PERGAMON

Transport Policy 7 (2000) 4150

www.elsevier.com/locate/tranpol

Methods for evaluation of transportation projects in the USA q

D.B. Lee Jr.
US Department of Transportation, Volpe National Transportation Systems Center, Kendall Square, Cambridge, MA 02142, USA

Abstract Projects, as the term is used here, are capital investmentsfrom resurfacing streets to multi-billion dollar constructionthat create transportation infrastructure. Methods are primarily benetcost analysis, although other frameworks have been, and still remain, in use. Most projects are constructed by public agencies and authorities, primarily at the state and local level, but the federal government is the dominant source of evaluation guidance because most transportation projects use some share of federal funds. Benetcost analysis (BCA or BC) is a decision framework for government agencies to use in considering the desirability of taking alternative actions, whether investment, operations, or regulation. This survey describes the use of BCA by US transportation agencies, comparing theory, published guidance, and actual practice. Published by Elsevier Science Ltd.
Keywords: Transportation project evaluation; Benetcost analysis

1. Institutional factors affecting evaluation Although the benetcost (BC) framework has come to dominate other methods of evaluation in the US, Benet cost analysis (BCA) is by no means supreme, and any kind of technical evaluation faces an uphill struggle in the decision process. Application of BC is the strongest at the federal level, but states and, to a lesser extent, localities accept the appropriateness of the BC format while not necessarily doing a lot of it. 1.1. Political pressures for evaluation Considerable pressure comes from both the Ofce of Management and Budget (OMB, which seeks to reduce requests for funds by federal agencies) and Congress (which seeks justication for spending taxpayer funds). Those in the political arena who believe that objective analysis will support their position favor BCA because they believe it is neutral or at least arguable, while those who want to see how things look before making a commitment also ask for BC. Those who believe an objective evaluation will produce results contrary to their interests oppose or try to ignore BC. The result is that requests for studies from Congress often explicitly call for benetcost
q A previous version of this paper was presented at a symposium on international comparisons of benetcost practices hosted by the Japanese Society of Civil Engineers in Tokyo in May 1999. The author thanks attendees and anonymous reviewers for helpful comments and suggestions.

to be applied, even for programs (such as Intelligent Transportation Systems) that Congress continues to support. 1.2. The intergovernmental context for transportation evaluation The process by which transportation projects are selected in the US is tied up in intergovernmental relations and nancing mechanisms (Wiener, 1999). The Interstate Highway program and similar programs for transit and airports created user tax instruments that channel funds to the national level, for redistribution back to states and localities. The return grants generally require matching, with the federal government paying 6090% of the costs; states often pick up most or all of the remainder. With such a large share of funding coming from higher levels of government, local politicians have a strong incentive to get as much as possible, whether the projects are worthwhile or not. With respect to highways, this problem has been dealt with by allocating funds through formulas, so that states cannot get a larger share by lobbying for more projects. This constraint, in turn, has spawned demonstration projects that are earmarked by congressional jurisdiction on a pork-barrel basis. Transit funding also has a combination of formula funds and earmarked projects. Airport funding is similar. 1.3. Incentives for under-maintenance Amid pressures to bring home the bacon, long term costs may be discounted or ignored. Operating costs,

0967-070X/00/$ - see front matter Published by Elsevier Science Ltd. PII: S 0967-070 X(00)00 011-1

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Fig. 1. Major components of benetcost analysis.

especially for transit, can be a large share of total costs over the lifetime of a facility. By providing a higher federal contribution for capital expendituresmaking capital dollars cheaper than operating cost dollarslocalities are encouraged to substitute capital for maintenance. For highways, this means that although resurfacing (an overlay of three or more inches) is considered a capital expense, surface treatments are postponed until the improvement can be treated as capital. The response for transit has been to provide operating subsidies as well as capital grants, although this does not eliminate the tendency to buy new vehicles rather than maintain the old. Full life-cycle costs can be readily assessed within a BC evaluation, but such evaluations are less likely to contribute as much to decisions as they would without the funding incentives. 1.4. State and local roles Under this intergovernmental system, it is unclear who is responsible for evaluating projects. States and localities propose projects, and states (including independent authorities) do most of the construction. Although the federal government is supposed to approve the projects, it almost never rejects a project on grounds of insufcient justication. Under ISTEA, localities have more discretion to choose among projects of different modes (they can spend the same money on transit or highways) and thus have somewhat more motivation for applying benetcost. Metropolitan Planning Organizations (MPOs) have evolved an analytic methodologyknown as four-step models, for trip generation, distribution, assignment, and mode choicethat is not well suited to BCA. Politically, MPOs have difculty in reaching consensus or addressing regional problems of congestion and air quality, and the context is not receptive to the discipline required for BCA (Lyons et al., 1993; van der Wilden et al., 1996).

