metropolitan planning 

documents, and ensuring that a wide range of transportation planning 

factors are considered. The many stakeholders include not only state, 

regional, and local agencies, but also private industry and the public. The 

planning process begins with the definition of overall state and regional 

goals and objectives. As part of this process, states and Metropolitan 

Planning Organizations (MPO)3

 must collect and analyze data to help 

evaluate project priorities. These priorities are specified in state and 

metropolitan long-range plans and short-range programs. Long-range plans 

identify transportation needs for the next 20 years or more, and shortrange programs identify specific projects to be initiated in the near future, 

usually about 3 years. Both state and metropolitan short-range programs 

must specify funding sources and be financially constrained.4

 In selecting 

 3

MPOs are regional transportation policy bodies made up of representatives from various 

governmental and other organizations. The Federal Highway Act of 1970 required the 

development of such agencies in areas with populations of 50,000 or greater to carry out 

cooperative planning at the metropolitan level. These organizations were created to ensure 

that federal funds would be spent through a transportation planning process that was 

based on continuing, comprehensive, and cooperative planning. 

4

To be financially constrained, state and MPO short-range programs must include a 

financial plan that demonstrates which projects can be implemented using existing revenue 

sources and which projects are to be implemented using projected revenue sources. 

Results in Brief 
Page 4 GAO-04-744 Transportation Investment Decisions 

projects for the plan, states and MPOs must consider a wide range of 

planning factors specified by the federal government, such as conformity 

with environmental and civil rights laws, preservation of existing systems, 

and increasing accessibility and mobility, among others. While federal 

requirements specify a wide range of these specific factors, they generally 

do not specify what analytical tools—such as benefit-cost analysis—

planners should use to evaluate these factors. Instead, states and MPOs 

are largely responsible for selecting the methods used to analyze these 

factors. 

The Office of Management and Budget (OMB), DOT, and GAO have 

identified benefit-cost analysis as a useful tool for integrating the social, 

environmental, economic, and other effects of investment alternatives and 

for helping decision-makers identify projects with the greatest net 

benefits. In addition, the systematic process of benefit-cost analysis helps 

decision-makers organize and evaluate information about, and determine 

trade-offs between, alternatives. Research and best practices indicate key 

steps of the analysis to ensure that the analyst defines the project 

objectives, identifies all reasonable alternatives, and systematically 

evaluates and compares the projected effects of each alternative. 

Challenges of benefit-cost analysis include difficulties in identifying the 

distribution of benefits and costs of alternative projects across affected 

locations and population groups, quantifying and assigning a dollar value 

to some effects, defining the scope of the alternative projects, and 

ensuring the precision of estimates used in the analysis. Notwithstanding 

these challenges, benefit-cost analysis remains an important and useful 

tool in helping select transportation infrastructure projects. DOT agencies 

and the National Research Council’s Transportation Research Board have 

initiatives under way to improve benefit-cost analysis done by planners 

and to expand its use. 

Transportation planners with whom we talked, particularly at the regional 

level, said that other factors, many of which are recognized in existing 

transportation legislation, can play a major role in final investment 

decisions. For example, transportation decision-makers consider the 

availability of federal funding sources, which are largely structured to 

direct funds to highways and transit systems, rather than railroads or 

intermodal projects. Also, transportation decision-makers are aware that 

they must achieve a consensus on improvements while incorporating 

public participation into the process. In some cases, achieving support 

from the voters through referenda is required before projects may proceed 

or financing can be secured. This need for voter support is an especially 

important factor in California, where sales taxes have become a primary 
Page 5 GAO-04-744 Transportation Investment Decisions 

source of funding new transportation infrastructure. Furthermore, 

physical limitations also affect choices of transportation investments. 

Difficulties in expanding capacity and limits on existing infrastructure may 

direct available investments toward preserving and maintaining facilities 

or improving operations rather than building new infrastructure. 

Nationwide, spending on system preservation—as a share of highway 

capital spending—from all sources increased from 45 percent to 52 

percent from 1993 to 2000. In Chicago, transportation planners cited 

system preservation as a primary consideration in making decisions about 

projects and in the Los Angeles and San Francisco regions, fully 80 percent 

of transportation funds are spent on system preservation, maintenance, 

and operations. Finally, long, multistate transportation corridors may 

present special planning and coordination challenges. Achieving 

cooperation and coordination among multiple agencies, communities, and 

transportation modes—each with its own priorities—makes the planning 

and implementation of multistate and multiregion projects difficult. In 

some cases, ad hoc state coalitions have emerged to try to meet this need, 

especially in coordinating intelligent transportation system technologies.5

However, planning for intrastate transportation corridors fits more easily 

into the framework of state planning. 

We provided copies of this report to the Department of Transportation for 

its review and comment. The department generally agreed with the 

report’s contents and also provided technical comments, which we 

incorporated as appropriate. 

The nation’s federal surface transportation investment policy has become 

increasingly complex, changing from a narrow focus on completing the 

nation’s interstate highway system to a broader emphasis on maintaining 

and more efficiently operating our highways, supporting mass transit, 

protecting the environment, and encouraging innovative technologies. 

With the interstate system largely completed in the 1980s—and continuing 

with the passage of ISTEA in 1991 and TEA-21 in 1998—the federal 

government has shifted its focus toward preserving and enhancing the 

capacity of the transportation system by supporting a large network of 

highway, mass transit, and other surface transportation programs and 

projects. 

 5

Intelligent Transportation Systems are technology-based systems intended to improve the 

safety, efficiency, and effectiveness of transportation facilities. 

Background 
Page 6 GAO-04-744 Transportation Investment Decisions 

The funding for transportation plans and projects comes from a variety of 

sources including federal, state, and local governments; special taxing 

authorities and assessment districts; and user fees and tolls. While 

metropolitan areas receive transportation funds from state and local 

sources, the federal government also is a significant funding source, using 

revenues from federal highway tax receipts and supplemented by general 

fund revenues. ISTEA and TEA-21 continued the use of the federal 

Highway Trust Fund—which is divided into a Highway Account and Mass 

Transit Account—as the mechanism to account for federal highway user 

tax receipts that fund various surface transportation programs. The 

Federal Highway Administration (FHWA) distributes highway program 

funds to state transportation departments that, in turn, allocate the funds 

to urban and rural areas on the basis of local priorities and needs.6

 The 

Federal Transit Administration (FTA) sends most urban transit funds 

directly to local transit operators while state transportation departments 

administer rural transit funds. In some cases, Congress may designate 

specific transportation projects for funding. For example, TEA-21 

allocated $9.4 billion over 6 years to 1,850 congressionally designated 

projects. Finally, ISTEA and TEA-21 also allowed the use of certain federal 

highway program funds for either highway or transit projects, referred to 

as flexible funding.7

Key issues—such as traffic congestion, air pollution, land use and sprawl, 

the economic viability of neighborhoods and commercial areas, and 

facilitating national economic growth—are significantly affected by 

decisions about how federal transportation funds are spent. These 

decisions grow out of an overall transportation planning and decisionmaking process involving states, MPOs, local governments, and other 

stakeholders. 

 6

A portion of the Surface Transportation Program funds is allocated directly to 

Transportation Management Areas, which are urbanized areas over 200,000 in population. 

7

Flexible funding is primarily available in FHWA’s National Highway System, Surface 

Transportation Program, Congestion Mitigation and Air Quality Improvement Program, and 

for FTA’s Urban Formula Funds. 
Page 7 GAO-04-744 Transportation Investment Decisions 

Federal laws and requirements specify an overall approach for 

transportation planning agencies to use in planning and deciding on 

projects. State, regional, and local government agencies must operate 

within these requirements to receive federal funds. The laws and 

requirements—which include ISTEA, TEA-21, and their associated 

regulations—establish certain requirements governing the way states and 

local governments plan and decide upon transportation projects. In 

particular, the requirements describe various planning tasks that states 

and MPOs must perform, including (1) involving a wide range of 

stakeholders in the process; (2) identifying overall goals and objectives 

and data to support transportation investment choices; (3) developing 

long- and short-range transportation programs and plans; (4) specifying 

financing for the transportation programs and projects; and (5) ensuring 

that the transportation planning and decision-making process reflects a 

variety of planning factors, such as environmental concerns. States and 

MPOs must consider a wide range of planning factors laid out in federal 

statutes and regulations. However, federal planning requirements 

generally do not provide specific guidance on how transportation planners 

should evaluate these factors. 

ISTEA and TEA-21 provided stakeholders with greater control over 

transportation decisions in their own regions than was done in the past 

and recognized that multiple agencies were responsible for planning, 

operating, and maintaining the entire transportation system. For this 

reason, the laws established a planning process that emphasizes 

cooperation and coordination among transportation stakeholders in the 

investment decision-making process. To achieve this goal, both ISTEA and 

TEA-21 sought to strengthen planning practices and coordination between 

states and metropolitan areas and between the private and public sectors 

and to improve connections between different forms of transportation. To 

foster involvement by all interested parties, states and MPOs are expected 

to provide opportunities for notice and public involvement throughout the 

planning and project selection process. For stakeholders and other 

interested parties (see table 1), federal regulations require a formal public 

involvement process that includes reasonable access to technical and 

policy information used in developing transportation plans as well as 

adequate periods for public comment. 

Federal Requirements 

Specify an Approach 

for Planning and 

Deciding on 

Transportation 

Projects 

Transportation Planning 

Involves Multiple 

Stakeholders 
Page 8 GAO-04-744 Transportation Investment Decisions 

Table 1: Potential Stakeholders Involved during the Metropolitan and Statewide 

Planning Process 

Potential stakeholders 

• Elected officials, 

• Public transit operators, 

• Affected public agencies, 

• Representatives of transportation agency 

employees, 

• Freight shippers, 

• Providers of freight transportation services, 

• Private providers of transportation, 

• Representatives of users of public transit, 

• Citizens, and 

• Other interested parties. 

Source: GAO analysis of federal metropolitan and statewide transportation planning statutes and regulations. 

State departments of transportation—working with transportation 

organizations, local governments, and the public—develop state 

transportation goals and plans. Local governments, such as cities and 

counties, and regional entities, such as MPOs, carry out additional 

transportation planning and project implementation functions, especially 

for highway projects. Transit agencies, in addition to operating transit 

services such as bus, subway, light rail, commuter railroad, and other 

forms of mass transit, also plan and implement capital projects. Other 

organizations, such as nonprofit, environmental, and community 

organizations, are involved in transportation decision-making through the 

public participation process. Finally, private sector firms also may 

participate as advisors in the planning and decision-making process, 

especially when public decisions directly affect their interests. 

MPOs, which are regional transportation policy bodies composed of 

representatives from various governmental and other organizations, are 

key players in the coordination of transportation plans and projects. MPOs 

are designed to provide a setting for impartial transportation decisionmaking by facilitating evaluation of alternatives, development of long- and 

short-range planning documents, and public involvement. In particular, 

MPOs provide the forum for the various providers of transportation 
Page 9 GAO-04-744 Transportation Investment Decisions 

facilities8 to come together to develop a more comprehensive approach to 

meeting regional transportation needs. Finally, DOT oversees state and 

metropolitan transportation planning and provides advice and training on 

transportation issues. 

In initiating the transportation planning process, states and MPOs are 

expected to have a long-term vision that articulates broad goals for the 

future of the transportation systems in the state or region. DOT guidance 

states that in developing the long-term vision, states and regions are to 

consider several factors, including projected population growth and 

economic changes, current and future transportation needs, maintenance 

and operation of existing transportation facilities, preservation of the 

human and natural environment, and projected land uses. States and 

MPOs may also conduct investment and planning studies to identify major 

transportation corridors in the state or region. 

In deciding which proposed transportation projects meet the needs and 

reflect the long-range vision of the state or region, states and MPOs are 

required to establish a process for collecting and analyzing data to 

evaluate different transportation alternatives and using the resulting 

information to establish priorities for improving the area’s transportation 

assets. As part of this process, transportation planners may develop 

performance measures and transportation models to evaluate existing or 

proposed projects. Performance measures are important indicators of how 

well the transportation system is operating. Some examples of useroriented performance measures are average trip travel time, length of 

delay, and reliability of trip making. Transportation models are simulations 

of the “real world” that can be used to show the impact of changes in a 

metropolitan area on the transportation system (such as addition of a new 

road or transit line or increases in population or employment). Specific 

types of transportation models are not required by federal planning 

regulations. 

 8

Transportation facilities refers to all of the fixed physical assets of a transportation 

system, such as roads, train stations, bus terminals, bridges, and bike paths. 

