Surface Transportation: Many Factors Affect Investment Decisions
Published: 2004-06-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: 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.
section_title: What GAO Found
paragraphs: 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.

section_title: Letter
paragraphs: The scope of the U.S. surface transportation system—which primarily  includes roads, mass transit systems, and railroads—is vast and  increasingly congested. 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. 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  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 cost- beneficial 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 benefit- cost 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 decision- making, 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  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.)
subsections: section_title: Background
paragraphs: 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.
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. 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.
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 decision- making process involving states, MPOs, local governments, and other  stakeholders.
section_title: Federal Requirements Specify an Approach for Planning and Deciding on Transportation Projects
paragraphs: 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.
subsections: section_title: Transportation Planning Involves Multiple Stakeholders
paragraphs: 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.
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 decision- making 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  facilities 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.
section_title: Transportation Planning Requires Identifying an Overall Vision and Analyzing Alternatives before Deciding on Projects
paragraphs: 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 user- oriented 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.
section_title: Federal Laws Require That Transportation Needs and Proposed Projects Be Documented in Long- Range Plans and Short- Range Programs
paragraphs: 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 short- range programs. 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).
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  greater share of transportation funds to the counties. 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.
section_title: Many Factors To Be Considered Throughout the Planning and Decision- Making Process
paragraphs: 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.
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. 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  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. 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). 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  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.
section_title: Transportation Planners Generally Have Discretion in Selecting Analytical Tools
paragraphs: 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  benefits, costs, and impacts of alternative strategies to address a  transportation problem in a given corridor.
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. 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.
section_title: Benefit-Cost Analysis Is a Method for Evaluating Alternatives and Improving Transportation Infrastructure Decision-Making
paragraphs: 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 decision- maker 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  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 benefit- cost analysis and other analytic tools for practitioners.
subsections: section_title: Federal Guidance Supports the Use of Benefit-Cost Analysis
paragraphs: 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. 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. DOT  encourages and provides guidance on the use of benefit-cost analyses in  decision-making for transportation planning. In addition, in the past, we  have encouraged the use of benefit-cost analysis in other areas such as  freight transportation.
section_title: Benefit-Cost Analysis Integrates Multiple Effects Using a Systematic Approach to Evaluate Alternatives
paragraphs: 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 benefit- cost 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. (See app. III for a  detailed discussion of each of the key elements of the analysis.)
section_title: Benefit-Cost Analysis Can Yield Valuable Information for Decision-Makers
paragraphs: 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  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. 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 decision- makers 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.
section_title: Benefit-Cost Analysis Has Practical Challenges
paragraphs: 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  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. Moreover, the outcome of benefit- cost 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. 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.  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. In commenting on a draft of  this report, FHWA said that although there is some debate about the  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. 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  models or their application. 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.
section_title: Research Studies Are Available to Improve Benefit-Cost Analysis and Other Analytic Tools
paragraphs: 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). In both programs,  practitioners and other potential users of research results are involved in  identifying their research needs, participating in selecting projects, and  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.
section_title: Many Other Factors Shape Transportation Investment Choices
paragraphs: While transportation decision-makers consider analyses, such as benefit- cost 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 decision- makers’ 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, decision- makers are recognizing the importance of longer, multistate transportation  corridors and the special challenges that they pose for investment  decisions.
subsections: section_title: Analysis Assists, but Does Not Drive, Many Transportation Decisions
paragraphs: 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  role in many investment decisions, although they may help rule out bad  investments and point out serious problems. 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 decision- making. 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. 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, 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.
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. 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. 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. We  recommended in our December 2003 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  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 transportation 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.
section_title: Federal Financing Structure and Other Factors Limit Intermodal Investment Decision- Making
paragraphs: 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. Regarding freight rail projects, the private sector owns,  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 TEA- 21 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.
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. 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. 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  some flexibility, the federal funding structure narrows the ability to make  optimal intermodal choices.
Our December 2003 report 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 decision- making 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  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- 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.
section_title: Public Input and Other Political Considerations Shape Investment Decisions
paragraphs: 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. 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  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.
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 county- level 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.
section_title: Investments to Preserve Existing Infrastructure Are a Priority
paragraphs: Due to infrastructure and space concerns, and time lags associated with  new construction projects, state and regional transportation decision- makers 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. The amount spent on system preservation rose  from 45 percent of capital improvements nationally in 1993 to 52 percent  in 2000. 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 space- constrained 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. 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. 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 decision- makers to look at alternate solutions and place a premium on maintaining  and improving the existing transportation system.
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  were discussed earlier. 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 decision- making 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.
section_title: Planning for Longer Transportation Corridors Presents Additional Challenges and Opportunities
paragraphs: 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. 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 clear- cut 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.
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 Chicago- Gary-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. 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.
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.
section_title: Concluding Observations
paragraphs: 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  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.
section_title: Agency Comments and Our Evaluation
paragraphs: 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.
section_title: Appendix I: Scope and Methodology
paragraphs: 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  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.
section_title: Appendix II: Summary of Three Types of Economic Analyses for Comparing Investment Alternatives
paragraphs: 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.
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. 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  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  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.  Like benefit-cost analysis, these user costs include travel time costs, costs  associated with crashes, and vehicle operating costs.
section_title: Appendix III: Overview of Benefit-Cost Analysis
paragraphs: From our review of research and best practices on transportation  investment analysis, we identified 10 elements integral to sound benefit- cost 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 benefit- cost 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. 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  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. 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.  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  congested major highways, which serve as connectors to the two ports.  Moreover, independent studies report that shifting greater amounts of  freight from highways to rail could relieve highway congestion.
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  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. 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  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.
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.
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. 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  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 high- occupancy 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 benefit- cost 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  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.
section_title: Appendix IV: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Acknowledgments
paragraphs: 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.