2. Guidance for project evaluation Attempts by higher-level government agencies to inuence decisions at lower levels are always fraught with some conict. Local governments prefer that someone else take on the onus of levying taxes, and return the money without strings. The federal government is willing to raise the revenues, but expects to redirect the funds to some extent so as to achieve national objectives. This tug-of-war is continuously being renegotiated. Issuance of prescriptive guidance is one mechanism used by the federal government to try to bring lower governments up to an acceptable minimum practice of decision making, but it is only one of many instruments. 2.1. Substantive requirements versus process requirements A technical manual prescribing correct methods for conducting benetcost analysis lies at one end of the substantive-procedural spectrum. The trend over the past several decades has been away from attempting to specify how to do an evaluation and toward more indirect technical guidance, along with process suggestions. Prescriptive guidance had the effect of forcing everyone down to the lowest common denominator, and worked least well on those with the least technical capability. The National Environmental Policy Act (NEPA) called for an Environmental Impact Statement (EIS) for major projects, with mandatory detailed outlines (FHWA/FTA, 1987). This legislation provided much work for consultants, and subsequently for lawyers who took the reports to court to assess adequacy. Not much light was shed on whether the projects were any good, but it introduced the era of public involvement. NEPA is still in force, but has been folded in practice into subsequent planning requirements. 2.2. Planning requirements FTA initially demanded alternatives analysis to justify funding for major transit projects, but this has been gradually softened into Major Investment Studies (MIS) that are

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more exible in how the evaluation is performed (FHWA/ FTA, August 1994; FTA, 1999). The Intermodal Surface Transportation Efciency Act (ISTEA) made large changes in shifting categorical programs (transit, highway, bridges) into poolable funds that could be redirected at the state and local level. Rather than prescribe the evaluation method, the legislation listed six elements that should be covered (Siwek, 1995): a broadly inclusive public involvement process; consideration of a 15 planning factors checklist that includes such items as enhancement of transit, congestion relief, and consistency with land use plans; major investment studies as appropriate; management systems for congestion, intermodal, pavement, bridges, etc. nancial plans; and conformity to air quality implementation plans. While these checks and balances tend to ensure some internal consistency to plans, and analytic methods are left open, there is no particular encouragement to use BC at the project level. Instead, more attention has been paid to the technical certication process, and major MPOs were reviewed with respect to their technical resources and organizational capabilities for carrying out the intentions of ISTEA (FHWA/FTA, April 1994; Siwek, 1995). 3. Benetcost guidance 3.1. The basic framework The technical process of BC analysis can be separated into alternatives, impacts, and evaluation phases, as represented in Fig. 1. Impacts are the differences caused by the actions taken, relative to the base, and their translation into benets. Evaluation is the synthesis of the information into a conclusion about whether the project is feasible or not (the framework used here is presented in Appendix D of Camus and Weinblatt, 1999; other authoritative sources include Mohring, 1993; Layard and Glaister, 1994; Nas, 1996; Small, 1999). 1. Base Alternative. The base alternativeloosely referred to as the do nothing alternativeshould be the most plausible yet efcient utilization of the stock of capital resources that is likely to be available over the life of the proposed project, without substantial additional investment. Plausible is in conict with efcient because existing transportation facilities are, by and large, not efciently operated (e.g. they exhibit congestion). Selecting a base alternative that is inefciently operated assumes that correction of the inefciency is not feasible during the lifetime of the proposed project. Such an evaluation will be biased against inefcient alternatives. 2. Project Alternative(s). Capital investment alternatives are generally ordered according to the magnitude of the