Transportation Planning 

Requires Identifying an 

Overall Vision and 

Analyzing Alternatives 

before Deciding on 

Projects 
Page 10 GAO-04-744 Transportation Investment Decisions 

After articulating a vision of overall transportation goals and considering 

alternative ways of reaching those goals, federal laws and regulations 

require that states and metropolitan areas document their decisions about 

future transportation needs and their selection of federally funded surface 

transportation projects through long-range transportation plans and shortrange programs.9

 A metropolitan long-range transportation plan identifies 

transportation needs for at least the next 20 years, but does not 

necessarily identify specific projects. It is expected to include a 

description of congestion management strategies as well as capital 

investments and other measures necessary to (1) ensure the preservation 

of the existing transportation system and (2) make the most efficient use 

of existing transportation facilities to relieve congestion and enhance the 

mobility of people and goods. A state long-range plan is expected to be 

developed in cooperation with MPOs in the state and to be intermodal and 

statewide in scope. (see fig. 1). 

 9

23 U.S.C. 134 (metropolitan planning); 23 U.S.C. 135 (statewide planning); 23 C.F.R. 450 

(planning assistance and standards). 

Federal Laws Require That 

Transportation Needs and 

Proposed Projects Be 

Documented in LongRange Plans and ShortRange Programs 
Page 11 GAO-04-744 Transportation Investment Decisions 

Figure 1: Federally Required Elements of Metropolitan and Statewide Transportation Plans 

● Plan time frame: at least 3 years

● Updated at least every 2 years

● Plan time frame: at least 20 years

● Updated every 3-5 years (MPOs) 

or as appropriate (states)

Source: GAO analysis of federal regulations governing metropolitan and statewide transportation planning.

Metropolitan planning

Statewide planning

Federal Highway Administration/Federal Transit Administration

Metropolitan long-range transportation plan

● Identifies projected transportation demand and congestion 

management strategies

● Assesses capital investments and the existing transportation system

● Reflects social, economic, environmental, and 

energy conservation goals and objectives

● Includes a financial plan to demonstrate revenue 

sources for transportation investments

Metropolitan transportation improvement program

● Identifies proposed federally supported transportation 

projects or phases of a project 

● Financially constrained–includes a financial plan to 

demonstrate current and proposed revenue sources 

● Identifies the criteria and process for prioritizing 

implementation of transportation plan elements

● Governors and MPOs approve the program

MPO and state planning process certification

(on an annual basis)

● Certifies that the major issues facing the area are being addressed

● Ensures that the planning process is conducted 

in accordance with applicable federal requirements

STIP approval

(at least once every 2 years)

● Requires joint approval by FHWA/FTA

● Certifies that the transportation planning process 

is carried out in accordance with applicable federal 

requirements

Statewide long-range transportation plan

● Intermodal and statewide in scope

● Coordination with metropolitan long-range plans

● References planning studies and reports significant to 

the development of the plan

● Summarizes availability of financial and other 

resources needed to carry out the plan (optional)

State transportation improvement program (STIP)

● Covers the MPO regions and all other state areas

● Contains descriptions of all capital and noncapital 

transportation projects, with some exceptions

● Financially constrained–demonstrates current and 

proposed revenue sources

Short-range programs Long-range plans
Page 12 GAO-04-744 Transportation Investment Decisions 

In contrast to the long-range plan, a short-range program covers a more 

limited time frame—usually about 3 years—and describes specific 

transportation projects or phases of an included project, including the 

scope and estimated costs of those projects. In a metropolitan short-range 

Transportation Improvement Program (TIP), MPOs are required to identify 

the criteria and process for prioritizing proposed transportation projects, 

including the extent to which comparisons among modes were 

considered. In addition, all surface transportation projects that are to 

receive federal funding must be included in the metropolitan and state 

programs to receive federal funds. At the state level, each state DOT is 

expected to work cooperatively with its MPOs to develop a single State 

Transportation Improvement Program (STIP), which is an intermodal 

program of projects encompassing all the areas of the state. The STIP 

incorporates TIPs developed by the MPOs within the state, and a project in 

a metropolitan region must be included in the TIP before it may be 

included in the state program. Once adopted by the state, the STIP is 

concurrently submitted to FHWA and FTA for approval at least once every 

2 years. In addition to approving the STIP, FHWA and FTA are also 

responsible for certifying that the state planning processes are conducted 

in accordance with all applicable federal requirements. 

Under federal requirements, states and MPOs must specify funding 

amounts and sources for transportation programs and projects. States and 

MPOs must consider funding needs for both new projects and the 

maintenance and operation of the existing transportation system. 

Financial planning is part of both the short- and long-range planning 

processes and includes identification of resources that are reasonably 

expected to be available. Projects in the TIP and STIP are specifically 

linked to funding sources and additional strategies for securing funds are 

included in the plan. 

While federal requirements specify that all MPOs have an analytical 

process in place to help prioritize and select projects, how projects 

originate and are selected for inclusion in transportation plans and 

programs may vary in different regions. In some instances, state DOTs are 

heavily involved in the metropolitan planning process. For example, the 

Illinois DOT heavily influences the planning process in metropolitan 

Chicago. In contrast, by state law, California has chosen to give more 

planning and decision-making power to counties by directly allocating a 
Page 13 GAO-04-744 Transportation Investment Decisions 

greater share of transportation funds to the counties.10 Another defining 

characteristic of transportation project development in the sites we visited 

in California is direct citizen involvement in selecting transportation 

projects through local ballot initiatives. 

Federal legislation has identified many factors that states and 

metropolitan areas are to consider in planning and deciding on surface 

transportation investments. As shown in table 2, these factors include 

environmental compliance, safety, system maintenance and operations, 

and land use, among others.11

 10California state law requires that 75 percent of state transportation funds be allocated 

directly to counties under the Regional Transportation Program, with the remaining 25 

percent allocated to the state transportation planning agency for its interregional 

transportation program. Counties within the MPO region do the actual project planning. 

11See Federal Highway Administration and Federal Transit Administration, The 

Metropolitan Planning Process: Key Issues, (Washington, D.C.: November 2001). 

Many Factors To Be 

Considered Throughout 

the Planning and DecisionMaking Process 
Page 14 GAO-04-744 Transportation Investment Decisions 

Table 2: Key Factors To Be Considered in Planning and Deciding on Transportation 

Investments, as Identified in Federal Requirements 

Key factors 

• Ensure compliance with provisions of the National Environmental Policy Act, Clean Air 

Act, and Civil Rights Act; 

• Support the economic vitality of the metropolitan area, especially by enabling global 

competitiveness, productivity, and;

 efficiency;a

• Increase the safety and security of the transportation system for motorized and 

nonmotorized users;a

• Increase the accessibility and mobility options available to people and for freight;a

• Protect and enhance the environment, promote energy conservation, and improve 

quality of life;a

• Enhance the integration and connectivity of the transportation system, across and 

between modes, for people and freight;a

• Promote efficient system management and operation;a

• Emphasize the preservation of the existing transportation system;a

• Promote congestion relief and prevention through management strategies/systems; 

• Consider the likely effect of transportation policies on land use and development; 

• Consider using innovative mechanisms for financing projects; 

• Expand, enhance, and increase use of transit services; 

• Examine the overall social, economic, energy, and environmental effects of 

transportation decisions; 

• Consider access to ports, airports, and intermodal transportation facilities; 

• Preserve rights-of-way access for future transportation projects; 

• Consider connectivity of roads in areas outside MPO planning boundaries and in other 

states; and 

• Consider recreational travel and tourism needs. 

Source: GAO analysis of federal regulations governing metropolitan and statewide transportation planning. 

a

Planning factors designated in TEA-21. 

For example, transportation planners and decision-makers must develop 

alternatives and select projects that conform to the requirements of a 

variety of laws, such as the National Environmental Policy Act (NEPA) of 

1969 and Title VI of the Civil Rights Act.12 Under NEPA, federal agencies 

must assess the impact of major federal actions significantly affecting 

environmental quality. Agencies document these analyses in 

environmental impact statements. This analysis serves two principal 

purposes: (1) to ensure that agencies have available detailed information 

concerning potentially significant environmental impacts to inform their 

 12The Civil Rights Act of 1964: 42 U.S.C. 2000(d). 
Page 15 GAO-04-744 Transportation Investment Decisions 

decision-making, and (2) to ensure that the public has this information so 

that it may play a role in both the decision-making process and the 

implementation of the decision. 

In analyzing the effects of a proposed action and alternatives, agencies 

must assess a variety of effects—including ecological, economic, and 

social. Agencies may include or refer to benefit-cost analyses in 

environmental impact statements. However, for purposes of complying 

with NEPA, the weighing of the merits and the drawbacks of the various 

alternatives need not be displayed in a monetary benefit-cost analysis and 

should not be when there are important qualitative considerations.13 When 

it is uncertain whether the proposed action would have significant 

environmental effects, agencies use environmental assessments to 

determine whether the proposed action would have such effects and 

therefore whether an environmental impact statement is necessary. 

Environmental assessments are relatively brief documents that need not 

include detailed effects analyses. Most transportation projects do not 

require the preparation of the more detailed environmental impact 

statement. In addition to requirements for environmental assessments or 

environmental impact statements, in metropolitan regions that have 

significant air quality problems, transportation plans and programs must 

conform to the State Air Quality Plans, which outline strategies for 

reaching compliance with air quality standards established by the U.S. 

Environmental Protection Agency (EPA).14 To meet these standards, states 

and MPOs in these designated regions must identify transportation 

projects that will help reduce motor vehicle emissions. 

Title VI of the Civil Rights Act of 1964 prohibits discrimination on the basis 

of race, color, or national origin in programs and activities that receive 

federal financial assistance. To comply with Title VI, DOT issued 

regulations requiring recipients of federal transportation funds to provide 

assurances of compliance, periodic compliance reports, and access to 

relevant information about compliance. The regulations require that each 

MPO state that its planning process is in compliance with Title VI, as well 

 13See 40 C.F.R. 1502.23 dealing with Environmental Impact Statements and Cost-Benefit 

Analysis. 

14The Clean Air Act of 1990 and Title 23 of the U. S. Code both require that transportation 

and air quality planning be integrated in areas designated by EPA as air quality 

nonattainment or maintenance areas. Nonattainment areas are geographic areas that do 

not meet the federal air quality standards, and maintenance areas are areas that formerly 

violated but currently meet the federal air quality standards. 
Page 16 GAO-04-744 Transportation Investment Decisions 

as other statutory requirements. Both Title VI and NEPA require 

involvement and input from the public, interest groups, resource agencies, 

and local governments throughout the transportation planning and project 

development process. 

Other than the NEPA requirements for environmental analyses, federal 

requirements give states and MPOs considerable flexibility in selecting 

specific analytical tools and elements used to evaluate projects and make 

investment decisions. For most surface transportation projects, current 

planning regulations require only that states (in coordination with MPOs) 

establish a process to conduct data analyses and evaluate alternatives for 

transit and highway projects. In defining the factors to be included in such 

an analysis, the requirements specify in general terms that states should 

consider identified social, economic, energy, and environmental effects of 

transportation decisions. Federal planning requirements also state that the 

metropolitan planning process should consider the cost-effectiveness and 

financing of alternative investments to meet transportation demand, 

support efficient transportation system performance, and consider the 

related impacts on social and economic development, housing, and 

employment goals. However, the requirements do not provide guidance to 

the states and MPOs on the types of analyses that are required or how they 

are to be prepared. 

An exception to this approach applies to major transit system projects 

eligible for capital investment grants and loans under FTA’s New Starts 

program. Under this program, FTA identifies and funds fixed guideway 

transit projects, including heavy, light, and commuter rail, ferry, and 

certain bus projects (such as bus rapid transit). In contrast to other FHWA 

and FTA programs where funds are distributed through statutory 

formulas, funding commitments for the New Starts program are made for 

specific projects, and projects are evaluated at various stages in the 

development process. For New Starts projects, federal requirements are 

more specific in terms of the types of data to be collected, the criteria for 

conducting an analysis, and the factors involved in evaluating a proposed 

project. For example, to be considered for possible New Starts funding, 

local project sponsors must prepare an alternatives analysis on the 

Transportation Planners 

Generally Have Discretion 

in Selecting Analytical 

Tools 
Page 17 GAO-04-744 Transportation Investment Decisions 

benefits, costs, and impacts of alternative strategies to address a 

transportation problem in a given corridor.15

While FHWA and FTA guidance does provide some technical assistance on 

the use of various analytical tools and models, neither FHWA nor FTA 

advocates the use of any particular set of analytical tools, except for the 

New Starts program. In addition, according to a 1999 National Cooperative 

Highway Research Program report, decision-makers are often uncertain 

about the appropriate use of analytic tools, including their usefulness, 

reliability, and data requirements.16 Furthermore, FHWA officials note that 

there currently is no minimum set of elements that are required to be 

included in an analytical model. In fact, FHWA officials point out the 

difficulty of establishing a consensus on modeling standards, especially 

since the use of tools or models varies from one region to the next. As a 

result, states and MPOs have largely been responsible for identifying and 

performing their own analyses during the planning process. 

Although the federal framework does not require the use of any particular 

tool, federal guidance advocates using benefit-cost analysis to evaluate 

investments. Benefit-cost analysis facilitates sound transportation 

investment decisions by integrating the effects of a potential alternative 

into a common monetary measure for comparison with other alternatives. 