investment, i.e. from low capital alternatives to high. Construction of a new freeway, for example, should be compared against TSM options, lane widenings, or other more modest investments, not against several alternative alignments for the same freeway. 3. Supporting Actions. Whichever alternative is chosen, there is a set of supporting actions associated with that alternative that ensure that the maximum benets are derived from the investment. If a rail transit line is constructed, land use policies should facilitate the appropriate densication around stations that will make the demand forecasts reasonable (FTA recognized this need in its 1978 Policy Toward Rail Transit; see Wiener, 1999). These supporting actions become assumptions upon which the evaluation is based. When an alternative is selected, it implies a commitment to the implementation of the supporting actions as well as the project actions. 3.2. Impacts: costs, benets, and transfers All impacts can be classied into costs, benets, and transfers. The vast bulk of impacts are transfers, in which individuals may gain or lose but society is unaffected in the aggregate. The most obvious type of transfers are nancial or monetary, such as changes in user fees or taxes used to nance construction, but also jobs resulting from construction and operation, or changes in land use or pollution. Society as a whole is not made better off or worse off by transfers, other than insofar as they affect equity or cause changes in behavior (e.g. mode choice) that lead to costs and benets. Ultimately, all that matters is the difference between costs and benets, so whether a particular item is called a cost or a benet is not critical so long as it is properly debited or credited. As a matter of practice, costs typically consist of direct outlays for the project. This may or may not include operating and maintenance costs, but certainly includes capital costs. Project benets can be derived from the objectives served by building the project, and include positive and negative spillovers (externalities) as well: 1. Save Time. There is always a way to get from one place to another, by some means. A new or expanded facility allows the travel to be made in less time, perhaps with other benets as well. 2. Reduce User, Agency, and External Costs. User (capital and operating) costs, public (capital and operating) costs, and external costs (pollution, noise) may be reduced by a capital improvement. 3. Improve Safety. Improved safety reduces the risk of accidents that result in fatalities, injuries, damage to vehicles, and other property damage. 4. Improve Quality. A transportation improvement may result in greater comfort, security, convenience, and

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reliability for passengers, or less damage to goods for shippers. Quality changes for the user can often be represented as changes in the opportunity cost (value) of travel time. 5. Increase Consumer Surplus. All of the above can be broadly grouped as reducing the cost of transportation. When this occurs, and is reected in the generalized cost to the user, more travel will ensue. The additional volume is referred to as induced travel in the short run or induced demand in the long run. Because induced travelers have not previously expressed a willingness to pay for travel in the primary market, the benets of additional travel are valued as the area under the demand curve above the price, called consumer surplus. Disbenets of deterred travel can be valued in the same way. 3.3. Published benetcost guidance The published guidance (including drafts not widely distributed and not cited here) generally adheres to the above principles, but seldom goes beyond them except in narrowly specic areas such as accident costs, the value of time, and the discount rate. Guidance at the federal executive level tends to be broadly exhortatory rather than prescriptive, in the nature of stating what is preferred rather than giving orders (President of the United States, 1993 and 1994). Various departments and agencies, depending upon their scope of responsibility, issue policy or guidance that expands on the high-level guidance or recommends how to prepare project or funding justications. Thus OMB has elaborated the executive orders, and has traditionally recommended discount rates (OMB Circular A-94 and various memoranda and bulletins: OMB, 1992, 1994, 1996). Even these specic instructions are not followed slavishly. 1 The FAA has issued relatively detailed guidance for conducting benetcost evaluations of airport improvements and upgrades to the air trafc control system (FAA, Economic Analysis 1998; Hoffer et al., 1998). FHWA uses BCA in its biennial report to Congress on recommended highway investment levels nationally (Camus and Weinblatt, 1999). The FTA has been more tentative, but is moving gradually in the direction of benetcost (FTA, Revised Measures.,, September 1994; FTA, 1997; US DOT, 1997 Status, 1997). General guidance is sometimes issued in support of BCA but without recognizing the level of effort required to produce a denitive document (US DOT, 1994). There is little recognition in practice or in the guidance of the problem of inefcient (second-best) alternatives in transportation evaluation, especially the failure to impose efcient pricing.
1 When OMB previously recommended a real discount rate of 10%, it was taken with a grain of salt by professional analysts, who felt free to also use other rates.

3.4. The actual practice of benetcost Most of the guidance issued by federal and transportation agencies is reasonably sound and not especially detailed. Good benetcost analysis does not arise from precise instructions, but from establishing the groundrules for debate. If the general attitude is that programs and policies will get a more receptive hearing if they are presented in the language and concepts of benetcost, then agencies will try to absorb and use that language. Over the past three decades, the terms of debate at the DOT and in other arenas dealing with transportation have shifted from 100% engineering to roughly 80% economics. This does not mean that the terms used are fully understood. While engineering standards have also given ground at state and local levels, the extent is less, economic concepts (and BC) are less evident, and technical evaluation more informal. Thus although most professionals at the federal level accept that BCA is the preferred framework for evaluation, the practice of BCA falls well below the lip service. This is an inevitable lag. There are, however, incentives to improve. Different ofces compete to be the gurus on BC, and can be embarrassed if their pronouncements or practices or models are revealed to be defective. Consultants always present themselves as experts in everything, and invent whatever is acceptable when asked to do a BC analysis. Many analysts seek to produce the result their client or boss wants, but BCA makes it harder to bury the assumptions, and a knowledgeable reviewer can nd them more easily than if the procedures are hidden in some proprietary black-box model or idiosyncratic evaluation method (see Hahn, 1998, for an assessment of federal efforts to apply benetcost analysis to regulatory evaluation. A somewhat pessimistic review of the use of benetcost is found in Lave, 1986). The ascendancy of BC has not advanced to the degree where those who practice or are responsible for it are expected to be trained in the theory and methods. There is not much graduate education in the subject (as compared to, say, trafc engineering), and almost no supplemental training. 3.5. Other evaluation methods Evaluation methods that have receded or disappeared fall mainly into the category of scoring-and-weighting, bearing labels such as multi-objective or multi-criteria programming, goals-achievement, cost-effectiveness (different from true cost-effectiveness), and sufciency ratings (for highways). Process-oriented techniques (e.g. Delphi) have also largely disappeared, replaced by focus groups, i.e. talking to customers rather than the decision-makers. Measures Of Effectiveness (MOEs) are directed at how well an alternative works, how well it satises the objectives proposed for it, and how it compares on various indicators with other alternatives. The critical requirement for

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Fig. 2. Long run demand with short run demand curves.

calculation of an effectiveness measure is that it be comparable across all alternatives. Because there is no way to aggregate measures across more than one indicator, there is no need for the list of indicators to be either exhaustive or non-overlapping. Measures of primary output (person trips, vehicle trips, vehicle miles, or passenger miles) can be compared to total or incremental costs, to obtain some useful overall indicators of cost-effectiveness (e.g. cost per trip). With multiple objectives, however, cost-effectiveness analysis in the narrow and formal sense has limited application because rarely can costs be uniquely assigned to a particular output (e.g. the portion of capital cost that produces time savings versus the portion that reduces air pollution). The cost-effectiveness approach to evaluation is currently expressed as the calculation of performance measures, and is popular at the MPO level. 3.6. Feedback on evaluation results It has always been difcult to review previous governmental decisions, for purposes of improving the technical content and the decision process. There is a political cost to identifying wrong decisions, even if the actors have changed. The need to conduct evaluations of previous decisions has become generally accepted in the US, however, and this extends to the forecasts upon which decisions were based. One example was a review of the cost and ridership bases for major transit projects as of the time the decisions were made to begin construction (Pickrell, 1990). This study documented what everyone already knewthat cost estimates were low and ridership forecasts highbut nonetheless provoked a defensive reaction from transit interests. Since that study, however, planning forecasts have been somewhat more unbiased.

There has also been an increasing interest in retrospective BC evaluations, pressured by politicians seeking documentation for innovative programs involving risk and for judging initiatives previously taken. Unfortunately, in these cases there is no initial BCA, so the retrospective evaluation can shed light on whether the program should be continued or replicated, but not on whether the initial evaluation recommending the expenditures was sound. 4. Transportation demand forecasts Travel demand forecasts are critical to any project evaluation, since without users there are no benets. Until recently, demand forecasts have been treated as external to evaluation: travel was predicted to grow, and evaluation consisted of choosing among alternative means for dealing with the travel. Most existing trafc assignment models lack mechanisms for including elasticities, a lack that stems from the same conceptual underpinnings that produce single values for demand forecasts rather than a functional relationship between demand and price. 2 Thus existing forecasts incorporate exogenous demand factors, but seldom acknowledge endogenous factors. This myopia has contributed to a backlash from environmentalists claiming that demand forecasts do not account for induced demand, which inevitably lls up whatever capacity is provided. 4.1. Induced demand Induced demand is not mentioned in any guidance, but
2 Mode choice is often modeled with price as a factor, for both urban and intercity travel.

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Fig. 3. Consumer surplus with average cost pricing.

the term is much usedinconsistentlyin discussion. A simple denition is that induced demand is the change in volume from a movement along the demand curve (Lee et al., 1999). The additional travel may come from parallel routes, another time of day, new trips not previously being made, or other travel behavior resulting in more VMT. In the short run, changes in the generalized price of travel (user charges, time, operating costs) results in a change in travel, depending upon the price elasticity of demand. In the long run, the movement is along the long run demand curve, which implies a shift in the short run demand. Both short and long run demand curves should be estimated on a general equilibrium basis, meaning that they should incorporate diversions and other travel responses in the short run, and land use changes in the long run. In theory, as shown in Fig. 2, the consumer surplus captures the net value of changes in travel volume on all facilities, although it is measured only on the facility that is being improved. Specically, 1. The term induced means a movement along a travel demand curve as a result of changes in endogenous factors, which can be represented as components of generalized price. 2. The measurement of induced travel is dependent upon the market for which the demand curve is dened; induced travel dened at the facility level will include trafc diverted from parallel routes, while induced travel at the regional level will include only trips that are new to the region (Lee, 1999). 3. Benetcost evaluation of projects requires that baseline demand forecasts be adjusted to take into account induced demand, both short and long run; this is simply to say that improvements that change user costs should be evaluated in the light of whatever changes in volume will actually occur. Such demand curves are referred to as general equilibrium demand curves.