In assessing the relative benefits and costs of each alternative, the analyst 

attempts to integrate social, economic, energy, and environmental 

impacts, in accordance with federal guidance, directly into the benefit-cost 

analysis. Research and best practices indicate that key steps of the 

analysis include defining the project objectives, identifying all reasonable 

alternatives, and systematically evaluating and comparing the projected 

effects of each alternative. Upon completion of the analysis, the decisionmaker can derive useful information about the trade-offs among 

alternatives and identify the alternative that results in the greatest 

estimated net social benefit to society. Researchers acknowledge several 

practical challenges of benefit-cost analysis, such as difficulties in 

 15FTA proposes New Starts projects to the Congress for funding on an annual basis, based 

on an evaluation of their technical merits, including mobility improvements and cost 

effectiveness, and the stability of the local financial commitment. 

16Transportation Research Board, Guidance on Using Existing Economic Analysis Tools 

for Evaluating Transportation Investments, prepared for the National Cooperative 

Highway Research Program, NCHRP 2-19 (2) (Washington, D.C.: October 1999). 

Benefit-Cost Analysis 

Is a Method for 

Evaluating 

Alternatives and 

Improving 

Transportation 

Infrastructure 

Decision-Making 
Page 18 GAO-04-744 Transportation Investment Decisions 

quantifying some benefits and costs and defining the scope of the project. 

However, major transportation groups, such as DOT and the National 

Research Council’s Transportation Research Board (TRB), continue to 

work on guidance and provide resources to improve and simplify benefitcost analysis and other analytic tools for practitioners. 

While federal planning regulations for transportation generally do not 

require the use of specific analytical models, several federal sources have 

identified benefit-cost analysis as a useful tool to help decision-makers 

determine trade-offs between alternatives and identify projects with the 

greatest estimated net social benefits. For example, Executive Order 12893 

states that expected benefits and costs should be quantified and monetized 

to the maximum extent practicable when evaluating federal infrastructure 

investments in the areas of transportation, water resources, energy and 

environmental protection.17 Moreover, guidance from OMB on the planning 

of federal capital assets suggests that the selection of alternatives should 

be based on a systematic analysis of expected benefits and costs.18 DOT 

encourages and provides guidance on the use of benefit-cost analyses in 

decision-making for transportation planning.19 In addition, in the past, we 

have encouraged the use of benefit-cost analysis in other areas such as 

freight transportation.20

 17Executive Order 12893, Principles for Federal Infrastructure Investments (Washington, 

D.C.: Jan. 26, 1994). 

18See Office of Management and Budget, Capital Programming Guide, Supplement to 

Office of Management and Budget Circular A-11, Part 3: Planning, Budgeting and 

Acquisition of Capital Assets (Washington, D.C.: July 1997). 

19For example, see FHWA Toolbox for Regional Policy Analysis, FHWA Economic Analysis 

Primer. 

20See U.S. General Accounting Office, Freight Transportation: Strategies Needed to 

Address Planning and Financing Limitations, GAO-04-165 (Washington, D.C.: Dec. 19, 

2003). 

Federal Guidance 

Supports the Use of 

Benefit-Cost Analysis 
Page 19 GAO-04-744 Transportation Investment Decisions 

Unlike most other types of analysis, benefit-cost analysis allows analysts 

to integrate multiple effects into a common monetary measure for 

assessment of a wide variety of alternatives. As discussed earlier in this 

report, federal guidelines encourage decision-makers to consider the 

potential social, environmental, and safety effects of transportation 

projects. Many tools and methods exist to analyze these effects separately, 

including models that forecast travel demand, emissions measurement 

tools, and other types of analyses. (See app. II for a comparison of benefitcost analysis to other economic analyses.) However, benefit-cost analysis 

integrates and monetizes the quantifiable benefits and costs of each 

alternative, including the results of some of these other models. Therefore, 

benefit-cost analysis provides a more thorough assessment of the 

alternatives than an analysis of any single impact area. 

Benefit-cost analysis is a systematic approach to evaluating alternative 

investments that attempts to quantify and monetize benefits and costs 

accruing to society from an investment. This analysis examines the 

immediate effects of the investment on the people using the investment 

and the effects that accrue to nonusers as a result of the investment. 

Examples of effects on users of transportation investments are reduced 

travel time and improved safety for drivers and transit passengers. An 

example of an effect on a nonuser is a change in pollution levels. From 

research and guidance on transportation investment analysis and our own 

previous work, we identified 10 steps that an analyst should perform for 

sound benefit-cost analysis, as shown in table 3.21 (See app. III for a 

detailed discussion of each of the key elements of the analysis.) 

 21See U.S. General Accounting Office, Consumer Product Safety Commission: Better Data 

Needed to Help Identify and Analyze Potential Hazards, GAO-HEHS-97-147 (Washington,

D.C.: Sept. 29, 1997). 

Benefit-Cost Analysis 

Integrates Multiple Effects 

Using a Systematic 

Approach to Evaluate 

Alternatives 
Page 20 GAO-04-744 Transportation Investment Decisions 

Table 3: Key Elements for Benefit-Cost Analysis 

Key elements 

• Define project objectives; 

• Establish the base case for comparison; 

• Identify alternative projects; 

• Define a time frame for analysis; 

• Identify impacts of alternatives; 

• Quantify and monetize impacts as benefits and costs to the extent possible; 

• Discount benefits and costs to present values; 

• Compare benefits and costs of each project, using a common monetary measure; 

• Assess the sensitivity of the analysis to changes in assumptions and forecasted 

inputs; and 

• Identify the alternative that results in the estimated greatest net social benefit. 

Source: GAO Analysis of economic literature and federal guidance documents. 

In addition to assigning a single monetary value to each potential project, 

benefit-cost analysis provides decision-makers with valuable information 

for comparing investment alternatives. Specifically, benefit-cost analysis 

informs decision-makers about the relative merit of alternatives by 

systematically assessing and placing monetary value on the favorable and 

unfavorable effects of various investment options. That is, researchers 

state that benefit-cost analysis can help decision-makers better understand 

the implications of each alternative and make trade-offs between 

investment options more transparent. This process encourages objective 

analysis and can expose possible biases in decision-making. 

The systematic process of benefit-cost analysis also helps decision-makers 

because it organizes information about the alternatives and converts 

dissimilar values, such as hours of travel time and number of accidents, to 

a comparable dollar measure. Researchers highlight benefit-cost analysis 

as a useful organizational tool because it aggregates key information 

relevant to the investment decision in a meaningful way. In addition, 

benefit-cost analysis offers a comparison of the benefits and costs that 

might accrue over time—including projected future operating costs and 

benefits to society that might not materialize immediately—and converts 

them to values in a single time period for more accurate comparison. In 

commenting on a draft of this report, FHWA noted that the discipline of 

going through the steps of benefit-cost analysis also could disclose 

important, timely information for public officials, planners, designers, and 

Benefit-Cost Analysis Can 

Yield Valuable Information 

for Decision-Makers 
Page 21 GAO-04-744 Transportation Investment Decisions 

the public, even if the data and methods used in the analysis are imperfect. 

Such timely information can facilitate decision-making. 

During our site visit to Chicago, railroad officials noted the value of 

benefit-cost analysis in a practical application. The Chicago Regional 

Environmental and Transportation Efficiency project (CREATE) is a 

$1.5 billion plan that includes more than 70 infrastructure improvement 

projects to increase the efficiency and reliability of freight and passenger 

rail service, reduce highway congestion, and provide safety and 

environmental benefits in the Chicago area.22 Benefit-cost analysis was key 

in the decision to proceed with this public-private partnership, according 

to several railroad executives. Project sponsors used an extensive model 

of the Chicago regional railroad network to help determine the effects of 

various upgrades to the network. The model showed the extent to which 

CREATE would resolve freight rail congestion problems—rather than 

merely pushing them to another location in the regional railroad network. 

Using the results of this model, benefit-cost analysis was critical in 

identifying the highest return on investment for individual project 

segments across the Chicago rail system and helping to illustrate public 

and private benefits. Benefit-cost analysis also helped provide a 

calculation of the level of benefits that private railroads would receive 

from the project, thus providing an estimate of the level of financial 

contribution that the railroads should make. 

While the results of benefit-cost analysis aid decision-makers in selecting 

between alternatives, guidance on benefit-cost analysis advises decisionmakers to augment the results of the analysis by considering other factors 

when weighing investment alternatives. Such other factors, like public 

participation and equitable distribution of benefits, are those that cannot 

be quantified or incorporated directly into the analysis due to practical 

challenges of benefit-cost analysis or limitations of the underlying 

information. 

Although guidance from many federal agencies encourages the use of 

benefit-cost analysis as a useful tool for assessing the potential effects of 

transportation projects, such analysis has several practical challenges. One 

 22Chicago’s rail system is the nation’s largest freight hub, and the region also handles 73 

million railroad passenger trips annually. Major bottlenecks have developed as a result of 

the region’s need to move 1,200 trains each day. 

Benefit-Cost Analysis Has 

Practical Challenges 
Page 22 GAO-04-744 Transportation Investment Decisions 

challenge is that while benefit-cost analysis evaluates the net benefits of 

projects, it does not usually consider the distribution of benefits across 

locations or populations or other equity concerns that may exist with 

transportation investment projects.23 Moreover, the outcome of benefitcost analysis is a net value and therefore inherently eliminates any 

distinction between groups of citizens to whom benefits accrue. By 

summing the individual gains and losses to determine the effect on society 

as a whole, benefit-cost analysis assumes that each individual’s gains or 

losses should be valued equally with any other individual’s gains or 

losses.24 For example, FHWA guidance notes that benefit-cost results 

might disproportionately rank projects in urban areas over those in rural 

areas because of the higher level of benefits urban projects may generate. 

Another practical challenge of benefit-cost analysis is monetizing some 

impacts of transportation improvements, such as reductions in emissions, 

travel time saved, and increased safety and reductions in fatalities. 

Although agency guidance exists, researchers do not always agree on the 

appropriate methods and assumptions for valuing these effects. For 

example, a report by the National Cooperative Highway Research Program 

(NCHRP) cites several outstanding issues in placing economic value on 

the time people spend traveling, such as (1) the fraction of the wage rate 

that should be used for work-related travel and personal travel, (2) 

whether to apply the same time value for very short periods of time saved 

as for longer periods, and (3) how to account for variation of travel time.25

Furthermore, debate surrounds the appropriate value of saving one 

statistical life through an improvement in safety; some advocates assert 

that human life is priceless and cannot be measured in monetary terms, 

while some researchers state that monetizing the impact of a reduction in 

fatalities leads to more complete analysis.26 In commenting on a draft of 

this report, FHWA said that although there is some debate about the 

 23Analysts could address these distributional problems within benefit-cost analysis by 

mathematically weighting the benefits and costs to a disadvantaged group differently than 

the benefits and costs to other segments of the population. However, in practice, it is very 

difficult to determine appropriate weights and equitably assign them to different population 

groups. 

24GAO-HEHS-97-147.

25Transportation Research Board, Assessing the Social and Economic Effects of 

Transportation Projects, NCHRP B25-19 (Washington, D.C.: February 2001). 

26For additional discussion on this topic, see OMB, Economic Analysis of Federal 

Regulations Under Executive Order 12866 (Washington, D.C.: Jan. 11, 1996). 
Page 23 GAO-04-744 Transportation Investment Decisions 

monetary value of some impacts of transportation improvements, there is 

also much about the valuation of impacts that economists can agree on. 

For example, FHWA noted that monetary values available in agency 

guidance can be assigned to the performance measures—such as travel 

time saved—that are already calculated by regional models in order to aid 

the evaluation of proposed transportation projects. 

Another challenge of implementing benefit-cost analysis is properly 

scoping the alternatives to analyze. Benefit-cost analysis is typically 

practiced as a way to compare one project against one or more individual 

projects rather than evaluating a system of projects. FHWA guidance 

cautions against evaluating a project that is actually a combination of two 

or more independent projects because an inefficient project might be 

hidden in the aggregate result. If multiple projects are aggregated and the 

net benefits of the group of projects are calculated, the result might 

indicate that the group of projects results in greater total benefits than the 

total costs incurred. However, one or more of the individual projects might 

not result in benefits greater than its costs if it were analyzed separately. 

Other research shows that analyzing each project independently and 

selecting projects without regard to the interrelation of the project 

outcomes can lead to selection of a combination of projects that do not 

maximize net benefits to society.27 In other words, one project, such as 

traffic signal coordination, might complement another project, such as a 

dedicated bus lane. In such a case, independent assessment of each 

project would not reveal the full benefits of implementing both projects. 

According to FHWA, in cases where projects are significantly interrelated, 

but not dependent on each other to produce net benefits to society, the 

effects of one project on another (e.g., changes in traffic) should be 

included in the analysis. 

Finally, because benefit-cost analysis integrates the effects of many 

different impact areas, it carries with it the challenges of forecasting and 

measuring the effects in those areas. For example, travel demand models 

forecast future use of the transportation system; therefore, their outputs 

become inputs to benefit-cost analysis. According to a TRB report, though 

travel demand models have been commonly used for 4 decades, few 

universally accepted guidelines or standards of practice exist for these 

 27Hof, John G. and Douglas B. Rideout, “Limitations of the With and Without Principle in 

Benefit-Cost Analysis,” Public Finance Quarterly (17, 2) April 1989, pp. 216-226; and Cohn, 

Elchanan, “Benefit-Cost Analysis: A Pedagogical Note,” Public Finance Review (31, 5) 

September 2002, pp. 534-549. 
Page 24 GAO-04-744 Transportation Investment Decisions 

models or their application.28 Practitioners’ views on appropriate methods 

vary because each organization conducting analysis tailors the forecasting 

approach to its region’s characteristics, available data, and the preferences 

and knowledge of the staff doing the analysis. The resulting uncertainty 

over the best approach to forecasting is an important challenge because 

such uncertainty can lead to imprecise or inaccurate inputs, which can 

severely affect the outcome of the analysis. For example, research on an 

emissions model highlights uncertainties in the data used to estimate 

reductions in vehicle emissions from congestion mitigation and concludes 

that these uncertainties lead to large uncertainties in the model outputs.29

Several major transportation organizations—TRB, FHWA, FTA, the 

Association of Metropolitan Planning Organizations, the American 

Association of State Highway and Transportation Officials (AASHTO), and 

the American Public Transportation Association (APTA)—conduct 

research to help MPOs address some of the practical challenges of 

implementing benefit-cost analysis, as well as other analytic tools. For 

example, FHWA has developed a “Toolbox for Regional Policy Analysis” 

that offers guidance on a variety of techniques, including benefit-cost 

analysis, that MPOs can use to evaluate investment alternatives. MPOs 

also may adopt best practices developed by other MPOs or use consultants 

to assist with analysis and modeling. Initiatives such as the Transportation 

Planning Capacity Building Program—sponsored by FHWA and FTA—

offer peer exchanges, roundtables, and workshops to facilitate such 

information sharing. In addition, many studies that are relevant to analysis 

and decision-making come from two major applied, user-oriented research 

programs—the NCHRP, which focuses on highway research and the 

Transit Cooperative Research Program (TCRP).30 In both programs, 

practitioners and other potential users of research results are involved in 

identifying their research needs, participating in selecting projects, and 

 28Transportation Research Board, First Report of the Transportation Research Board’s 

Committee for Review of Travel Demand Modeling by the Metropolitan Washington 

Council of Governments, (Washington, D.C.: Sept. 8, 2003). 

29Committee to Review EPA’s Mobile Source Emissions Factor (MOBILE) Model, Modeling 

Mobile-Source Emissions, (Washington, D.C.: 2000). 

30TRB administers both programs. State transportation departments that are AASHTO 

members have sponsored NCHRP in cooperation with FHWA since 1962 and make about 

$30 million available annually to sponsor its projects. FTA provides about $8 million 

annually and has worked with APTA’s nonprofit education and research organization since 

1992 to sponsor TCRP research. 

Research Studies Are 

Available to Improve 

Benefit-Cost Analysis and 

Other Analytic Tools 
Page 25 GAO-04-744 Transportation Investment Decisions 

helping guide projects. When research is complete, TRB publishes and 

widely disseminates the research findings. 

Several experts have indicated that while transportation researchers have 

devoted considerable attention to developing detailed guidance on 

analysis and modeling, they anticipate an increasing emphasis on this 

issue. They emphasized that TRB is likely to lead a major analysis to 

review and improve the state of the practice in modeling transportation 

impacts, benefit-cost analysis, and other tools. 

While transportation decision-makers consider analyses, such as benefitcost analyses, in investing resources to meet transportation needs, 

analyses often do not have a decisive impact on the final investment 

choices made by states and MPOs. According to transportation research, 

planning officials, and our prior work, other factors play a greater role in 

shaping decisions. For example, the federal funding structure for surface 

transportation and federal program incentives tend to focus decisionmakers’ attention on highway and transit projects and stakeholders rather 

than on railroads or other freight concerns. Moreover, there are relatively 

few instances in which decisions involve trade-offs among the various 

transportation modes to meet passenger and freight mobility needs, 

according to local planning officials. Decision-makers also are required to 

seek public input and involve a wide range of public and private 

stakeholders in reaching a consensus on investments. Ensuring that 

investment choices will maintain the existing infrastructure or improve its 

operation, rather than expand the transportation system’s capacity, also 

appears to be an important priority for decision-makers. Finally, decisionmakers are recognizing the importance of longer, multistate transportation 

corridors and the special challenges that they pose for investment 

decisions. 

MPOs, especially in major metropolitan areas, produce a substantial 

amount of analysis and modeling, according to transportation experts we 

interviewed. The results of such analyses can be a factor in transportation 

investment decision-making. For example, as noted previously in this 

report, transportation decision-makers in Chicago stated that the results of 

benefit-cost analysis had factored into their decision to implement the 

CREATE project. However, such analyses do not appear to play a decisive 

Many Other Factors 

Shape Transportation 

Investment Choices 

Analysis Assists, but Does 

Not Drive, Many 

Transportation Decisions 
Page 26 GAO-04-744 Transportation Investment Decisions 

role in many investment decisions, although they may help rule out bad 

investments and point out serious problems.31 For example, planners in 

Los Angeles noted that the projects selected for the TIP were not 

necessarily the ones with the highest benefit-cost ratios, although their 

analysis showed that every project in the plan did generate more benefits 

than costs. In addition to the limitations of benefit-cost analysis we 

discussed previously in this report, decision-makers may not be relying 

upon analyses, in part, due to various concerns about the usefulness and 

reliability of the analyses, according to the transportation research 

literature and our interviews with experts and officials in Chicago, Los 

Angeles, and San Francisco. 

State DOTs and MPOs have expressed uncertainty about the usefulness of 

analytical tools in guiding their transportation planning and decisionmaking. For example, states and MPOs view existing analytical tools as 

having limited usefulness in comparing investment alternatives among 

transportation modes and between passenger and freight investments. 

TRB’s applied research programs are trying to address this need through 

development of specific tools to help in making multimodal trade-offs. In 

addition, understanding how and when to use analysis is challenging for 

decision-makers.32 During our site visits, we found few instances in which 

investment decisions involved direct cross-modal trade-offs, such as 

railroad versus highway. According to a NCHRP survey published in 

2001,33 88 percent of state DOT respondents and 85 percent of MPO 

respondents reported that more useful guidelines—such as a guidebook 

for agency use in applying methods and analytic techniques—was either 

badly needed or would help to enhance the agency’s ability to evaluate the 

social and economic effects of transportation system changes. 

Accordingly, the study concluded that decision-makers need to be able to 

better select when, how, and why to use particular analytic tools in 

investment decisions. 

 31For example, financial analysis and air quality conformity analysis might reveal concerns 

that would play an important role in some investment decisions. 

32Transportation Research Board, Guidance on Using Existing Economic Analysis Tools 

for Evaluating Transportation Investments, NCHRP 2-19 (2), (Washington, D.C.: October 

1999). 

33Transportation Research Board, Assessing the Social and Economic Effects of 

Transportation Projects, NCHRP B25-19, (Washington, D.C.: February 2001). 
Page 27 GAO-04-744 Transportation Investment Decisions 

There are also concerns about data used in the analyses. Insufficient state 

and local data—particularly freight-related data—limits the quality and 

amount of analysis and modeling, according to NCHRP research and our 

December 2003 report.34 The lack of metropolitan level data, which is 

needed to analyze investment alternatives, has been a continuing concern 

in transportation research. For example, data needed to identify heavily 

traveled highways and freight bottlenecks, and to develop and evaluate 

alternative solutions for addressing such congestion (e.g., comparing the 

benefits of improving highway operations to the benefits of adding new 

road capacity), is not always available. Furthermore, data needed to apply 

a specific analytic tool may not be available or funds may not be sufficient 

to acquire or collect needed data. Compounding the problem, existing 

modeling software cannot always successfully accommodate the data 

limitations to yield results that are credible and usable. In the NCHRP 

survey of state DOTs and MPOs published in 2001, 82 percent of state DOT 

respondents and 97 percent of MPO respondents reported that better data 

to analyze social and economic effects either were needed badly or would 

help enhance the agency’s ability to evaluate the social and economic 

effects of transportation system changes. 

Freight data pose special challenges because shifting product mix, trade 

patterns, and consumer demands make freight a fast-changing area. The 

U.S. Bureau of Transportation Statistics reported in 2003 that there is a 

consensus that existing freight data often are too outdated to capture 

current freight status, many data elements are missing, and data often 

cannot be compared across modes.35 TRB and we have made 

recommendations to improve freight data. TRB recommended that 

resources be focused on developing a national freight data program that 

targets the needs of transportation analysts and planners.36 We 

recommended in our December 200337 report that DOT facilitate the 

collection of freight-relevant data, which would allow state and local 

planners to develop and use better evaluation methods such as demand 

forecasts, modal diversion forecasts, and estimates of the impacts of 

 34GAO-04-165. 

35U.S. Department of Transportation/Bureau of Transportation Statistics, Transportation 

Statistics Annual Report 2003 (Washington, D.C.: October 2003). 

36Transportation Research Board, Letter Report on the Freight Analysis Framework 

(Washington, D.C.: Feb. 9, 2004). 

37GAO-04-165. 
Page 28 GAO-04-744 Transportation Investment Decisions 

investments on congestion and pollution, thus providing a better basis for 

making transportation investment choices. FHWA has developed a Freight 

Analysis Framework (FAF) designed to estimate the flows of commodities 

and related freight transportation among states, substate regions, and 

major international gateways. The FAF also forecasts changes in the flows 

due to changes in economic conditions, transportation facilities, or other 

factors. FHWA is currently working to improve the FAF by improving the 

accuracy of freight flows, updating sources used in the model, and 

possibly incorporating new data sources and forecasting methods. 

Other considerations affect decision-makers use of analyses, such as how 

competently the analyses are interpreted and how well analyses are 

communicated, according to a transportation researcher. TRB and we 

have expressed a concern about impending shortages of skilled 

transportation professionals with expertise to choose and use analytic 

tools and communicate their results. Timing also can have an impact on 

the use of analysis. A local official observed that analyses that come later 

in the decision-making process may be viewed as the most relevant 

because they reflect the most current information available as projects are 

being considered. 

Concerns also have been raised about the ability of MPOs to produce and 

disseminate quality analyses that aid investment decision-making, given 

their broad scope of responsibilities and current funding levels. A recent 

study of metropolitan decision-making in transportation38 concluded that 

although MPOs have been given new planning responsibilities in areas 

such as environmental justice, job access, freight planning, and systems 

operations, highway program funding for metropolitan planning has not 

increased. DOT officials also told us that local budget constraints 

complicate the ability of MPOs to deliver quality data analysis because 

analysis is usually the first thing to be cut. During our Chicago site visit, a 

transportation consultant expressed concern that the MPO for that area is 

very thinly funded for the work that it is being asked to perform. 

 38Bruce Katz, Robert Puentes, and Scott Bernstein, The Brookings Institution Series on 

Transportation Reform, Improving Metropolitan Decision Making in Transportation: 

Greater Funding and Devolution for Greater Accountability, (Washington, D.C.: October 

2003). 
Page 29 GAO-04-744 Transportation Investment Decisions 

In evaluating and deciding on investments, the structure of federal funding 

and the lack of freight stakeholder involvement are important factors that 

focus decision-making principally on highways and transit and on 

stakeholders associated with these modes. In addition, during our site 

visits, we found few instances where investment decisions considered 

direct trade-offs between modes or between passenger and freight issues. 

ISTEA, TEA-21, and federal planning guidance all emphasize the goal of 

establishing a system wide, intermodal approach to addressing 

transportation needs. However, the reality of the federal funding 

structure—which directs most surface transportation spending to 

highways and transit, rather than railroad infrastructure—plays an 

important role in shaping MPO investment choices. In fiscal year 2001, for 

example, federal transportation grants to state and local governments 

totaled about $27.8 billion for highway programs, $7.0 billion for transit 

programs, and $37 million for railroad programs. The federal financial 

support for highways and transit systems comes mainly from federal 

highway user fees (i.e., fuel taxes deposited into the Highway Trust Fund), 

with the revenue generated from these fees generally targeted for highway 

or transit projects. While most federal funding sources and programs are 

linked to highway or transit uses, some funding flexibility between 

highway and transit is allowed under programs such as the National 

Highway System, Surface Transportation Program (STP), and Congestion 

Mitigation and Air Quality Improvement (CMAQ) programs. Federal 

programs provide limited support for investment in railroad infrastructure, 

with railroad investments largely financed by the private sector. 