These concepts are understood by some planners, but they are not covered in guidance and they are not yet commonly applied in practice. 4.2. Consumer surplus The most confused area of benetcost practice concerns the measurement and interpretation of the portion of incremental benets associated with changes in trafc volumes from a highway improvement, or from other induced travel. If addressed at all in guidance, it is represented as a triangle under the demand curve and lying between the average cost of travel with and without the improvement. A typical diagram is shown in Fig. 3. The rectangle to the left of the shaded triangle is also consumer surplus, but is referred to as cost savings to existing users. The incremental consumer surplus represents the benets of additional travel if demand is elastic. This representation is correct so long as pricing is exactly at average variable cost, but it has no application to other conditions. It becomes more general if the dashed lines simply give the price, or cost to the user, rather than attempting to show the social costs (external to the user) at the same time. 4.3. Time savings on parallel facilities Benetcost analyses of highway improvements have sometimes counted as a benet the savings in travel time on road sections other than the one that has been improved, on the rationale that trips diverted to the improved section relieve congestion on substitute routes. These conditions are characterized here as a primary facility and a parallel facility. The issue concerns the degree to which changes in costs or benets on the parallel facility are relevant to the evaluation of improvements to the primary facility. The conclusion reached is that such changes should not be included at all in the benets of the improvement to the

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primary facility under rst-best conditions, and included in very limited ways under second-best conditions. A travel market is a facility carrying vehicles from some points on a network to other points, such that the travel between these points can be regarded as a single homogeneous good: a traveler is indifferent with respect to how the travel is accomplished, only that it be accomplished at the lowest cost. Typically, the market occurs on a single facility, but conceivably the market might be a corridor in which improvements were being made to several facilities. Improvements to the primary facility will attract travelers from other routes, and stimulate additional travel on complementary routes. With respect to impacts on the parallel route: 1. Travel time savings on undiverted trips is only one of many impacts that may take place in related markets as a result of improvements in the primary market. Coincidentally, these savings represent one of the few positive impacts, so singling them out for inclusion in the evaluation of improvements in the primary market while ignoring losses from diverted travel creates a bias toward overstating benets in the primary market. 2. Impacts in related markets transmitted entirely through the demand curves fall in the category of pecuniary externalities, i.e. changes in prices and quantities that have no net efciency consequences; they are regarded as transfers. 3. If an attempt were made to estimate all impacts in related markets and sum them up, the required knowledge would be daunting in magnitude and elusiveness. Each market places different values on its output, meaning that a trip in one market is not the same as a trip in another. 4. Because the losses of consumer utility in the related market are mostly if not entirely captured in or shifted to other markets, any combining of impacts in primary markets with those in related markets is largely or entirely double-counting. 5. Measures of systemwide (network) travel time savings are not useful for benetcost analysis; evaluation is done using impacts on the improved facility only. These conclusions are based on rst-best conditions in all markets. Among the assumptions in such an analysis is the requirement that related markets adapt instantly and costlessly, reaching new price and quantity equilibria without any loss in transition. Resources are perfectly mobile and can be redeployed immediately from one market or form into another. Second-best conditions would greatly complicate the analysis, and modify the conclusions only slightly, by allowing changes in efciency distortions in related markets to be counted as benets in the primary market. Quantitatively, these external effects are likely to be small.

5. Value of time Because the primary purpose of most transportation improvements is to reduce the time it takes to get from one place to another, the valuation of that time in terms commensurate with the improvement costs is unavoidably a central issue in project evaluation. Time is regarded as an opportunity costtravelers are presumed to have other activities they would prefer to engage in if they weren't travelingwhose value depends upon the travelers willingness to pay to shift the time from travel to another activity. While the wage rate underlies most concepts of travel time valuation, empirical estimates have traditionally been differentiated on trip purpose (commute, shopping, recreation), mode (auto, transit in-vehicle, transit wait, air), and paid versus unpaid time. More recently, theory has been rened and attention focused on more fundamental distinctions: travel time is now regarded has having a pure opportunity cost component (the extent to which preferred activities are precluded) and a disutility component (discomfort and anxiety make the time more costly). Individuals are presumed to be able to balance their mix of activities such that major differences do not occur between one and another (e.g. between commuting and recreation), whereas attributes such as schedule exibility (departure at will), travel time reliability, uncertainty about connections, exposure to unpleasant or dangerous conditions, and having a seat or not vary greatly among travel experiences. The same logic mitigates against major differences between paid or on-the-clock time and unpaid time; although commercial vehicles are given higher time values than passenger vehicles, this is in large part due to the opportunity cost of the truck and its cargo. Use of the wage rate for anything other than broad averages is seldom done. The DOT's guidance on estimating the value of travel time recommends using national averages, primarily because of the numerous differences in how the wage rate is measured (e.g. how fringe benets and taxes are handled) mean that measured differences (e.g. between regions) may be more than due to measurement differences rather than actual income (US DOT, 1997). Another reason for avoiding ne wage rate distinctions is the suspicion that public money might be directed at saving rich people's time at the expense of the poor. This apprehension notwithstanding, air travelers' times are valued at three to four times that of urban passenger travel. 3 Although generic travel time values have been
3 Wilbur Smith (1994) started with a base of US$ 5.92 (1993) per personhour for highway travel, added US$ 1 per hour for increased comfort, U$ 2 per person-trip for each of higher reliability and perception of safety, and US$ 5 per driver-hour for sleep/read/work ability, multiplied by 2.4 persons per vehicle; rates of US$ 2060 per hour are cited for intercity air and rail studies. HERS (Camus and Weinblatt, 1999) uses US$ 13 per vehicle hour for cars and US$ 22 per vehicle hour for trucks. These values are simply examples; there are no correct or widely sanctioned numbers.

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occasionally published, such standard values are generally frowned upon. It is preferred that the analyst understand the value of time issues that are relevant to the evaluation being conducted, and defend his/her choices on pragmatic grounds rather than resort to authoritative or standard citations. 6. Trafc safety Empirical studies of the costs of accidents have been conducted and standard unit costs for fatalities (the value of life), injury, and property damage have been published, these values are of less signicance than those for travel time (US DOT, 1993; FHWA, 1994). One reason is that safety often does not vary much between alternatives; there is no explicit willingness to trade off safety for money. 4 Another reason is that the relationship between physical design and accidents is not especially strong. 5 Third, improvements in safety allow for higher capacity (higher speeds, closer spacing) while holding safety constant. Again, while agencies will not admit they make such choices, it inevitably occurs. Finally, because accidents occur infrequently under normal conditions, assigning responsibility among possible causes is difcult. In those cases, however, where an improvement in safety is signicant, unit valuations are useful. 7. Environmental impacts Measurement and valuation of environmental impacts is difcult under any circumstances, and made more so by competing advocacy claims. For xed costs, such as loss of habitat, wetlands, and parks, federal law many years ago imposed the constraint of no net loss. If another route was impossible, then whatever such resources existed prior to construction had to be replaced in kind. For variable costs (emissions), there has been considerable tension created between EPA and public works agencies (DOT, Army Corps of Engineers) over how to control emissions. One prong is directed at reducing the rate of emissions (primarily by exhaust control devices, but also by reformulated gasoline) per vehicle mile. The other prong has been to try to reduce VMT. Enormous strides have been made on the rst, reducing emissions by an order of magnitude per VMT and also improving ambient air quality. VMT has continued to grow, however, and promises to offset much of the gain.
4 A famous suit against an automaker revealed that the costs of locating the gasoline tank in a safer place had been compared to the difference in fatalities that would result, and the decision made in favor of the less-safe position. That any responsible person or company could conduct such an analysis was roundly condemned in the press. 5 The notable exception is divided versus undivided highways. Alcohol and falling asleep are much clearer causes of accidents, but these are operational rather than investment problems.

FHWA's Highway Economic Requirements System (HERS) model, which evaluates road improvements for the US DOT's biennial Condition and Performance report to Congress, incorporates emissions estimates into its project evaluation algorithms (US DOT, 1997 Status; Don H. Pickrell, Appendix E in Camus and Weinblatt, 1999). While the incorporation of emissions costs into the benetcost evaluation does not have major impacts on project feasibility, it could reduce justiable projects by perhaps 5%. 8. Efciency criteria The efciency goal can be stated in a number of ways: nd the alternative that is most worthwhile, that creates the highest net benets for society as a whole, that makes the most productive use of the resources available, or has the highest (net) present value. The test for efciency is marginal benets equal to marginal costs, along the relevant dimension(s) of output. The most efcient investment alternative is the one for which incremental benets are greater than incremental costs, no matter which (lower cost) alternative it is compared against. Benetcost is the analytic framework for evaluating efciency. Among those knowledgeable about benetcost analysis, the only relevant criterion is net benet, i.e. benets minus costs. For practitioners, it is usually necessary to also calculate benetcost ratios, but this can be done so as to simply indicate the feasibility of the project as opposed to its rank order. For short and long range improvement programs, the capital expenditure budget is treated as the constrained cost, and the remaining costs and benets are placed on the benet side. The effect of this is to treat some costs as more valuable than other costs (per dollar), but the damage done is probably slight. Other criteria are sometimes proposed (return on investment, internal rate of return, payback period, etc.) but should be avoided. They are not recommended in most of the extant guidance, and even when calculated they are at best a distraction from more relevant measures. 9. Regional economic impacts Over the past several decades there has been continuing debate over the relevance of indirect economic impacts in project selection. Although politicians and some consultants assert that jobs and economic development are the justication for a project, academic and professional opinion does not generally support this view. Obviously, a federal grant that goes to one region and not another is likely to be a benet to the receiving region, but the relevant comparison is between the benets of the project in one region versus another. Multiplier effects, of course, amount to double and triple counting, but this does not stop advocates of publicly supported sports stadiums, convention centers, and