In addition to the federal transportation grants to state and local 

governments discussed above, the federal government also provides some 

support to Amtrak for intercity passenger rail service. For example, in 

fiscal year 2003, the federal government appropriated about $1 billion to 

Amtrak to cover operating and capital expenses. However, the role of the 

federal government in providing financial support to Amtrak is currently 

under review amid concerns about the corporation’s financial viability and 

discussions about the future direction of federal policy toward intercity 

rail service.39 Regarding freight rail projects, the private sector owns, 

 39The Amtrak Reform and Accountability Act of 1997 prohibited Amtrak from using federal 

funds for operating expenses, except an amount equal to excess Railroad Retirement Tax 

Act payments, after 2002. However, Congress specifically appropriated funds for Amtrak to 

cover operating expenses in fiscal year 2003 (see the Consolidated Appropriations 

Resolution, 2003, P.L. 108-7). 

Federal Financing 

Structure and Other 

Factors Limit Intermodal 

Investment DecisionMaking 
Page 30 GAO-04-744 Transportation Investment Decisions 

operates, and provides almost all of the financing for freight railroads, 

with the public sector providing the supporting infrastructure—such as 

highways, ports, and intermodal facilities. Innovations in ISTEA and TEA21 allowed states more flexibility to use federal funds for freight projects, 

established public-private partnerships, and allowed the expenditure of 

federal aid on nonhighway freight projects in certain circumstances.40

A number of concerns have been raised about the availability of funding 

for railroad infrastructure, particularly for intermodal investments that 

could improve freight mobility. For example, AASHTO has reported that, 

although the railroad industry’s return on investment has improved, it still 

is below the cost of capital, a factor that might adversely affect future 

railroad infrastructure investment levels.41 In addition, we reported in 

December 2003 that access to funding sources for freight railroads—such 

as the National Corridor Planning and Development Program and the 

Coordinated Border Infrastructure Program—has been limited because, 

according to FHWA, these programs are oversubscribed and much of the 

funding for these programs has been allocated to congressionally 

designated projects.42 In addition, National Corridor Planning and 

Development Program funds may not be used for improvements on 

railroads’ heavy-use “mainline” tracks. Furthermore, given the intermodal 

nature of freight projects, the overall lack of flexibility for using federal 

transportation funding across modes limits the availability of funding for 

improving railroad and freight infrastructure. For example, the eligibility 

criteria under the Transportation Infrastructure Finance and Innovation 

Act do not allow assistance to privately owned facilities, such as privately 

owned rail infrastructure. Local planning officials we interviewed 

expressed concerns that limited public funding for freight railroad 

investments might limit regional options for addressing infrastructure 

requirements. For example, one local planning official told us that the lack 

of flexible funding limited that city’s ability to address freight-related 

problems. A regional planning official noted that while CMAQ money has 

 40Federal programs that can support railroad-related infrastructure that meet eligibility 

requirements include the Transportation Infrastructure Finance and Innovation Act, 

Railroad Rehabilitation and Improvement Financing, and the Rail-Highway Grade Crossing 

Program. 

41American Association of State Highway and Transportation Officials, Transportation: 

Invest in America: Freight-Rail Bottom Line Report (Washington, D.C.: 2002). 

42GAO-04-165. 
Page 31 GAO-04-744 Transportation Investment Decisions 

some flexibility, the federal funding structure narrows the ability to make 

optimal intermodal choices. 

Our December 2003 report43 on freight transportation pointed to another 

concern about freight decision-making—that state and local transportation 

planning and financing is not well suited to addressing freight 

improvement projects. At the local level, planning is oriented to projects 

that clearly produce public benefits, such as passenger-oriented projects. 

While freight projects also may produce public benefits by reducing freight 

congestion, they often can have difficulty securing public funds because 

they may generate substantial private sector benefits. For example, in 

California, local planning officials told us that State Transportation 

Improvement Program (STIP) funds could not be used for freight railroad 

improvements unless there were distinct benefits for passenger 

movement. Unlike passenger projects, it may be more difficult to identify 

clear-cut public benefits associated with freight railroad projects and 

balance them with private benefits. In California, local planning officials 

said they consider railroad improvements to be at a disadvantage in public 

referenda on transportation improvements because public support for 

freight and railroads is lacking. Chicago officials acknowledged that the 

lack of federal funds for freight projects limits the region’s investment 

options and local governments’ interest in spending their own funds on 

freight projects, such as the CREATE project. Finally, railroad industry 

investment criteria are not always aligned with the goals of the states and 

MPOs. While freight railroad industry investments may meet the internal 

industry tests of providing revenues, profits, and financial feasibility, they 

may not deal adequately with national transportation concerns, such as 

improving mobility, reducing nationally significant chokepoints, and 

enhancing system capacity. 

Several other considerations limit freight stakeholder involvement in local 

investment decisions—potentially affecting the MPOs’ ability to take a 

system wide, intermodal approach to addressing transportation needs. 

Although MPOs are required to consider freight needs, reflecting the 

concerns of freight stakeholders—such as freight railroads—in decisionmaking has proven challenging. For example, the Chicago region has been 

particularly active in involving freight railroads in the MPO’s Intermodal 

Advisory Task Force. But a railroad official, who described the railroad 

companies’ interaction with the MPO, nevertheless saw the need to modify 

 43GAO-04-165. 
Page 32 GAO-04-744 Transportation Investment Decisions 

the long-standing, local decision-making process so that freight railroads 

have a clearer role in investment decisions. Railroad officials in Chicago 

also cited the unfamiliarity of planners and decision-makers with freight 

operations as an obstacle to freight investments. They noted that many 

local officials and transportation agencies do not have a clear 

understanding of how freight operates, including the complexities of a 

consumer goods distribution system that typically starts in Asia or other 

areas of the world. However, several Chicago officials believed that the 

CREATE project may help change this situation by providing a plan to 

improve freight rail efficiency and freight rail’s interface with passenger 

transportation, and by giving freight more visibility with local officials. 

The freight industry may face other challenges in participating in 

transportation decision-making. For example, freight railroad companies 

operate in many states—each with numerous MPOs in their borders. A 

railroad executive noted that if all MPOs were serious about freight issues, 

companies could not handle the demands on their resources to participate. 

The freight industry also has long-standing concerns about working with 

the public sector. A railroad official we interviewed said that federal rail 

regulation left a lingering legacy of industry distrust of the government. In 

addition, freight railroads have long made their own investment decisions 

and supplied their own capital—with no public sector influence. As private 

entities that own most of the nation’s railroad infrastructure, freight 

railroads typically have not worked with the public sector because of 

concern about requirements and regulations that are tied to federal funds, 

unless a proposed infrastructure project will yield financial returns for the 

company. In addition, the lengthy planning and construction time 

associated with public infrastructure projects does not match the shorter 

planning and investment horizons of private companies. 

In addition to the focus on highways and transit over railroad investment 

choices, during our site visits we also found that cross-modal comparisons 

play a limited role in transportation investment decisions. We found 

limited instances in which investment decisions involved direct trade-offs 

in choices between modes or users—such as railroad versus highway or 

passenger versus freight. Officials in Chicago indicated that railroad and 

highway investments, and passenger and freight projects, rarely are in 

direct competition—perhaps because railroads and highways often serve 

different needs or markets. An official in Los Angeles commented that 

planners there avoid making modal comparisons because they view them 

as comparing “apples to oranges.” In Chicago, an official described only a 

few situations that posed modal choices and trade-offs for decision-
Page 33 GAO-04-744 Transportation Investment Decisions 

makers, for example, deciding between a transit alternative versus adding 

lanes to an existing tollway. 

Several researchers told us that whether planners and decision-makers 

make cross-modal and passenger-freight comparisons may be a moot point 

because local conditions, such as the physical environment often dictate 

modal choices. For example, metropolitan areas that are adjacent to a 

seaport may have few choices about whether to use highways or railroads 

to move products to and from the port. Space constraints and existing 

infrastructure, as well as the characteristics of freight (i.e., ports that 

handle bulk commodities such as coal or grain usually use railroads, while 

ports that handle computers usually use trucks), foreclose choices. 

Overall, moving freight usually offers fewer transportation choices than 

moving passengers, an expert noted. In addition, the demographic or other 

characteristics of specific transportation markets—such as a growing area 

with many transit commuters—also may determine modal choice. 

Metropolitan decision-making is designed to be a collaborative process 

that involves the public and its diverse concerns in identifying actions to 

improve transportation system performance. MPOs are required to seek 

public comment and have clear federal guidance on involving the public—

it is integral to their mission and one of their core functions. Moreover, the 

definition of the public is wide ranging—virtually all private and public 

individuals and organized groups that are potentially affected by 

transportation decisions in a given area.44 Federal regulations also state 

that MPOs must cooperate with the state and local transportation 

providers such as transit agencies, airport authorities, maritime operators, 

rail-freight operators, Amtrak, port operators, and others. MPOs are 

directed to provide the public with meaningful opportunities to provide 

input on transportation decisions and are expected to consider public 

input on the full range of financial, social, economic, and environmental 

consequences of their investment alternatives. 

Public participation can introduce considerations such as quality of life 

and other issues that are difficult to quantify in making transportation 

choices. It also puts decision-makers in the position of balancing different 

 44FHWA, FTA, AASHTO, APTA, The Association of Metropolitan Planning Organizations, 

The Metropolitan Transportation Planning Process: Key Issues (Washington, D.C.: 

November 2001). 

Public Input and Other 

Political Considerations 

Shape Investment 

Decisions 
Page 34 GAO-04-744 Transportation Investment Decisions 

public agendas about funding and values, according to a transportation 

researcher. Funding conflicts may arise between modes or from concerns 

about spreading benefits across the metropolitan area. Value conflicts may 

result from public concern about a potential project’s impacts on a 

neighborhood or the environment. 

As we observed in our site visits, public participation can play an 

influential role in transportation investment decisions. In California, public 

views often are expressed in county-level ballot box initiatives on the sales 

taxes and municipal bonds that finance transportation projects. Whether 

voters approve these initiatives is a significant factor in the investment 

decision-making process because of the growing prominence of local sales 

taxes in funding transportation projects. Local sales taxes have surpassed 

user fees as the primary source of funding for new transportation project 

construction in California because fuel tax revenues have not kept pace 

with travel volume and systems costs. The need for voter support may 

result in a greater number of transportation investment proposals that 

clearly identify public benefits for local constituents. In Chicago, an 

official noted that when an expressway extension with a High Occupancy 

Vehicle lane was proposed, attendees at public meetings opposed the 

project and endorsed additional mass transit service instead. 

Besides public input, other political considerations also shape investment 

decisions. The metropolitan planning process emphasizes the importance 

of achieving stakeholder agreement on the set of projects that constitute 

the MPO’s plan. One researcher said that achieving consensus often is 

difficult—especially with regard to completing large-scale projects—even 

when decision-makers are like-minded professionals. Arriving at a 

consensus puts a premium on how well local elected and appointed 

officials negotiate and build coalitions to obtain support for projects. 

Several researchers noted that this need for consensus may elevate the 

importance of certain political considerations—such as ensuring a rough 

equity in use of local and state funds for the distribution of transportation 

projects throughout a metropolitan area—in selecting projects for funding. 

In addition, state and metropolitan transportation politics may make some 

organizations, such as state DOTs, large units of local government such as 

cities and counties, or large transit agencies more influential in planning 

and project selection than others. This uneven influence may mean that a 

project’s priority can be determined by which agency sponsors the project. 

Our site visits also suggest that the relative influence of decision-makers 

varies across locations. For example, officials in Chicago described the 

Illinois DOT as having strong influence on metropolitan planning. 
Page 35 GAO-04-744 Transportation Investment Decisions 

Furthermore, a recent study indicated that federal and state agency 

decisions can be very important in determining the scope and composition 

of key decisions in the Chicago area. By contrast, officials in Los Angeles 

and San Francisco described local planning agencies, especially countylevel Congestion Management Agencies, as most influential. 

Finally, state decisions to distribute funds across the state may shape 

investment decisions. For example, California state law requires that 75 

percent of State Transportation Improvement Program funds be directly 

allocated to counties, who work through the county Congestion 

Management Agencies. However, according to CALTRANS officials, the 

total funding allocated to the counties is first divided between the counties 

of northern and southern California, with the 13 southern counties 

receiving 60 percent of the funds and the balance of California counties 

receiving 40 percent of the funds. Thus, while modal choices are primarily 

made at the regional or county level, the choices are constrained by state 

funding splits, according to CALTRANS officials. 