D.B. Lee / Transport Policy 7 (2000) 4150 Table 1 Selected benetcost components Component Discount rate Highway vehicle-price elasticity Value of time (US$/hour) Value of life (US$ million) Personal injury (US$/accident) Property damage (US$/accident) Air pollution (US$/VMT) Economic and development impacts Equity Typical values 7% 20.8 840 2.6 0.02 Not included in BC Separate analysis Range 310% 20.2 to 22.0 0.45.0 5K500K 2K5K 0.010.30

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11. Summary of benetcost recommendations It has been emphasized above that in the US there is less interest in standardizing practice and relying on sanctioned parameter values, and more reliance placed on transparency and defensibility independent of the methods or values chosen. Nonetheless, there are common tendencies and loosely dened agreements on some numbers. These are presented in Table 1. References
AASHTO, 1978. A Manual on User Benet Analysis of Highway and BusTransit Improvements, Washington, DC: American Association of State Highway and Transportation Ofcials. Cameron, M.W., 1994. Efciency and Fairness on the Road: Strategies for Unsnarling Trafc in Southern California, Oakland, CA: Environmental Defense Fund. Camus, G., Weinblatt, H., 1999. Highway Economic Requirements System: Technical Report (DRAFT), Vol. IV, Version 3, prepared for FHWA, Cambridge, MA: US DOT/Volpe Center. Federal Aviation Administration, 1998. Economic Analysis of Investment and Regulatory Decisions: Revised Guide, Washington, DC: US DOT/ FAA, January. Federal Highway Administration, 1994. Motor Vehicle Accident Costs, Technical Advisory T7570.2, Washington, DC: US DOT/FHWA, 31 October. Federal Highway Administration, and Federal Transit Administration, 1987. Environmental Impacts and Related Procedures: Title 23, Part 771, Federal Register. Federal Highway Administration, and Federal Transit Administration, April 1994. Federal Certication of the MPO (TMA) Process, Washington, DC: US DOT. Federal Highway Administration, and Federal Transit Administration, August 1994. Guidance on Major Investment Studies, Washington, DC: US DOT. Federal Transit Administration, September 1994. Revised Measures for Assessing Major Investments: A Discussion Draft, Washington, DC: US DOT/FTA. Federal Transit Administration, 1997. FTA New Starts Criteria, Federal Register, 62, 218, pp. 60 75560 758. Federal Transit Administration, 1999. Major Capital Investment Projects, Federal Register, 64, 66, pp. 17 06217 071. Hahn, R.W., 1998. Government analysis of the benets and costs of regulation. Journal of Economic Perspectives 12 (4), 201210. Hoffer, S., Berardino, F., Smith, J., Rubin, S., 1998. Economic Values for Evaluation of Federal Aviation Administration Investment and Regulatory Programs, Washington, DC: US DOT/FAA, June. Lave, L.B., 1996. Benetcost analysis. In: Hahn, R.W. (Ed.). Risks, Costs, and Lives Saved, AEI Press, Washington, DC, pp. 104134. Layard, R., Glaister, S., 1994. In: Layard, R., Glaister, S. (Eds.). Cost benet analysis, Cambridge University Press, Cambridge, UK. Lee, D.B., Klein, L.A., Camus, G., 1999. Induced trafc and induced demand in benetcost analysis. Transportation Research Record 1694, 120125. Lee Jr, D.B., 1999. Appendix C: demand elasticities for highway travel. In: Camus, G., Weinblatt, H. (Eds.). Highway Economic Requirements System: Technical Report, US DOT/VNTSC, Cambridge, MA. Lee, Jr., D.B., 1994. Project Feasibility vs. Economic Impacts: Net Benets, Multiplier Effects, and Income Transfers, paper for ACSP, Cambridge, MA: US DOT/VNTSC, November. Lyons, W., et al., 1993. Review of the Transportation Planning Process in the Southern California Metropolitan Area, prepared for US DOT/FTA and FHWA, Cambridge, MA: US DOT/Volpe, August.

gambling casinos from claiming economic benets to the region. Intergovernmental grants tend to reinforce the idea that expenditures are benets rather than costs. One analytic response is to expand the nancial evaluation framework to include both net benets, on the one hand, and income transfers on the other (an example is Wilbur Smith, 1994). In general, the more circuitous the nancing (the path from the person paying the costs to the person receiving the benet, i.e. the user), the less desirable are the income transfers. Instead of performing benetcost tabulations for selected geographic areas or other subsets of the population, regional economic impact analysis should be conducted under the equity rubric and the results identied as transfers.

10. Treatment of equity Not only is the question of aggregate net benets at issue, but so is the question of how the costs and benets are distributed among different groups and locations. Analysts can provide information regarding monetary and in-kind transfers that will take place if one alternative is implemented rather than another, and can propose countermeasures to offset adverse impacts, but it is for policy makers and the courts to decide what is fair. An adverse impact is usually a transfer from poor to rich, or a gain at the expense of a minority or disadvantaged group. Assessment of distributional impacts can be combined with an efciency evaluation. Although relatively new, the integration of equity concerns into benetcost evaluation has become generally accepted at a broad level while left vague in practice. The primary advantage of including equity is to separate efciency from equity issues, which otherwise become confused; the transfers can't be ignored and excluded, so better to keep them in the analysis but under some control. Given that the practice of benetcost is rudimentary at best, it is too early to expect much in the way of equity analysis (Cameron, 1994; Lee, 1994).

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D.B. Lee / Transport Policy 7 (2000) 4150 Small, K.A., 1999. Project evaluation. In: Gomez-Ibanez, J.A., Tye, W., Clifford, W. (Eds.). Essays in Transportation Economics and Policy, Brookings, Washington, DC, pp. 137177. Smith, W., Associates, 1994. Evaluation of Trans-American Transportation Corridor Alternatives. Smith, W., Associates, and Howard Needles Tammen & Bergendorff, September 1994. Trans-American Transportation Corridor: Feasibility Study, prepared for FHWA, Columbia, SC: W. Smith Associates. US Department of Transportation, 1993. Treatment of Value of Life and Injuries in Preparing Economic Evaluations, Memorandum, Washington, DC: US DOT/OST, 6 January. US Department of Transportation, 1994. State-of-the-Art for Benet/Cost Analysis, paper, Washington, DC: US DOT, 22 July. US Department of Transportation, 1997. Status of the Nation's Surface Transportation System: Condition and Performance, Report to Congress, Washington, DC: US DOT/FHWA/FTA, 1997. US Department of Transportation, 1997. The Value of Saving Travel Time: Departmental Guidance for Conducting Economic Evaluations, Washington, DC: US DOT/OST, 9 April. van der Wilden, P., et al., 1996. Enhanced Planning Review of the Miami Metro-politan Area, prepared for US DOT/FTA and FHWA, Cambridge, MA: US DOT/Volpe, May. Wiener, E., 1999. The History of US Transportation Policy. 2nd ed., Sage, Newbury Park, CA.

Mohring, H., 1993. Maximizing, measuring, and not double counting transportation improvement benets: a primer on closed- and open-economy cost benet analysis. Transportation Research (B) 27, 413424. Nas, 1996. CostBenet Analysis: Theory and Applications, Sage, Thousand Oaks, CA. Ofce of Management and Budget, 1992. Guidelines and Discount Rates for BenetCost Analysis of Federal Programs: Revised, OMB Circular A-94, Washington, DC: OMB, 29 October. Ofce of Management and Budget, 1994. Guidance on Executive Order No. 12893: Principles for Federal Infrastructure Investments, OMB Bulletin No. 94-16, Washington, DC: OMB, 7 March. Ofce of Management and Budget, 1996. Economic Analysis of Federal Regulation Under Executive Order 12866, OMB Memorandum, Washington, DC: OMB, 11 January. Pickrell, D.H., 1990. Urban Rail Transit Projects: Forecast Versus Actual Ridership and Cost, prepared for UMTA, Cambridge, MA: US DOT/ VNTSC, October. President of the United States, 1994. Principles for Federal Infrastructure Investments, Executive Order 12893, Washington, DC: Ofce of the Press Secretary, 27 January. President of the United States, 1993. Regulatory Planning and Review, Executive Order 12866, Washington, DC: Ofce of the Press Secretary, 30 September. Siwek, S.J., 1995. A Guide to Metropolitan Transportation Planning Under ISTEA: How the Pieces Fit Together, prepared for US DOT/FHWA and FTA, Washington, DC: US DOT/FTA.