Due to infrastructure and space concerns, and time lags associated with 

new construction projects, state and regional transportation decisionmakers are increasingly giving priority to highway investments that 

preserve, enhance, and maintain the existing infrastructure over 

investments in new construction. According to FHWA data, of the $64.6 

billion spent nationally in 2000 on highway capital improvements, 52 

percent ($33.6 billion) of all funds were spent on system preservation, 40 

percent ($25.9 billion) on new roads and expansion of existing roads, and 

8 percent ($5.1 billion) on the installation of system enhancements, such 

as safety enhancements.45 The amount spent on system preservation rose 

from 45 percent of capital improvements nationally in 1993 to 52 percent 

 45Capital expenditures on highways include those for (1) system preservation, which 

includes capital improvements on existing roads and bridges, intended to preserve the 

existing infrastructure, but does not include routine maintenance; (2) system 

enhancements, which are traffic operations improvements, such as the installation of 

intelligent transportation systems (ITS) and environmental enhancements; and (3) system 

expansion, which includes construction of new roads and bridges, as well as additional 

lanes on roads. Noncapital expenditures are for maintenance and operations of highways, 

including functions necessary for day-to-day operations, such as keeping roads free of 

obstacles, performing pavement and shoulder maintenance, operating ITS, and performing 

incident management (the quick removal of incapacitated vehicles from the highway) to 

improve safety and traffic flow. 

Investments to Preserve 

Existing Infrastructure Are 

a Priority 
Page 36 GAO-04-744 Transportation Investment Decisions 

in 2000.46 In addition to the money spent on system preservation, all levels 

of government spent $24.2 billion on routine maintenance in 2000. 

In our site visits, we found that system preservation and operations and 

maintenance activities were high priorities for local transportation 

officials. For example, in Chicago, planners told us that in the spaceconstrained Chicago area, the primary strategy has been to periodically 

rebuild existing infrastructure rather than build new infrastructure. In 

California, both the Southern California Association of Governments 

(SCAG) and the Metropolitan Transportation Commission in Northern 

California spend approximately 80 percent of their regional budgets on 

maintenance and operations. SCAG officials pointed out that regions such 

as Los Angeles and San Francisco tend to focus less on capital 

improvements due to capacity and infrastructure limitations. Some 

situations offer few alternatives for expansion from the onset. 

Infrastructure that is old and inadequate, such as underpasses or tunnels 

with insufficient clearance, often has limited expansion potential.47 Further 

complicating new construction is the limited supply of available land. 

Densely populated urban areas, where space is at a premium, offer few 

alternatives for expansion due to geographic constraints on the 

surrounding development.48 In addition, land-use planning and zoning 

issues can be highly contested in a space constrained real estate market. 

Capacity constraints and costs of new construction are forcing decisionmakers to look at alternate solutions and place a premium on maintaining 

and improving the existing transportation system.49

System preservation and maintenance and operations improvements are 

also preferred because they offer quicker remedies than new capital 

projects, which can take almost 20 years to plan and build. A key reason 

for the length of time to complete projects is the set of federal and state 

requirements, which include clean air, water quality, historical 

preservation, New Starts reporting, and public input requirements that 

 46FHWA and FTA, Status of the Nation’s Highways, Bridges, and Transit: Conditions and 

Performance Report, 2002 Report to Congress (Washington, D.C.: 2002). 

47GAO-04-165. 

48GAO-04-165. 

49American Society of Civil Engineers, Statement of American Society of Civil Engineers 

Before the Banking, Housing and Urban Affairs Committee, U.S. Senate (Washington, 

D.C.: Oct. 8, 2002). 
Page 37 GAO-04-744 Transportation Investment Decisions 

were discussed earlier.50 However, the length of time for project 

development is also influenced by the diffusion of authority over 

transportation decisions and the resulting complexity of the decisionmaking process. Changes in local priorities, lack of local matching funds, 

and locally driven changes in project scope are often associated with 

project longevity. Requirements for benefit-cost and other economic 

analyses could extend the length of time for project development. One 

local planning official noted that the long lag time for new projects acts as 

a disincentive for planners and officials when considering capacity 

expansion projects. Transportation decision-makers operate in an 

environment where they must consider preexisting factors and needs 

when making transportation investment decisions. 

Finally, corridors that extend across multiple state and local boundaries 

pose challenges for intermodal transportation decision-making due to 

coordination and cross-jurisdictional issues. A majority of investment 

decisions are made at the state and local levels, with local planners 

tending to focus on local and regional planning needs, as opposed to larger 

corridor needs. Getting the cooperation of and coordinating with multiple 

agencies, communities, and transportation modes—each with its own 

priorities—makes the planning and implementation of multistate and 

multiregion projects difficult.51 Further complicating this type of planning 

is the variety of approaches used by the local and regional agencies in 

analyzing projects. The type of transportation modeling used in one 

location may not be available or used in another. 

Particularly problematic are interstate corridors that do not provide clearcut benefits for all states that the proposed corridor crosses, but require 

that the costs be borne by all states involved. Although state DOTs work to 

address freight mobility challenges on a statewide basis, many corridors 

cross state boundaries; and unless states are part of a multistate coalition, 

states may not address projects that involve multijurisdictional corridors.52

 50U.S. General Accounting Office, Highway Infrastructure: Preliminary Information on 

the Timely Completion of Highway Construction Projects, GAO-02-1067T (Washington, 

D.C.: Sept. 19, 2002). 

51C.F.R. 450.310 requires “planning agreements” between the state and MPOs, between 

MPOs in the same metropolitan area, and between MPOs and designated air quality 

agencies. 

52GAO-04-165. 

Planning for Longer 

Transportation Corridors 

Presents Additional 

Challenges and 

Opportunities 
Page 38 GAO-04-744 Transportation Investment Decisions 

For example, an Illinois transportation official explained that developing 

high-speed rail service to the east of Illinois is contingent on whether other 

states will share the costs. To date, only one other state has been willing to 

contribute. Similarly, freight infrastructure needs may involve projects 

along a freight corridor that cuts across the jurisdictions of several 

transportation-planning agencies and, in some cases, states. 

For the most part, planning for longer multistate corridors is conducted by 

ad hoc state coalitions. In the past, the impetus for creating such 

multistate coalitions has come from state departments of transportation, 

and the federal government’s role in making these interstate decisions is 

limited. Generally these ad hoc groups do not receive federal funding. 

However two groups, the Interstate 95 Corridor Coalition and the ChicagoGary-Milwaukee Coalition, did receive funding in TEA-21. The Interstate 

95 Corridor Coalition, which runs from Maine to Florida, was initially 

created to examine ITS systems along the corridor but has now widened 

its focus to include intermodal issues. The coalition developed a railroad 

operations study for the region, which identified deteriorating 

transportation system performance in the mid-Atlantic region, noted that 

all modes of transportation needed to be improved to deal with the 

situation, and suggested that railroads could play a larger role in meeting 

the region’s transportation needs.53 Studies such as this one illustrate the 

opportunities for these multistate coalitions to analyze problems in a 

larger corridor. 

Other such state groupings exist. For example, state DOTs along Interstate 

10 have organized an I-10 partnership to conduct research on managing 

freight movement along the corridor running from California to Florida. 

The I-10 partnership group developed a transportation planning study 

based on vehicle volume, traffic flow, and alternative scenario testing for 

freight movement. Rather than focusing on one particular mode, the study 

included highways, railroads, and barges in its analysis of freight traffic, 

and explicitly attempted to be mode neutral. While the partnership study 

projected the effects of different possible infrastructure improvements 

along the corridor, individual states are ultimately responsible for deciding 

whether to implement the study’s findings. 

 53Cambridge Systematics Inc., Parsons Brinkerhoff Quade and Douglas, Inc., and the I-95 

Corridor Coalition, Mid-Atlantic Rail Operations Study (Mid-Atlantic: April 2002). 
Page 39 GAO-04-744 Transportation Investment Decisions 

In contrast to these multistate groupings, planning for intrastate projects 

fits more easily into the framework of state planning. For example, in the 

case of passenger rail corridor development in California, intrastate 

passenger rail is funded primarily by the state DOT and the localities and 

operated by state and local joint powers authorities. In some cases, 

Amtrak serves as the operator for these state-supported routes. Some of 

these routes are Amtrak’s most heavily traveled outside the Northeast 

Corridor, including the Capitol Route in Northern California, the San 

Joaquin Route in Central California, and the Pacific Surfliner Route in 

Southern California. Planning for proposed routes, such as high-speed and 

passenger railroad, is facilitated when the route remains within a single 

state because such projects fit readily into the existing state planning 

framework. However, many of the corridors that would benefit from such 

projects involve more than one state. 

ISTEA and TEA-21 both articulated a goal of moving from a traditional 

focus on single transportation modes to a more efficient, integrated 

system that draws upon each mode to enhance passenger and freight 

mobility. These key pieces of legislation also provided MPOs and states 

discretion in selecting projects to address local needs and conditions. In 

exchange, MPOs and states are expected to follow federal planning and 

program requirements to reflect the national public interest in their 

decisions. The approach for investment planning and decision-making that 

emerged from ISTEA and TEA-21 provides guidance on a systematic 

process for making transportation investment choices and a host of 

factors to consider, while generally allowing MPOs and states considerable 

discretion in choosing the analytical methods and tools that will be used to 

evaluate and select projects. 

Our work has shown that while much analysis is done by states and MPOs, 

the results of those analyses do not appear to play a decisive role in many 

investment decisions, except to rule out the most problematic projects. 

Instead, other factors play a major role in shaping investment choices, 

including the federal government’s funding structure that provides 

incentives for investing in highway or transit projects rather than railroad 

infrastructure or intermodal projects, public or political support for 

certain projects, and the practical realities of simply preserving the 

existing infrastructure. In addition, the data and other limitations 

associated with using analytical tools, such as benefit-cost analysis, may 

discourage their use by decision-makers. DOT, TRB, and other major 

transportation organizations are doing research to improve analytical tools 

and methods and to help states and MPOs use them to better evaluate 

Concluding 

Observations 
Page 40 GAO-04-744 Transportation Investment Decisions 

investment alternatives. In a prior report, we also encouraged the use of 

benefit-cost analysis in freight transportation decision-making and 

recommended that DOT facilitate the collection of freight data that would 

allow state and local planners to develop better methods for evaluating 

investments. It is possible that overcoming the challenges of using 

analytical tools would make them more attractive to decision-makers, thus 

leading to improved investment decision-making. 

We provided copies of this report to the Department of Transportation for 

its review and comment. The department generally agreed with the 

report’s content and said that the report provided a useful overview of the 

literature and practice involving transportation investment decisions. The 

department also provided technical comments, which we incorporated 

into this report as appropriate. 

As arranged with your office, unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days after the 

date of this letter. At that time, we will send copies of this report to 

congressional committees with responsibilities for surface transportation 

programs; DOT officials, including the Secretary of Transportation and the 

administrators of FHWA, Federal Railroad Administration, and FTA; and 

the President of Amtrak. We will make copies available to others on 

request. This report will also be available on our home page at no charge 

at http://www.gao.gov. 

If you have any questions about this report, please contact me at 

siggerudk@gao.gov or by telephone at (202) 512-2834. GAO contacts and 

acknowledgments are listed in appendix IV. 

Sincerely Yours, 

Katherine Siggerud 

Director, Physical Infrastructure Issues 

Agency Comments 

and Our Evaluation 
Appendix I: Scope and Methodology 

Page 41 GAO-04-744 Transportation Investment Decisions 

Our scope of work included reviewing the processes that decision-makers 

at all levels of government use to analyze and select surface transportation 

infrastructure investments. Our overall approach was to review and 

synthesize federal requirements, Department of Transportation (DOT) 

guidance, and the economics literature and transportation planning 

studies; interview federal transportation officials, national association 

representatives, and transportation experts to obtain their perspectives; 

and conduct site visits in three major metropolitan regions to understand 

how investment decisions are actually made in those regions. 

To identify the key federal requirements for planning and transportation 

infrastructure decision-making, we reviewed federal laws and regulations 

relating to the metropolitan and state planning and funding process, as 

well as federal guidance provided by the Federal Highway Administration 

(FHWA) and Federal Transit Administration (FTA) to states and 

Metropolitan Planning Organizations (MPO) on the transportation 

planning process. We interviewed transportation officials in the following 

U.S. DOT offices: Federal Railroad Administration, FHWA, FTA, and the 

Office of Intermodalism. We also interviewed national stakeholders 

including Amtrak, the Association of American Railroads, the Association 

of Metropolitan Planning Organizations, the American Public 

Transportation Association, and the American Association of State 

Highway and Transportation Officials. To get regional perspectives on the 

federal requirements and guidance for transportation planning, we 

interviewed state and regional transportation officials in California and 

Illinois. 

To identify how benefit-cost analysis facilitates sound transportation 

investment decisions, we reviewed the economics literature, academic 

research, and transportation planning studies containing evaluations of 

various economic analytical tools, with an emphasis on benefit-cost 

analysis. A GAO economist read and reviewed these studies, which we 

identified by searching economics literature databases and consulting with 

researchers in the field, and found their methodology and economic 

reasoning to be sound and sufficiently reliable for our purposes. We 

interviewed researchers and consultants from the National Research 

Council’s Transportation Research Board (TRB), DOT, university research 

centers, national transportation organizations, and selected state DOTs to 

get their perspective on these analytical tools, the general applicability of 

benefit-cost analysis, and the feasibility of cross-modal comparisons. In 

addition, we reviewed our previous studies that had key findings relating 

to the use of analytical tools in investment decision-making and consulted 

Appendix I: Scope and Methodology 
Appendix I: Scope and Methodology 

Page 42 GAO-04-744 Transportation Investment Decisions 

with our Chief Economist regarding the value of benefit-cost analysis and 

its challenges. 

To identify other factors transportation decision-makers consider in 

evaluating and deciding on investments, we interviewed federal 

transportation officials and the other national stakeholders identified 

above. We interviewed transportation researchers from the TRB and, 

based on their input and that of federal transportation officials, 

interviewed additional researchers from university research centers—and 

other think tanks—as well as representatives from civic and private sector 

organizations who are knowledgeable about transportation investment 

issues. We also conducted site visits in three major metropolitan regions: 

Chicago, IL; Los Angeles, CA; and San Francisco, CA. These sites are 

major centers of passenger and freight traffic and contain a wide variety of 

planning agencies, transportation issues, and modes. During our site visits, 

we conducted semistructured interviews with officials from state, regional 

and local transportation planning agencies, including state departments of 

transportation, MPOs, city or county transportation planning agencies, and 

organizations involved in railroad investment issues. From these 

interviews, we obtained information on each region’s planning and 

decision-making processes, the factors that drove decision-making in that 

region, the extent to which analytical tools were used, and other issues 

affecting the planning and decision-making processes. In addition, we also 

analyzed planning documents and analytical tools used by these regional 

decision-makers. The information collected and analyzed from our site 

visits was intended to illustrate how investment decisions were made in 

those areas. 

To ensure the reliability of information presented in this report, we relied 

to a large extent on studies from the economics and transportation 

literature that were reviewed by peers prior to publication. A GAO 

economist reviewed these studies and found them methodologically 

sound. We also corroborated much of the testimonial information 

provided during our three site visits by obtaining documentation of 

investment decision-making processes and results, although we did not 

test the reliability of specific data contained in reports prepared by 

officials from those three sites. Additionally, we obtained statistics 

presented in the introduction of this report about passenger and freight 

travel growth from DOT; because this information is included as 

background only, we did not assess its reliability. We conducted our work 

from September 2003 through June 2004 in accordance with generally 

accepted government accounting standards. 
Appendix II: Summary of Three Types of 

Economic Analyses for Comparing Investment 

Alternatives 

Page 43 GAO-04-744 Transportation Investment Decisions 

While benefit-cost analysis aims to monetize and compare all direct 

benefits and costs to identify the alternative that results in the greatest net 

social benefit, other types of analysis consider different types of impacts 

to yield different criteria for comparison. Two common types of analysis 

are economic impact analysis and cost-effectiveness analysis. Figure 2 

illustrates the differences between benefit-cost analysis, economic impact 

analysis and life-cycle cost analysis, a special case of cost effectiveness 

analysis. 

Figure 2. Comparison of Three Types of Economic Analyses 

Economic impact analysis assesses how some direct benefits and costs of 

investment alternatives convert to indirect effects on the local, regional, or 

national economy or on a particular sector of the economy.1

 Examples of 

indirect impacts are changes in wages and employment, purchases of 

goods and services, land use, and changes in property values. These 

impacts result from increased or decreased levels of economic activity 

caused by the investment and can accrue within or outside of the 

immediate area of the investment. Economic impact analysis often 

 1

The use of the terms “direct” and “indirect” to classify types of benefits and costs is 

common in transportation economics literature but might not apply generally to economic 

analysis in other fields. 

Appendix II: Summary of Three Types of 

Economic Analyses for Comparing 

Investment Alternatives 

Type and purpose of analysis Factors considered/inputs 

to analysis

Outcome of analysis

Direct costs to users 

and nonusers

Identification of the 

least costly alternative

Source: GAO analysis of economic literature and guidance documents.

Benefit-cost analysis:

Compare monetary value of 

benefits and cost of each 

alternative

Quantifiable benefits

and costs to society

● Direct benefits and 

costs to users and 

nonusers

Identification of the 

alternative that results 

in the greatest estimated

net benefit to society

Market conversions of 

direct impacts to users 

and nonusers

● Indirect impacts to users 

and nonusers

Impact of alternatives 

on local, regional, or 

national economy

Economic impact analysis:

Measure effects on the 

economy derived from 

investment alternatives

Life cycle cost analysis: 

Compare costs of alternatives 

when the benefits of each 

option are equal
Appendix II: Summary of Three Types of 

Economic Analyses for Comparing Investment 

Alternatives 

Page 44 GAO-04-744 Transportation Investment Decisions 

includes a number of factors other than those that meet the stricter 

criteria for inclusion in a benefit-cost analysis. As a result, advocates or 

opponents of a project can use this type of analysis to illustrate 

implications of an investment other than the estimated net social benefit. 

However, economic impact analysis is not an appropriate technique for 

identifying which alternative provides society with the greatest net benefit 

because often the values of benefits to society are counted twice in 

different forms in this analysis. Guidance from both TRB and FHWA states 

that the net direct user benefits included in benefit-cost analysis have the 

same monetary value as the net indirect benefits and caution that the two 

are not additive when analyzing an investment for economic efficiency. In 

other words, indirect impacts are not included in benefit-cost analysis 

because economists generally agree that they are market transformations 

of direct benefits. Thus, while economic impact analysis can provide 

interesting information for policy makers regarding the effects of potential 

investments on the local, regional, or national economy as well as on 

specific industries, researchers state that economic impact analysis can be 

considered complementary to, but different from benefit-cost analysis. 

Cost-effectiveness analysis is similar to, but less comprehensive than, 

benefit-cost analysis. This type of analysis attempts to systematically 

quantify the costs of alternatives. However, cost-effectiveness analysis 

does not attempt to quantify the benefits of alternatives. Rather, it 

assumes that each alternative results in achieving the same stream of 

benefits. Thus, cost-effectiveness analysis identifies the lowest cost option 

for achieving a given level of benefits rather than identification of the 

alternative that achieves the greatest benefit per dollar of cost to society. 

Life-cycle cost analysis, essentially a subset of benefit-cost analysis, is a 

specific example of cost-effectiveness analysis. Life-cycle cost analysis 

involves several of the same steps included in benefit-cost analysis, but 

excludes any assessment of benefits because each of the alternatives 

compared is expected to result in the same level of benefits. The key 

elements of life-cycle cost analysis are identifying alternatives, defining a 

time frame for analysis, identifying and quantifying the costs of each 

alternative, discounting costs to present values, assessing the sensitivity of 

the analysis to changes in assumptions, and identifying the alternative that 

results in the lowest cost over the life-cycle of the project. When 

identifying and quantifying the costs of each alternative for transportation 
Appendix II: Summary of Three Types of 

Economic Analyses for Comparing Investment 

Alternatives 

Page 45 GAO-04-744 Transportation Investment Decisions 

projects, best practices indicate that analysts should consider 

construction, rehabilitation, and maintenance costs as well as costs to 

users associated with work zones during construction and maintenance.2

Like benefit-cost analysis, these user costs include travel time costs, costs 

associated with crashes, and vehicle operating costs. 

 2

See appendix III for a description of best practices for the other steps, as the procedures 

for these are consistent with their parallel steps in benefit-cost analysis. 
Appendix III: Overview of Benefit-Cost 

Analysis 

Page 46 GAO-04-744 Transportation Investment Decisions 

From our review of research and best practices on transportation 

investment analysis, we identified 10 elements integral to sound benefitcost analysis. Analysts include these steps to ensure a thorough evaluation 

of the social benefits and costs of investment alternatives and to 

systematically assess the trade-offs between investment alternatives. 

Using benefit-cost analysis, as described below, analysts determine the 

project that will result in the greatest benefit to society for a given level of 

cost. 

Analysts first should identify the project objectives to ensure a clear 

understanding of the desired outcome and to aid in determining 

appropriate alternative projects to be considered. Reports from TRB and 

FHWA identify several possible surface transportation project objectives 

including addressing an existing congestion problem, investing to 

accommodate expected future demand, generating economic 

development, improving safety in an area, or increasing mobility for 

disadvantaged citizens. Identifying the intended outcome at the outset 

leads to analysis focused on alternative projects that can achieve the 

stated objectives. For example, if the primary objective were to ease 

congestion, adding a highway lane or new transit option might be 

reasonable alternatives to consider; however, if the objective were to 

improve safety in an area, perhaps other alternatives would be more 

appropriate. Federal Aviation Administration (FAA) guidance on benefitcost analysis cautions that the analyst should be careful not to identify the 

objective in a way that prejudges the alternatives for achieving the 

objective. For example, an objective stated as construction to address an 

existing congestion problem ignores the possibility of nonbuild 

alternatives that might improve the use of the existing system. 

Establishing a realistic base case provides a reference point against which 

the incremental benefits and costs of alternatives will be measured. 

According to FAA guidance, the base case is the best course of action that 

would be pursued in the absence of a major initiative to meet the 

investment objectives identified.1

 In other words, the base case should 

represent existing infrastructure, including improvements that are already 

planned, as well as on-going maintenance. FHWA guidance states that the 

base case should be realistically defined including, for example, 

allowances for changes in traffic patterns with congestion. Failure to allow 

 1

The base case is sometimes referred to as the “do nothing” or “no-build” scenario; 

however, a more accurate name is the “do minimal” alternative. 

Appendix III: Overview of Benefit-Cost 

Analysis 
Appendix III: Overview of Benefit-Cost 

Analysis 

Page 47 GAO-04-744 Transportation Investment Decisions 

for such changes in the base case can lead to overly pessimistic 

assessments of the base case in comparison to alternatives. 

Given the project objectives and the base case, analysts should identify the 

investment alternatives capable of achieving the stated objectives to 

define the scope of the analysis. In generating the list of possible 

alternatives, analysts should consider options across different 

transportation modes. For example, alternatives for a congested 

metropolitan route could include adding a lane to the existing highway, 

providing new or better bus service, or building a light rail line. Moreover, 

passenger alternatives for a congested intercity corridor could include 

high-speed rail, new or expanded air travel, or a new or expanded 

highway. In addition to evaluating multiple modes, low-cost noncapital 

intensive alternatives should be considered. These alternatives include 

Intelligent Transportation Systems (ITS) and demand management 

approaches. ITS solutions are designed to enhance the safety, efficiency, 

and effectiveness of the transportation network and are relatively low-cost 

options for maximizing the capacity of the existing infrastructure.2

 ITS 

solutions include coordinating traffic signals to improve traffic flow, 

improving emergency management responses to crashes, and using 

electronic driver alert boards to notify drivers of congested routes. 

Similarly, demand management alternatives can relieve congestion 

without major infrastructure investments. Demand management 

alternatives are ways of reducing the number of vehicles traveling on a 

congested route during the most congested times or peak periods. 

Demand management alternatives encourage drivers to drive during less 

congested times, or on less congested routes, or to ride together in 

carpools or vanpools. Charging single occupancy vehicles a toll during 

congested times on congested routes, providing free or discounted 

convenient parking for persons riding in carpools or vanpools, and 

subsidizing transit usage are possible demand management alternatives.3

Finally, both passenger and freight options for addressing congestion 

should be considered. Our past work on freight transportation shows that 

truck use significantly affects highway congestion. For example, officials 

at the Ports of Los Angeles and Long Beach estimate that truck traffic 

accounts for about 30 to 60 percent of the total traffic on two particularly 

 2

U.S. General Accounting Office, Surface and Maritime Transportation: Developing 

Strategies for Enhancing Mobility, GAO-02-775 (Washington, D.C.: Aug. 30, 2002). 

3

GAO-02-775. 
Appendix III: Overview of Benefit-Cost 

Analysis 

Page 48 GAO-04-744 Transportation Investment Decisions 

congested major highways, which serve as connectors to the two ports.4

Moreover, independent studies report that shifting greater amounts of 

freight from highways to rail could relieve highway congestion.5

Following the identification of alternative projects, analysts should list the 

relevant impacts of each alternative to ensure that all aspects of a project 

are considered in the analysis. As previously stated, benefit-cost analysis 

considers all direct user impacts and externalities, but it does not consider 

indirect impacts because these are transfers of direct impacts and their 

inclusion would constitute double counting. Transportation economics 

research and government agency guidance we reviewed identified the 

following list of direct user impacts that should be considered for 

transportation investment decisions: construction, operations and 

maintenance costs; travel time savings and construction travel time cost; 

vehicle operating costs; safety improvements; and environmental impacts, 

such as noise pollution and air pollution. Tolls, fares, or any other user 

fees should not be included as impacts of the projects, because these are 

payments made by consumers to receive the benefits already counted in 

the list above. 

After identifying the user impacts for each alternative, the analyst must 

define a single time frame or life cycle for all alternatives over which the 

benefits and costs will be compared. This element of the analysis is 

necessary for equal comparison of projects with differing expected future 

streams of benefits and costs from current investment. Typically, a region 

constructing major infrastructure investments incurs a majority of the 

costs of the project within the first years of the life cycle and reaps the 

majority of the benefits later in the life cycle of the project; therefore, the 

analyst should choose a time frame that allows for the measurement of 

benefits and costs expected to materialize throughout the useful life of the 

investment. 

The impacts of each alternative should be quantified and monetized as 

benefits and costs to the greatest extent possible to enable the analyst to 

compare the value of each project to the alternatives. In addition to 

 4

GAO-04-165. 

5

American Association of State Highway and Transportation Officials, Transportation 

Invest in America: Freight-Rail Bottom Line Report (Washington, D.C.) and Brown, 

Thomas R. and Anthony B. Hatch, Rail Intermodal: On the Fast Track 

http://www.tomorrowsrailroads.org/industry/railstudies.cfm. 
Appendix III: Overview of Benefit-Cost 

Analysis 

Page 49 GAO-04-744 Transportation Investment Decisions 

compiling the obviously quantitative impacts, like construction and 

operations costs, the analyst must quantify other identified impacts of 

alternatives, like emissions reduction. The analyst must then convert those 

values to dollars so the impacts are expressed in common units. 

Forecasting tools and benefit-cost analysis models facilitate the process of 

quantifying and monetizing benefits and costs. Forecasting tools predict 

future behavior of system users, like travel demand and ridership, for the 

investment alternatives. Values from the forecasts are used as inputs into a 

larger model that quantifies and monetizes direct user impacts and 

quantifiable externalities. Therefore, the accuracy of the forecasts directly 

affects the accuracy of the analysis. Several widely accessible models of 

highly varying complexities measure and quantify predicted benefits and 

costs.6

 These models rely on some assumptions, but also require users to 

enter location and project specific data to generate estimates, which are 

used to assess the overall net benefit of alternatives. Therefore, the 

outcome of the analysis depends, in part, on the quality of the model used 

for calculations of benefits and costs. 

After monetizing the direct user benefits and costs, the analyst converts all 

values to present dollar values to allow an accurate comparison of 

projects with different levels of future benefits and costs. The dollar values 

of the benefits and costs of each alternative cannot simply be summed 

over the life of the project to calculate the total. Benefits and costs 

incurred in the future have lower values than those incurred in the present 

because, in the case of benefits, the benefits cannot be enjoyed now and, 

in the case of costs, the resources do not need to be expended now. In 

other words, benefits and costs are worth more if they are experienced 

sooner because of the time value of money. Therefore, analysts must 

convert future values into their present equivalents to compare benefits 

and costs expected in the future with benefits and costs incurred in the 

present. This conversion requires the use of a discount rate, which 

represents the interest rate that could be earned on alternative uses of the 

resources. Researchers explain that the discount rate can have a strong 

influence on the outcome of the analysis and note that higher discount 

rates tend to favor short-term projects and lower rates favor long-term 

projects. Thus, analysts should use care in choosing a discount rate that 

will not bias the outcome of the analysis and will accurately account for 

 6

For a listing and evaluation of some models, see National Cooperative Highway Research 

Program, Guidance on Using Existing Economic Analysis Tools for Evaluating 

Transportation Investments (Washington, D.C.: October 1999). 
Appendix III: Overview of Benefit-Cost 

Analysis 

Page 50 GAO-04-744 Transportation Investment Decisions 

the benefits and costs expected in the future. Office of Management and 

Budget (OMB) provides guidance on choosing appropriate discount rates 

for different types of investments.7

After all benefits and costs have been discounted to present values, the 

analyst should evaluate the benefits and costs of each project using a 

common measure to allow for comparison across different alternatives. 

Net present value and benefit-cost ratio are two useful measures for 

project comparison. Net present value is the discounted sum of all benefits 

less the discounted sum of all costs associated with an alternative and is 

generally the preferred measure. If the net present value is positive, then 

the project is economically efficient in that the gainers from the project 

could potentially compensate those who incur costs and still benefit from 

the project. That is, the benefits throughout the life cycle of the project 

exceed the costs incurred in the same time frame. A benefit-cost ratio is 

the discounted sum of benefits divided by the discounted sum of costs. If 

the benefit-cost ratio is greater than one, benefits outweigh costs and the 

project is economically efficient. In essence, the benefit-cost ratio 

indicates whether $1 invested in one project earns a higher rate of return 

than $1 invested in a different project. Researchers and government 

agency guidance caution analysts to assign costs and benefits consistently 

when calculating benefit-cost ratios because inconsistency can result in 

incorrect comparisons between alternatives. For example, if maintenance 

costs are included in the cost component, the denominator of the fraction, 

for one project, but are netted out of the benefits, the numerator of the 

fraction, for a different project, the two benefit-cost ratios will not be 

comparable. 

Due to the inherent uncertainty in calculating the inputs to benefit-cost 

analysis, a critical element of investment analysis is assessing the 

sensitivity of the analysis to changes in the assumptions and forecasts. In 

addition, uncertainty can also affect the economically suggested choice of 

the project resulting in the greatest net benefit to society. Several 

methods, which vary in their complexity, exist for conducting sensitivity 

analysis including simple sensitivity analysis and Monte Carlo simulation. 

Simple sensitivity analysis involves recalculating the net present values or 

benefit-cost ratios after adjusting uncertain inputs to reflect alternative 

values, as well as the expected value typically used in the original analysis. 

 7

OMB, Circular A-94 Guidelines and Discount Rates for Benefit-Cost Analysis of Federal 

Programs (Washington, D.C.: 2002). 
Appendix III: Overview of Benefit-Cost 

Analysis 

Page 51 GAO-04-744 Transportation Investment Decisions 

Using this approach, the analyst can determine whether or not the 

alternative would still be economically efficient if the actual values were 

different from their predicted values. For example, transportation 

researchers widely accept that ridership forecasts for transit projects can 

be very uncertain. An analyst using simple sensitivity analysis can 

determine if the net present value of a transit alternative would still be 

positive even, if ridership in the future were lower than predicted. 

Monte Carlo simulation or probabilistic-based risk assessment is a more 

comprehensive and preferred approach to sensitivity analysis. With Monte 

Carlo simulation, the analyst assesses the probability distribution of each 

uncertain input and recalculates the benefit-cost analysis multiple times 

while drawing values that fall within the probability distribution for each 

of the uncertain inputs. The results are examined in the context of their 

probability distribution covering all potential outcomes of the analysis as 

well as reporting the average or other values. This approach allows the 

analyst to judge alternatives not only on their average net present value, 

given multiple possible input value combinations, but also on the 

likelihood that the project will achieve outcomes such as a positive net 

present value. 

Real options analysis incorporates uncertainty directly into benefit-cost 

valuation. It acknowledges and internalizes both the cost of making 

irreversible investments under uncertain conditions and the value of 

option-creating actions.8

 This type of analysis incorporates timing of the 

decision as a factor rather than assuming investments are now or never 

decisions that cannot be delayed. In addition, real options analysis 

recognizes that a cost is associated with making decisions when the 

information that decision-makers use as a basis for the decision is 

uncertain and may change in the future. The analysis attempts to quantify 

the inherent opportunity cost of making an investment decision. In other 

words, real options analysis accounts for the lost opportunity to make a 

different decision at a later time when more or better information is 

 8

Option-creating actions are steps that decision-makers can take to improve the 

information available for making a decision, including resolving uncertainty, enabling 

flexibility, and uncovering new and relevant information. For example, if existing levels of 

demand do not support a light rail line for a planned new highway corridor but planners 

expect that such demand might materialize in the future, an option-creating action would 

be to build the highway compatible with the possibility of constructing a light rail line in 

the median. Brand, Daniel, Shomik Raj Mehndiratta and Thomas E. Parody, “Options 

Approach to Risk Analysis in Transportation Planning,” Transportation Research Record 

1706, Paper No. 00-1075. 
Appendix III: Overview of Benefit-Cost 

Analysis 

Page 52 GAO-04-744 Transportation Investment Decisions 

available. For an investment to be advisable under real options analysis, 

the net present value of the investment must exceed the value of keeping 

the investment option alive until more certain information is available. 

While the real options approach is becoming more common in private 

sector investment decision-making, research suggests that this approach is 

not widely used in the public sector. Researchers have highlighted several 

ways that public sector transportation investment decision-makers could 

use real options analysis. First, decision-makers can use incremental 

planning and staged implementation of phases of projects to maintain the 

option to defer a decision and wait for new information or to terminate a 

partially-completed project if new information reveals that the investment 

is no longer beneficial to society. Decision-makers can also actively create 

flexible options by taking steps like acquiring a right-of-way but not 

building until more is known about the potential project, including 

demand conditions, potential costs, and expected benefits of alternatives. 

Finally, planners can use options to take incremental actions that increase 

learning. One study uses the case of San Diego’s conversion of a highoccupancy vehicle (HOV) lane to a high-occupancy toll (HOT) lane as an 

example of taking incremental action that increases learning. By using 

existing infrastructure and adding a pricing component, decision-makers 

tested users’ reactions to optional congestion pricing before implementing 

a congestion-pricing model that would affect all drivers. 

Finally, after the analysis has been completed and the results have been 

checked for sensitivity to uncertain inputs, analysts should use the results 

of the analysis to compare alternatives and identify the project that results 

in the greatest estimated net social benefit. As stated above, any project 

that has a positive net present value or benefit-cost ratio greater than one 

is expected to provide net benefits to society. However, transportation 

decision-makers have budget constraints and typically cannot implement 

all projects resulting in net benefits. Rather, they must rank alternatives 

and identify the best project that can be implemented given the budget 

constraint. In general, projects with higher net present values or benefitcost ratios should be chosen over projects with lower net present values 

or benefit-cost ratios. If projects are not mutually exclusive, then a 

combination of projects, the total cost of which does not exceed the 

budget constraint, might lead to the greatest net social benefit. In this 

case, the decision-maker should examine all feasible combinations of 

projects, sum the net present values for each combination, and identify the 

combination that yields the highest total net present value. In addition, 

according to Executive Order 12893, OMB guidance, and our past 

research, in the likely event that not all benefits and costs could be 
Appendix III: Overview of Benefit-Cost 

Analysis 

Page 53 GAO-04-744 Transportation Investment Decisions 

quantified and monetized when developing the benefit-cost analysis, the 

decision-maker should consider the nonquantifiable factors in addition to 

the numeric results of the analysis when evaluating alternatives. 
Appendix IV: GAO Contacts and Staff 

Acknowledgments 

Page 54 GAO-04-744 Transportation Investment Decisions 

Katherine Siggerud, (202) 512-2834 

Rita Grieco, (202) 512-9047 

In addition to those named above, Christine Bonham, Jay Cherlow, Robert 

Ciszewski, Lindy Coe-Juell, Sarah Eckenrod, Colin Fallon, Scott Farrow, 

Peter Guerrero, Libby Halperin, Hiroshi Ishikawa, Sara Ann Moessbauer, 

Stacey Thompson, and Dorothy Yee made key contributions to this report. 

Appendix IV: GAO Contacts and Staff 

Acknowledgments 

GAO Contacts 

Acknowledgments 

(545037) 
The General Accounting Office, the audit, evaluation and investigative arm of 

Congress, exists to support Congress in meeting its constitutional responsibilities 

and to help improve the performance and accountability of the federal 

government for the American people. GAO examines the use of public funds; 

evaluates federal programs and policies; and provides analyses, 

recommendations, and other assistance to help Congress make informed 

oversight, policy, and funding decisions. GAO’s commitment to good government 

is reflected in its core values of accountability, integrity, and reliability. 

The fastest and easiest way to obtain copies of GAO documents at no cost is 

through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and fulltext files of current reports and testimony and an expanding archive of older 

products. The Web site features a search engine to help you locate documents 

using key words and phrases. You can print these documents in their entirety, 

including charts and other graphics. 

Each day, GAO issues a list of newly released reports, testimony, and 

correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site 

daily. The list contains links to the full-text document files. To have GAO e-mail 

this list to you every afternoon, go to www.gao.gov and select “Subscribe to e-mail 

alerts” under the “Order GAO Products” heading. 

The first copy of each printed report is free. Additional copies are $2 each. A 

check or money order should be made out to the Superintendent of Documents. 

GAO also accepts VISA and Mastercard. Orders for 100 or more copies mailed to a 

single address are discounted 25 percent. Orders should be sent to: 

U.S. General Accounting Office 

441 G Street NW, Room LM 

Washington, D.C. 20548 

To order by Phone: Voice: (202) 512-6000 

TDD: (202) 512-2537 

Fax: (202) 512-6061 

Contact: 

Web site: www.gao.gov/fraudnet/fraudnet.htm 

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470 

Jeff Nelligan, Managing Director, NelliganJ@gao.gov (202) 512-4800 

U.S. General Accounting Office, 441 G Street NW, Room 7149 

Washington, D.C. 20548 

GAO’s Mission 

Obtaining Copies of 

GAO Reports and 

Testimony 

Order by Mail or Phone 

To Report Fraud, 

Waste, and Abuse in 

Federal Programs 

Public Affairs